UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K


(Mark
One)


þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
Fiscal Year Ended May 31, 2009


OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the Transition Period from
to


Commission
File 000-28385








PROTALEX,
INC.


(Exact
name of registrant as specified in its charter)




Delaware
                    
                    91-2003490(State
      or other jurisdiction
                      of
      incorporation or organization)
                    
                    (IRS
      Employer
                      Identification
      Number)145
      Union Square Drive, New Hope, Pennsylvania
                    
                    18938(Address
      of principal executive offices)
                    
                    (Zip
      Code)




(215)
862-9720


(Registrant’s
telephone number, including area code)





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


Title
      of each class
            
            Name
      of each exchange on which registeredNone
            
            None




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





Common
Stock


(Title
of Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o             Noþ


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


Yes o             Noþ


Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yesþ     No ̈




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




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




Large
      accelerated filer ̈
              Accelerated
      filer ̈
              Non-accelerated
      filer ̈
              Smaller
      Reporting Companyþ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yeso    Noþ




The
approximate aggregate market value of Common Stock held by non-affiliates of the
registrant was $5,422,375 as of November 30, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter.





The
number of shares of the registrant’s Common Stock outstanding as of
August 24, 2009 was 28,600,464.





DOCUMENTS
INCORPORATED BY REFERENCE





None.










PROTALEX, INC.





FORM
10-K





May
31, 2009





TABLE
OF CONTENTS




PART
      IITEM 1.
                                                                  BUSINESS
                                                                  2ITEM 1A.
                                                                  RISK
      FACTORS
                                                                  7ITEM 1B.
                                                                  UNRESOLVED
      STAFF COMMENTS
                                                                  13ITEM 2.
                                                                  PROPERTIES
                                                                  13ITEM 3.
                                                                  LEGAL
      PROCEEDINGS
                                                                  13ITEM 4.
                                                                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                  13PART
      IIITEM 5.
                                                                  MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                                  13ITEM 6.
                                                                  SELECTED
      FINANCIAL DATA
                                                                  14ITEM 7.
                                                                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                                  14ITEM 7A.
                                                                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                  18ITEM 8.
                                                                  FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                  18ITEM 9.
                                                                  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURES
                                                                  18ITEM 9A.
                                                                  CONTROLS
      AND PROCEDURES
                                                                  18ITEM 9B.
                                                                  OTHER
      INFORMATION
                                                                  18PART
      IIIITEM 10.
                                                                  DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                  19ITEM 11.
                                                                  EXECUTIVE
      COMPENSATION
                                                                  21ITEM 12.
                                                                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                                                  24ITEM 13.
                                                                  CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                                  25ITEM 14.
                                                                  PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                                                                  25PART
      IVITEM 15.
                                                                  EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                                                                  26EXHIBIT
      INDEX
                                                                  27SIGNATURES
                                                                  29




Exhibit Index


Ex-31.1 Section 302 Certification of
the CEO


Ex-31.2 Section 302 Certification of
the CFO


Ex-32.1 Section 906 Certification of
the CEO


Ex-32.2 Section 906 Certification of
the CFO









NOTICE
ABOUT FORWARD-LOOKING STATEMENTS





Various
statements made in this Annual Report on Form 10-K are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include those which express plan, anticipation,
intent, contingency, goals, targets or future development and/or otherwise are
not statements of historical fact. We have based these forward-looking
statements on our current expectations and projections about future events and
they are subject to risks and uncertainties known and unknown which could cause
actual results and developments to differ materially from those expressed or
implied in such statements. These forward-looking statements include statements
about the following:




•
              the
      status and anticipated timing of regulatory review and approval, if any,
      for our product candidates;
 
 •
              our
      product development efforts, including results from clinical
      trials;
 
 •
              anticipated
      dates of clinical trial initiation, completion and announcement of trial
      results by us;
 
 •
              anticipated
      clinical trial results and regulatory submission dates for our product
      candidates by us;
 
 •
              analysis
      and interpretation of data by regulatory
  authorities;
 
 •
              anticipated
      operating losses and capital
expenditures;
 
 •
              estimates
      of the market opportunity and the commercialization plans for our product
      candidates;
 
 •
              our
      intention to rely on third parties for
  manufacturing;
 
 •
              the
      scope and duration of intellectual property protection for our
      products;
 
 •
              our
      ability to raise additional capital;
and
 
 •
              our
      ability to acquire or in-license products or product
      candidates;




In some
cases, you can identify forward-looking statements by terminology such as “may”,
“will”, “should”, “could”, “would”, “expect”, “plan”, “anticipate”, “believe”,
“estimate”, “target”, “goal”, “continue”, or the negative of such terms or other
similar expressions. Factors that might cause or contribute to differences
include, but are not limited to, those discussed in Item 1A. Risk Factors
of this Annual Report and discussed in our other Securities and Exchange
Commission (“SEC”) filings.





We urge
you to carefully review and consider the disclosures found in these filings, all
of which are available in the SEC EDGAR database at www.sec.gov. Given the
uncertainties affecting biotechnology companies in the development stage, you
are cautioned not to place undue reliance on any such forward-looking
statements, any of which may turn out to be wrong due to inaccurate assumptions,
unknown risks, uncertainties or other factors. We undertake no obligation to
(and expressly disclaim any such obligation to) publicly update or revise the
statements made herein or the risk factors that may relate thereto whether as a
result of new information, future events or otherwise.





The
following discussions should be read in conjunction with our audited Financial
Statements and related notes thereto included elsewhere in this Annual Report
and the Risk Factors in Item 1A of this Report.









PART
I





ITEM
      1.
            BUSINESS





Overview





In
September 1999, Protalex acquired a majority of the issued and outstanding
shares of common stock of Enerdyne from Don Hanosh, pursuant to a Stock Purchase
Agreement between Protalex, Enerdyne and Mr. Hanosh. In November 1999, Protalex
merged with and into Enerdyne pursuant to a Merger Agreement and Plan of
Reorganization, and Enerdyne changed its name to Protalex, Inc. After the
merger, Protalex’s former stockholders held approximately 92% of the shares of
our common stock, and Enerdyne’s former stockholders held approximately 8% of
the shares of our common stock.   On December 1, 2004, Protalex,
Inc., a New Mexico corporation, consummated a merger with and into its
newly-formed, wholly-owned subsidiary, Protalex Delaware, in order to
reincorporate in the State of Delaware. Our authorized capital stock consists of
100,000,000 shares of $0.00001 par value common stock.





As of the
date of this Report, the Company has no employees and it has insufficient funds
to cover future clinical trials and Chemistry, Manufacturing and Control or CMC
related expenses beyond the third calendar quarter of 2009. If the Company is
unable to raise sufficient additional funds, it  will likely be
required to suspend or cease  further operations on or about the end
of the third calendar quarter of 2009 until such financing is obtained, if
ever.





These
matters raise substantial doubt about the ability of the Company to continue as
a going concern.





We are a
development stage company which has been engaged in developing a class of
biopharmaceutical drugs for treating autoimmune and inflammatory diseases. Our
lead product, PRTX-100, has demonstrated effectiveness in pre-clinical studies
in regulating the immune system with persisting effects.  The effectiveness
of PRTX-100 shown in pre-clinical studies using animal models may not be
predictive of the results that we would  see in  future
clinical trials.  We currently have no product on the market. We initially
targeted the autoimmune diseases idiopathic thrombocytopenic purpura, or ITP and
rheumatoid arthritis, or RA.





Favorable
pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid
the foundation for the Investigational New Drug Application or IND, for treating
RA.  We submitted the IND to the United States Food and Drug
Administration or FDA in March 2005 and later in March 2005 the FDA verbally
disclosed to us that it had placed our IND on clinical hold, pending additional
product characterization. In August 2005, we formally replied to the FDA and in
September 2005, the FDA notified us that it had lifted the clinical hold on our
IND and that our proposed study could proceed.  We commenced with our
first Phase I clinical trial in December 2005 and completed the Phase I clinical
trial in March 2006.  This Phase I clinical trial was performed in
healthy volunteers, and was designed primarily to assess the safety and
tolerability of PRTX-100.  The basic safety data demonstrated that
PRTX-100 was safe and well tolerated.  There were no deaths or serious
adverse events.  The pharmacokinetic (PK) profile was favorable and
the pre-clinical PK data were confirmed by the data in this Phase I clinical
trial.  In May 2007, we filed an amendment to the IND with the
FDA.  This amendment included the final Phase I safety study report,
CMC update, and a protocol for another Phase I clinical trial.





RA is an
autoimmune disease that causes the inflammation of the membrane lining multiple
joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed
joint lining, the synovium, can invade and damage bone and cartilage.
Inflammatory cells release enzymes and cytokines that may damage bone and
cartilage. The involved joint can lose its shape and alignment, resulting in
pain and loss of movement.  In July 2007, we commenced with an
additional Phase I clinical trial designed to gain more detailed information on
biomarkers, including gene expression profiling and platelet functional
assessments which will allow for more optimized patient selection and targeting
in the upcoming clinical trials. This second Phase I clinical trial extended the
clinical investigation of PRTX-100 tolerability, PK, and pharmacodynamics, or
PD, at higher dose ranges. Dosing was completed in July 2007 and final results
indicated that the drug was safe and well tolerated.  A Phase Ib
randomized, double-blind, placebo-controlled, multiple dose, dose escalation
safety and tolerability study of PRTX-100 in combination with methotrexate in
patients with active RA in South Africa has been approved.





ITP is an
uncommon autoimmune bleeding disorder characterized by too few platelets in the
blood.  Affected individuals may have bruising, small purple marks on
the skin called petechiae, bleeding from the gums after having dental work,
nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual
bleeding.  Although bleeding in the brain is rare, it can be life
threatening if it occurs.  The affected individuals make antibodies
against their own platelets leading to the platelets' destruction, which in turn
leads to the abnormal bleeding. In ITP, we contracted Trident Clinical Research
Pty Ltd, a leading Australian clinical research organization, to manage and
monitor our first-in-patient ITP clinical trial. This clinical trial is designed
to provide initial multiple dose safety and PK data as well as preliminary
efficacy information. We have been approved for six sites in Australia and one
in New Zealand, all regional referral centers for treatment of chronic ITP, to
conduct a repeated dose study of PRTX-100 in chronic ITP patients. This clinical
trial began enrolling patients in the second calendar quarter of 2008. In
calendar 2008, we enrolled nine patients of which five completed the trial and
final results indicated that the drug was safe and well tolerated, although no
efficacy data was obtained.  Subsequently, the Company obtained
protocol approval to increase the dose range. While the Company has actively
solicited patients in calendar 2009 under this new protocol, no patients have
been enrolled as of the date of this Report.





As of the
date of this Report, the Company has suspended  further recruitment of
patients for its ITP clinical trials pending the raising of additional
funding, the retention of additional clinical personnel and an evaluation of the
Company's clinical trial programs.





Our
bioregulatory compounds are based on the principle of normalizing the activities
of immune cells at a more basic level than traditional pharmaceutical agents,
which act upon the end products of complex body functions. In autoimmune disease
models, PRTX-100, which is a natural compound, has reversed the pathologic
process  resulting in a restoration and maintenance of normal healthy
tissue.  This biotechnology could be applied to a range of serious
autoimmune diseases that affect millions of sufferers worldwide, such as
pemphigus, systemic lupus erythematosus or lupus, psoriasis, inflammatory bowel
diseases such as Crohn’s disease and ulcerative colitis, insulin-dependent
diabetes mellitus, and multiple sclerosis.  To date, however, we have
not conducted any pre-clinical trials related to the treatment of these diseases
and to do so would require substantial additional capital
infusions.




.  Our
business and laboratory operations are located in New Hope, Pennsylvania. We
currently outsource all of  our activities to contract organizations
and facilities. For example, we refine the manufacturing process of PRTX-100
under Current Good Manufacturing Practice, or cGMP.  Without adequate
additional financing in the third calendar quarter of 2009, however, the Company
runs the risk of not having adequate clinical trial material available to
complete our ITP clinical trails if we continue to pursue ITP, which could also
lead to a significant delay in commencing future clinical trial
programs.




2




Our
in-house research previously included demonstrating the efficacy of PRTX-100 in
well established and characterized animal models of RA and other autoimmune
diseases. For example, we have tested PRTX-100 in the murine collagen induced
arthritis model, or CIA, which is considered to be a predictive efficacy model
for RA in humans. This is the model that was used to test the efficacy of the
FDA approved drug, etanercept, or Enbrel®. PRTX-100 has also demonstrated its
efficacy in an animal model of systemic lupus
erythematosus.  Additionally, our laboratory personnel have developed
a pre-clinical ITP model with data showing that PRTX-100 inhibits the
phagocytosis (ingestion) of platelets in vitro. Platelet phagocytosis is the
effector limb of ITP.





We have
concluded eight private placements of our common stock, raising a total of $42.2
million in the aggregate and carrying us through basic research, pre-clinical
and early stage clinical trials.  Our research and development
expenditures were $3,490,956, $7,657,127, and $5,562,485, for the years ended
May 31, 2009, 2008, and 2007, respectively. The private placement in July 2006
raised approximately $15.2 million.  We have completed two Phase I
clinical trials, commenced with the Phase Ib clinical trial for ITP in Australia
and previously commenced the planning process for a Phase Ib clinical trial for
RA in South Africa. Without adequate additional financing, however, the Company
will be unable to fund the ongoing FDA approval process.





About
PRTX-100





PRTX-100
is a highly-purified form of the Staphylococcal bacterial protein known as
Protein A.  PRTX-100 has the ability, at very low concentrations, to
bind to and to down regulate activation of human B-lymphocytes and macrophages
which are key cells mediating inflammation in certain autoimmune
diseases.  Laboratory studies indicate the mechanism involves
interference with specific intracellular signaling
pathways.  Pre-clinical studies also demonstrate that very low doses
of PRTX-100 have potent therapeutic effects on model inflammatory
diseases.





Animal
Studies





Protalex’s
lead candidate PRTX-100 has proven effective in two clinical standard mouse
autoimmune models:





Collagen-Induced Arthritis -
PRTX-100 has demonstrated reproducible efficacy in a well-established animal
model of RA. Mice received two injections of collagen in order to stimulate an
inflammatory response. One group was treated with various doses of PRTX-100, a
second group received Enbrel®, a leading commercially available treatment for
RA, and the control group was injected with vehicle saline solution. The mice
were observed for clinical symptoms, joint size and loss of function. The
results showed that very low doses of PRTX-100 and standard doses of Enbrel®
suppressed clinical symptoms including joint swelling over the first two to
three weeks of treatment, and slowed disease progression as compared with the
control group. Thereafter, the PRTX-100-treated mice continued to remain
disease-free whereas the mice treated with Enbrel® showed a resumption of joint
inflammation and tissue damage. This response to Enbrel® was expected because
the mice developed immune response to it because it is a foreign protein.
Overall, these results indicate that PRTX-100 is a potential treatment for RA in
humans. The data from these studies has been used to serve as a rationale for
conducting clinical trials in human patients.





BXSB Mice - These animals are
genetically predisposed to autoimmune diseases. This model is used to evaluate
drugs for autoimmune diseases such as Lupus, Crohn’s disease and other
autoimmune diseases. This genetic model more closely approximates the human
condition in that it is complex, multi-factorial and usually treated by multiple
drug regimens. In these studies, mice were treated with PRTX-100 and sacrificed
at regular intervals. Their organs were weighed and sectioned for histological
analysis and their spleens were used for immunological assays. Spleen
enlargement, or splenomegaly, was significantly reduced in treated animals
compared with the controls at almost every time point, demonstrating the ability
of PRTX-100 to delay the onset and severity of this disease. Treatment with
PRTX-100 also reduced non-specific immunoglobulin production and specific
autoantibody production and restored the number and function of immune cells
known as T and B lymphocytes. These results represent improvement in a whole
animal setting in this complex disease syndrome.





Completed
pre-clinical safety studies in animals have shown no drug-related toxicity. The
studies were conducted in New Zealand white rabbits which are a very sensitive
model to show any potential toxicity of immunomodulatory drugs such as PRTX-100.
All of the animals in this study survived to scheduled euthanasia. No
differences were observed in body weight gain or food consumption, nor in
hematology, clinical chemistry, urinalysis, or organ weight data in animals
treated with PRTX-100 compared with controls treated with vehicle, or the same
dilutive material less PRTX-100. These study results were a crucial component of
our IND application with the FDA.





We have
performed additional studies in non-human primates to determine the
pharmacokinetics of PRTX-100. The results of those studies have indicated more
favorable dosing schedules due to longer half lives than studies obtained from
rodents. Since non-human primates are more closely related to humans, we decided
to perform additional toxicology studies in monkeys to establish the toxicity
and starting doses in humans.





Manufacturing





We
currently contract the manufacturing of our lead drug substance PRTX-100 to
Eurogentec S.A. in Belgium where it is produced under cGMP conditions. The
product formulations, stability testing and packaging of the final drug product
for clinical supplies are conducted at several other reputable FDA-approved
companies in the United States. These companies have provided the drug product
for both toxicological testing and clinical supplies. We believe that this
entire process is scaleable to commercial production but will require additional
manufacturing resources.





Markets





RA is a
key focus for the Company. RA is a serious autoimmune disorder that causes the
body’s immune system to mistakenly produce antibodies that attack the lining of
the joints, resulting in inflammation and pain. RA can lead to joint deformity
or destruction, organ damage, disability and premature
death.  According to a Cowen and Company, LLC report entitled
“Therapeutic Categories Outlook” dated March 2009, RA affects about 1.0% of the
U.S. population with a female to male ratio of 2 to 1 and approximately 10% of
RA patients enter remission without treatment.  Of the remaining 90%,
one third has mild disease, one-third has moderate disease and has some response
to methotrexate and one-third has significant disease and has failed
methotrexate.




3




RA was
chosen as a target disease because it represents a well-defined, rapidly growing
market for which there is no current uniformly effective
treatment.  Current treatments are costly, and in most cases must be
continued for decades. In contrast, we believe that bioregulatory therapy such
as PRTX-100 could potentially provide these patients with a choice of therapy
that is efficacious, cost-effective, and has a highly favorable benefit-risk
ratio.   If ever developed and approved, we believe that our
products would be used to treat patients with moderate to severe cases of RA,
and particularly those individuals for whom other treatments have
failed.  Additionally, preliminary information gained in the
laboratory on the mechanism of action of PRTX-100 suggests potential efficacy in
a wide range of autoimmune diseases, including, but not limited to, lupus, type
I diabetes, and pemphigus.




ITP is an
uncommon autoimmune bleeding disorder characterized by too few platelets in the
blood.  Affected individuals may have bruising, small purple marks on
the skin called petechiae, bleeding from the gums after having dental work,
nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual
bleeding.  Although bleeding in the brain is rare, it can be life
threatening if it occurs.  The affected individuals make antibodies
against their own platelets leading to the platelets' destruction, which in turn
leads to the abnormal bleeding.  According to the Platelet Disorders
Support Association, approximately 200,000 individuals are affected by ITP, with
women affected approximately three times as often as men.  It can
affect all ages and ethnic groups, and about 50% of the new cases occur in
children.  Current treatment includes corticosteroids and removal of
the spleen.  Although most cases can be controlled with therapy, the
treatments can have significant side effects and there is currently no broadly
effective curative therapy.  We believe that PRTX-100 would offer
these patients an alternative therapy which is potentially more cost effective,
efficacious, and results in fewer side effects.





Additionally,
the Company’s business model contemplates the pursuit of FDA approval to treat
other autoimmune diseases, where the drug’s ability to decrease the inflammatory
response will abrogate the underlying disease processes. The BXSB animal model
is a generalized autoimmune model, and suggests PRTX-100 may be utilized to
treat a host of other autoimmune indications.





Competition





We
believe, based on the pre-clinical trials and the result of the two Phase I
clinical trials, that our compound, PRTX-100, has a potential competitive
advantage, as it may require lower doses and has the potential to be more
convenient, safer and more efficacious than existing therapies.  This
potential advantage has not yet been, and may not ever be, validated in clinical
trials. Current RA treatments are characterized by complex manufacturing methods
and have resulted in an average annual retail cost of approximately $15,000 to
$19,980 per patient, according to a Cowen and Company, LLC report entitled
“Therapeutic Categories Outlook” dated March 2009. A number of pharmaceutical
agents are currently being used, with varying degrees of success, to control the
signs and symptoms of RA and slow its progression. Available treatment options
include:





·
                Analgesic/anti-inflammatory
      preparations, ranging from simple aspirin to the COX-2
      inhibitors;


·
              Immunosuppressive/antineoplastic
      drugs, including azathioprine and
methotrexate;


·
              TNF
      (Tumor Necrosis Factor) inhibitors, also known as anti-TNF therapy,
      currently represented by etanercept (Enbrel®), infliximab (Remicade®), and
      adalimumab (Humira®);


·
              Soluble
      Interleukin-l (IL-I) Receptor Therapy, Anakinra
  (Kineret®).


·
              Costimulatory
      molecule inhibitor (abatacept, Orencia® Anti CD20 therapy, rituximab
      (Rituxan®)


·
              “Immunoadsorption
      Therapy,” also known as Prosorba®, now in limited use in Europe and the
      United States, entailing weekly sessions during which a patient’s blood is
      separated and passed through a molecular filter. The use of such extreme
      treatment modalities emphasizes the unmet need for a new treatment for
      patients who cannot respond to existing
  therapies.





Many
large and small pharmaceutical companies are active in this market, with Amgen
Corporation, Johnson & Johnson, Inc. and Abbott Laboratories, dominating the
market with their respective products, Enbrel®, Remicade® and
Humira®.  According to the Cowen and Company, LLC report dated March
2009 for RA in 2008 Enbrel® generated revenue of $2.09 billion; Remicade®
generated revenue of $1.55 billion; and Abbot’s Humira®, generated revenue of
$1.38 billion. Other recent entrants into the RA market are Orencia® from
Bristol-Myers Squibb and Rituxan® from Biogen Idec/Genentech which generated
revenue of $360 million and $300 million for RA in 2008,
respectively.





Post-marketing
experience has indicated an enhanced risk for serious and opportunistic
infections in patients treated with TNF inhibitors. Disseminated tuberculosis
due to reactivation of latent disease was also seen commonly within clinical
trials of TNF inhibitors. There is also a possibly increased risk of lymphoma in
patients treated with TNF inhibitors. TNF inhibitors are not recommended in
patients with demyelinating disease or with congestive heart failure. Transient
neutropenia or other blood dyscrasias have been reported with Enbrel® and the
other TNF inhibitors. There was also an increased risk of serious infections
with rituximab therapy in clinical trials, and abatacept has also been
associated with an increased risk of serious infections.  Findings
such as these indicate that new and safer treatments for autoimmune diseases
such as RA are needed. The Company anticipates that PRTX-l00 and its other
products will provide such opportunity, but there can be no assurance that such
results will occur.





There are
several companies that are developing thrombopietin agonists for treating
ITP.  GlaxoSmithKline’s Promacta® received FDA advisory panel approval
in June 2008, Amgen’s AMG531 is in Phase III, Ligand Pharmaceuticals’ LGD4665 is
in Phase II and Genzyme’s GMA161 is in Phase I.





We
expect the Company’s U.S. patent issued in May 2007 to be a potential barrier to
entry that could prevent competitors from implementing the same procedures as
the Company.  However, the Company may be unable to protect these
proprietary rights.  See the risk factor titled “If we are unable to
protect, obtain and maintain our proprietary rights, we may not be able to
compete effectively or operate profitably” on page 9 of this annual
report.





Government
Regulation and Product Approval





The FDA
and comparable regulatory agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the testing (preclinical
and clinical), manufacturing, labeling, storage, recordkeeping, advertising,
promotion, import, export, marketing and distribution, among other things, of
drugs and drug product candidates. If we do not comply with applicable
requirements, we may be fined, the government may refuse to approve our
marketing applications or allow us to manufacture or market our products, and we
may be criminally prosecuted.  We and our manufacturers may also be subject
to regulations under other United States federal, state, local and foreign
laws.




4




In the
United States, the FDA regulates drugs under the Food Drug and Cosmetic Act, or
FDCA, and implementing regulations. The process required by the FDA before our
drug candidates may be marketed in the United States generally involves the
following (although the FDA is given wide discretion to impose different or more
stringent requirements on a case-by-case basis):





·
              completion
      of extensive preclinical laboratory tests, preclinical animal studies and
      formulation studies, all performed in accordance with the FDA’s Good
      Laboratory Practice or GLP regulations and other
    regulations;





·
              submission
      to the FDA of an IND application which must become effective before
      clinical trials may begin;





·
              performance
      of multiple adequate and well-controlled clinical trials meeting FDA
      requirements to establish the safety and efficacy of the product candidate
      for each proposed indication;





·
              submission
      of a Biological License Application or BLA to the
  FDA;





·
              satisfactory
      completion of an FDA pre-approval inspection of the manufacturing
      facilities at which the product candidate is produced, and potentially
      other involved facilities as well, to assess compliance with cGMP,
      regulations and other applicable regulations;
  and





·
              the
      FDA review and approval of the BLA prior to any commercial marketing, sale
      or shipment of the drug.





The
testing and approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our drug candidates
will be granted on a timely basis, if at all. Risks to us related to these
regulations are described in the Risk Factors in Item 1A of this Annual
Report.




Preclinical
tests may include laboratory evaluation of product chemistry, formulation and
stability, as well as studies to evaluate toxicity and other effects in animals.
The results of preclinical tests, together with manufacturing information and
analytical data, among other information, are submitted to the FDA as part of an
IND application. Subject to certain exceptions, an IND becomes effective
30 days after receipt by the FDA, unless the FDA, within the 30-day time
period, issues a clinical hold to delay a proposed clinical investigation due to
concerns or questions about the conduct of the clinical trial, including
concerns that human research subjects will be exposed to unreasonable health
risks. In such a case, the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial can begin. Our submission of an IND, or those
of our collaboration partners, may not result in the FDA authorization to
commence a clinical trial. A separate submission to an existing IND must also be
made for each successive clinical trial conducted during product development.
The FDA must also approve changes to an existing IND. Further, an independent
institutional review board, or IRB, for each medical center proposing to conduct
the clinical trial must review and approve the plan for any clinical trial
before it commences at that center and it must monitor the study until
completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. Clinical testing also must satisfy
extensive Good Clinical Practice or GCP requirements and regulations for
informed consent.




Clinical
Trials




For
purposes of BLA submission and approval, clinical trials are typically conducted
in the following three sequential phases, which may overlap (although additional
or different trials may be required by the FDA as well):





·
              Phase I clinical trialsare initially conducted in a limited population to test the drug
      candidate for safety, dose tolerance, absorption, metabolism, distribution
      and excretion in healthy humans or, on occasion, in patients, such as
      cancer patients. In some cases, particularly in cancer trials, a sponsor
      may decide to conduct what is referred to as a “Phase Ib” evaluation,
      which is a second safety-focused Phase I clinical trial typically
      designed to evaluate the impact of the drug candidate in combination with
      currently FDA-approved drugs.





·
              Phase II clinical trialsare generally conducted in a limited patient population to identify
      possible adverse effects and safety risks, to determine the efficacy of
      the drug candidate for specific targeted indications and to determine dose
      tolerance and optimal dosage. Multiple Phase II clinical trials may
      be conducted by the sponsor to obtain information prior to beginning
      larger and more expensive Phase III clinical trials. In some cases, a
      sponsor may decide to conduct what is referred to as a “Phase IIb”
      evaluation, which is a second, confirmatory Phase II clinical trial
      that could, if positive and accepted by the FDA, serve as a pivotal
      clinical trial in the approval of a drug
  candidate.





·
              Phase III clinical
      trials are commonly referred to as pivotal trials. When
      Phase II clinical trials demonstrate that a dose range of the drug
      candidate is effective and has an acceptable safety profile,
      Phase III clinical trials are undertaken in large patient populations
      to further evaluate dosage, to provide substantial evidence of clinical
      efficacy and to further test for safety in an expanded and diverse patient
      population at multiple, geographically dispersed clinical trial
      sites.




In some
cases, the FDA may condition continued approval of a BLA on the sponsor’s
agreement to conduct additional clinical trials with due diligence. In other
cases, the sponsor and the FDA may agree that additional safety and/or efficacy
data should be provided; however, continued approval of the BLA may not always
depend on timely submission of such information. Such post-approval studies are
typically referred to as Phase IV studies.




Biological
License Application




The
results of drug candidate development, preclinical testing and clinical trials,
together with, among other things, detailed information on the manufacture and
composition of the product and proposed labeling, and the payment of a user fee,
are submitted to the FDA as part of a BLA. The FDA reviews all BLAs submitted
before it accepts them for filing and may request additional information rather
than accepting a BLA for filing. Once a BLA is accepted for filing, the FDA
begins an in-depth review of the application.




5




During
its review of a BLA, the FDA may refer the application to an advisory committee
for review, evaluation and recommendation as to whether the application should
be approved. The FDA may refuse to approve a BLA and issue a not approvable
letter if the applicable regulatory criteria are not satisfied, or it may
require additional clinical or other data, including one or more additional
pivotal Phase III clinical trials. Even if such data are submitted, the FDA
may ultimately decide that the BLA does not satisfy the criteria for approval.
Data from clinical trials are not always conclusive and the FDA may interpret
data differently than we or our collaboration partners interpret data. If the
FDA’s evaluations of the BLA and the clinical and manufacturing procedures and
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which contains the conditions that must be met in order to
secure final approval of the BLA. If and when those conditions have been met to
the FDA’s satisfaction, the FDA will issue an approval letter, authorizing
commercial marketing of the drug for certain indications. The FDA may withdraw
drug approval if ongoing regulatory requirements are not met or if safety
problems occur after the drug reaches the market. In addition, the FDA may
require testing, including Phase IV clinical trials, and surveillance
programs to monitor the effect of approved products that have been
commercialized, and the FDA has the power to prevent or limit further marketing
of a drug based on the results of these post-marketing programs. Drugs may be
marketed only for the FDA-approved indications and in accordance with the
FDA-approved label. Further, if there are any modifications to the drug,
including changes in indications, other labeling changes, or manufacturing
processes or facilities, we may be required to submit and obtain FDA approval of
a new BLA or BLA supplement, which may require us to develop additional data or
conduct additional preclinical studies and clinical trials.




Orphan
Drug Designation and Exclusivity




The FDA
may grant orphan drug designation to drugs intended to treat a rare disease or
condition, which generally is a disease or condition that affects fewer than
200,000 individuals in the United States. Orphan drug designation must be
requested before submitting an BLA. If the FDA grants orphan drug designation,
which it may not, the identity of the therapeutic agent and its potential orphan
use are publicly disclosed by the FDA. Orphan drug designation does not convey
an advantage in, or shorten the duration of, the review and approval process. If
a product which has an orphan drug designation subsequently receives the first
FDA approval for the indication for which it has such designation, the product
is entitled to seven years of orphan drug exclusivity, meaning that the FDA may
not approve any other applications to market the same drug for the same
indication for a period of seven years, except in limited circumstances, such as
a showing of clinical superiority to the product with orphan exclusivity
(superior efficacy, safety, or a major contribution to patient care). Orphan
drug designation does not prevent competitors from developing or marketing
different drugs for that indication. We intend to seek orphan drug designation
for our products at the appropriate time.




Under
European Union medicines laws, the criteria for designating a product as an
“orphan medicine” are similar but somewhat different from those in the United
States. A drug is designated as an orphan drug if the sponsor can establish that
the drug is intended for a life-threatening or chronically debilitating
condition affecting no more than five in 10,000 persons in the European Union or
that is unlikely to be profitable, and if there is no approved satisfactory
treatment or if the drug would be a significant benefit to those persons with
the condition. Orphan medicines are entitled to ten years of marketing
exclusivity, except under certain limited circumstances comparable to United
States law. During this period of marketing exclusivity, no “similar”
product, whether or not supported by full safety and efficacy data, will be
approved unless a second applicant can establish that its product is safer, more
effective or otherwise clinically superior. This period may be reduced to six
years if the conditions that originally justified orphan designation change or
the sponsor makes excessive profits.





Fast
Track Designation




The FDA’s
fast track program is intended to facilitate the development and to expedite the
review of drugs that are intended for the treatment of a serious or
life-threatening condition and that demonstrate the potential to address unmet
medical needs. Under the fast track program, applicants may seek traditional
approval for a product based on data demonstrating an effect on a clinically
meaningful endpoint, or approval based on a well-established surrogate
endpoint. The sponsor of a new drug candidate may request the FDA to
designate the drug candidate for a specific indication as a fast track drug at
the time of original submission of its IND, or at any time thereafter prior to
receiving marketing approval of a marketing application. The FDA will determine
if the drug candidate qualifies for fast track designation within 60 days
of receipt of the sponsor’s request.




If the
FDA grants fast track designation, it may initiate review of sections of a BLA
before the application is complete. This so-called “rolling review” is available
if the applicant provides and the FDA approves a schedule for the submission of
the remaining information and the applicant has paid applicable user fees. The
FDA’s Prescription Drug User Fee Act or PDUFA review clock for both a standard
and priority BLA for a fast track product does not begin until the complete
application is submitted. Additionally, fast track designation may be withdrawn
by the FDA if it believes that the designation is no longer supported by
emerging data, or if the designated drug development program is no longer being
pursued.




In some
cases, a fast track designated drug candidate may also qualify for one or more
of the following programs:





·
              Priority
      Review. As explained above, a drug candidate may be eligible
      for a six-month priority review. The FDA assigns priority review status to
      an application if the drug candidate provides a significant improvement
      compared to marketed drugs in the treatment, diagnosis or prevention of a
      disease. A fast track drug would ordinarily meet the FDA’s criteria for
      priority review, but may also be assigned a standard review. We do not
      know whether any of our drug candidates will be assigned priority review
      status or, if priority review status is assigned, whether that review or
      approval will be faster than conventional FDA procedures, or that the FDA
      will ultimately approve the
drug.





·
              Accelerated
      Approval.  Under the FDA’s accelerated approval
      regulations, the FDA is authorized to approve drug candidates that have
      been studied for their safety and efficacy in treating serious or
      life-threatening illnesses and that provide meaningful therapeutic benefit
      to patients over existing treatments based upon either a surrogate
      endpoint that is reasonably likely to predict clinical benefit or on the
      basis of an effect on a clinical endpoint other than patient survival or
      irreversible morbidity. In clinical trials, surrogate endpoints are
      alternative measurements of the symptoms of a disease or condition that
      are substituted for measurements of observable clinical symptoms. A drug
      candidate approved on this basis is subject to rigorous post-marketing
      compliance requirements, including the completion of Phase IV or
      post-approval clinical trials to validate the surrogate endpoint or
      confirm the effect on the clinical endpoint. Failure to conduct required
      post-approval studies with due diligence, or to validate a surrogate
      endpoint or confirm a clinical benefit during post-marketing studies, may
      cause the FDA to seek to withdraw the drug from the market on an expedited
      basis. All promotional materials for drug candidates approved under
      accelerated regulations are subject to prior review by the
    FDA




6




When
appropriate, we intend to seek fast track designation, accelerated approval or
priority review for our drug candidates. We cannot predict whether any of our
drug candidates will obtain fast track, accelerated approval, or priority review
designation, or the ultimate impact, if any, of these expedited review
mechanisms on the timing or likelihood of the FDA approval of any of our drug
candidates.




Satisfaction
of the FDA regulations and approval requirements or similar requirements of
foreign regulatory agencies typically takes several years, and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product or disease. Typically, if a drug candidate is intended to treat a
chronic disease, as is the case with the drug candidate we are developing,
safety and efficacy data must be gathered over an extended period of time.
Government regulation may delay or prevent marketing of drug candidates for a
considerable period of time and impose costly procedures upon our activities.
The FDA or any other regulatory agency may not grant approvals for changes in
dosage form or new indications for our drug candidates on a timely basis, or at
all. Even if a drug candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient populations and
dosages. Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a drug may result in restrictions on the drug
or even complete withdrawal of the drug from the market. Delays in obtaining, or
failures to obtain, regulatory approvals for our drug candidate would harm our
business. In addition, we cannot predict what adverse governmental regulations
may arise from future United States or foreign governmental action.




Other
Regulatory Requirements




Any drugs
manufactured or distributed by us or any potential collaboration partners
pursuant to future FDA approvals are subject to continuing regulation by the
FDA, including recordkeeping requirements and reporting of adverse experiences
associated with the drug. Drug manufacturers and their subcontractors are
required to register with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with ongoing regulatory requirements, including cGMP, which impose
certain procedural and documentation requirements upon us and our third-party
manufacturers. Failure to comply with the statutory and regulatory requirements
can subject a manufacturer to possible legal or regulatory action, such as
warning letters, suspension of manufacturing, sales or use, seizure of product,
injunctive action or possible civil penalties. We cannot be certain that we or
our present or future third-party manufacturers or suppliers will be able to
comply with the cGMP regulations and other ongoing FDA regulatory requirements.
If our present or future third-party manufacturers or suppliers are not able to
comply with these requirements, the FDA may halt our clinical trials, require us
to recall a drug from distribution, or withdraw approval of the BLA for that
drug.




The FDA
closely regulates the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational activities and
promotional activities involving the Internet. A company can make only those
claims relating to safety and efficacy that are approved by the FDA. Failure to
comply with these requirements can result in adverse publicity, warning and/or
untitled letters, corrective advertising and potential civil and criminal
penalties.




Foreign
Regulation




In
addition to regulations in the United States, we will be subject to a variety of
foreign regulations governing clinical trials and commercial sales and
distribution of our future products. Whether or not we obtain FDA approval for a
product, we must obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical trials or
marketing of the product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than that required for
FDA approval. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary greatly from country to
country.




Under
European Union regulatory systems, marketing authorizations may be submitted
either under a centralized or mutual recognition procedure. The centralized
procedure provides for the grant of a single marking authorization that is valid
for all European Union member states. The mutual recognition procedure provides
for mutual recognition of national approval decisions. Under this procedure, the
holder of a national marketing authorization may submit an application to the
remaining member states. Within 90 days of receiving the applications and
assessment report, each member state must decide whether to recognize
approval.




In
addition to regulations in Europe and the United States, we will be subject to a
variety of foreign regulations governing clinical trials and commercial
distribution of our future products.




Patents,
Trademarks, and Proprietary Technology





Our
success will also depend on our ability to maintain trade secrets and
proprietary technology in the United States and in other countries, and to
obtain and maintain patents for our bioregulatory technology. We filed an
initial usage patent application with the U.S. Patent and Trademark Office or
PTO, in April 2002.  In October 2006, the PTO notified us of the
allowance of the patent and in May 2007, the PTO issued US Patent
#7,211,258.  We have also filed for foreign protection relating to
this patent in Canada, Japan and the European Union.





Employees





We
currently have no employees. The only management member of the Company providing
services to the Company at this time is the Chief Financial Officer, Marc L.
Rose, who is being compensated beyond his severance payments as a consultant as
previously described in the Company’s Form 8-K Report filed on July 2, 2009. We
have never experienced an employee-related work stoppage. We will need to hire
and retain highly-qualified experienced technical, management and sales
personnel in order to execute our business plan, carry out product development
and secure advantages over our competitors, all of which is subject to raising
adequate additional financing, if ever.





ITEM 1A.
            RISK
FACTORS





You should carefully consider the
risks, uncertainties and other factors described below, in addition to the other
information set forth in this Annual Report on Form 10-K, because they could
materially and adversely affect our business, operating results, financial
condition, cash flows and prospects, as well as adversely affect the value of an
investment in our Common Stock. Also, you should be aware that the risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we do not yet know of, or that we currently think are
immaterial, may also impair our business operations. You should also refer to
the other information contained in and incorporated by reference into this
Annual Report on Form 10-K, including our consolidated financial statements and
the related notes.


7


Risks
Related to Our Business





We
have a history of significant losses, and we may never achieve or sustain
profitability.





We have
been focused on product development and have not generated any revenues to date.
We have incurred operating losses each year of our operations and if we continue
to operate we expect to continue to incur operating losses for at least the next
several years. As of the date of this Report, the Company has no employees and
it has insufficient funds to cover future clinical trials and CMC related
expenses beyond the third calendar quarter of 2009.  We may never
become profitable. The process of developing our products requires significant
clinical development and laboratory testing and clinical trials, as well as
regulatory approvals. In addition, commercialization of our targeted products
will require the establishment of sales, marketing and manufacturing
capabilities, either through internal hiring or through contractual
relationships with others. We expect our research and development and general
and administrative expenses will increase over the next several years and, as a
result, we expect our losses will increase. As of May 31, 2009, our cumulative
net loss was $44,584,511. Our net loss was $7,230,206 for the fiscal year ended
May 31, 2009. Our continued operational loss may lower the value of our common
stock and may jeopardize our ability to continue our operations.





If
we cannot raise additional capital on acceptable terms, we will be unable to
complete planned clinical trials, obtain regulatory approvals, commercialize our
product candidate or sustain our operations. Furthermore, if the Company is
unable to raise sufficient additional funds, it  will likely be
required to suspend or cease  further operations on or about the end
of the third calendar quarter of 2009 until such financing is obtained, if
ever.





As of the
date of this Report, the Company has suspended the further recruitment of
patients for its ITP clinical trials pending the raising of additional
funding, the retention of additional clinical personnel and an evaluation of the
Company's clinical trial programs.





We will
require substantial future capital in order to continue to conduct the research
and development, clinical and regulatory activities necessary to bring our
products to market and to establish commercial manufacturing, marketing and
sales capabilities.  If the Company is unable to raise sufficient
additional funds, it  will likely be required to suspend or
cease  further operations on or about the end of the third calendar
quarter of 2009 until such financing is obtained, if ever.. Our future capital
requirements will depend on many factors, including:


·
              the
      progress of pre-clinical development and laboratory testing and clinical
      trials;


·
              time
      and costs involved in obtaining regulatory
  approvals;


·
              the
      number of indications we
pursue;


·
              costs
      in filing and prosecuting patent applications and enforcing or defending
      patent claims; and


·
              the
      establishment of selected strategic alliances and activities required for
      product commercialization.





As of
May 31, 2009, we had cash and cash equivalents of $2,637,292 and net
working capital of $1,237,428 compared to cash and cash equivalents of
$8,442,809 and working capital of $7,542,741 as of May 31, 2008.  We
have suffered recurring losses from operations and negative cash
flows.  As of the date of this Report, the Company has no employees
and it has insufficient funds to cover future clinical trials and CMC related
expenses beyond the third calendar quarter of 2009.  As a result, our
independent registered accountants, Grant Thornton LLP, indicated in their
report on our 2009 financial statements that there is substantial doubt about
our ability to continue as a going concern.





We are
considering all strategic options and also options for generating additional
cash to fund our continuing business operations. If we raise additional funds
through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of our
Common Stock. Furthermore, because of the low trading price of our Common Stock,
the number of shares of the new equity or equity-related securities that may be
required to be issued may cause shareholders to experience significant dilution.
In addition, the issuance of debt securities could increase the liquidity risk
or perceived liquidity risk faced by us. We cannot, however, be certain that
additional financing will be available on acceptable terms or at
all.





If
we are unable to enroll enough patients to complete our clinical trials,
regulatory agencies may delay their review of, or reject our applications, which
may result in increased costs and harm our ability to develop
products.





ITP is an
uncommon autoimmune bleeding disorder characterized by too few platelets in the
blood.  Affected individuals may have bruising, small purple marks on
the skin called petechiae, bleeding from the gums after having dental work,
nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual
bleeding.  Although bleeding in the brain is rare, it can be life
threatening if it occurs.  The affected individuals make antibodies
against their own platelets leading to the platelets' destruction, which in turn
leads to the abnormal bleeding. In ITP, we contracted Trident Clinical Research
Pty Ltd, a leading Australian clinical research organization, to manage and
monitor our first-in-patient ITP clinical trial. This clinical trial is designed
to provide initial multiple dose safety and PK data as well as preliminary
efficacy information. We have been approved for six sites in Australia and one
in New Zealand, all regional referral centers for treatment of chronic ITP, to
conduct a repeated dose study of PRTX-100 in chronic ITP patients. This clinical
trial began enrolling patients in the second calendar quarter of 2008. In
calendar 2008, we enrolled nine patients of which five completed the trial and
final results indicated that the drug was safe and well tolerated, although no
efficacy data was obtained.  Subsequently, the Company obtained
protocol approval to increase the dose range. While the Company has actively
solicited patients in calendar 2009 under this new protocol, no patients have
been enrolled as of the date of this Report.





Regulatory
agencies may delay reviewing our applications for approval, or may reject them,
based on our inability to enroll enough patients to complete our clinical
trials. Patient enrollment depends on many factors, including the size of the
patient population, the nature of the protocol, the proximity of patients to
clinical sites and the eligibility criteria for the study. Delays in planned
patient enrollment may result in increased costs and delays, which could have a
harmful effect on our ability to develop products. We may also encounter delays
or rejections based on changes in regulatory agency policies during the period
in which we develop a drug or the period required for review of any application
for regulatory agency approval of a particular compound. We also may encounter
delays if we are unable to produce clinical trial material in sufficient
quantities and of sufficient quality to meet the schedule for our planned
clinical trials. In addition, we rely on a number of third-parties, such as
clinical research organizations, to help support the clinical trials by
performing independent clinical monitoring, data acquisition and data
evaluations. Any failure on the part of these third-parties could delay the
regulatory approval process.


8


Clinical
trials are expensive, time consuming and difficult to design and
implement.  If clinical trials for PRTX-100 don’t provide positive
results, we may be required to abandon or repeat such clinical
trials.





Human
clinical trials are expensive and difficult to design and implement, in part
because they are subject to rigorous requirements.  The clinical trial
process is also time consuming.  Even with adequate financing, we
estimate that our clinical trials for PRTX-100 will take several years to
complete. Furthermore, failure can occur at any stage of the trials, and we can
encounter problems that cause us to abandon or repeat clinical
trials.  The commencement and completion of clinical trials may be
delayed by several factors, including:


·
              unforeseen
      safety issues;


·
              determination
      of dosing issues;


·
              lack
      of effectiveness during clinical
trials


·
              slower
      than expected rates of patient
recruitment


·
              inability
      to monitor patients adequately or after treatment;
  and


·
              inability
      or unwillingness of medical investigators to follow our clinical
      protocols.





In
addition, we or the FDA and/or foreign regulatory agencies may suspend our
clinical trials at any time if it appears that we are exposing participants to
unacceptable health risks or if the FDA and/or foreign regulatory agencies find
deficiencies in our IND and/or country specific regulatory submissions or in the
conduct of these trials.  Therefore, we cannot predict with any
certainty the schedule for future clinical trials.





If
we fail to obtain regulatory approvals for PRTX-100 or any other drug we
develop, we will not be able to generate revenues from the commercialization or
sale of those drugs.





We must
receive regulatory approval of each of our drugs before we can commercialize or
sell that product. The pre-clinical laboratory testing, formulation development,
manufacturing and clinical trials of any product we develop, as well as the
distribution and marketing of these products, are regulated by numerous federal,
state and local governmental authorities in the United States, principally the
FDA, and by similar agencies in other countries. The development and regulatory
approval process takes many years, requires the expenditure of substantial
resources, is uncertain and subject to delays, and will thus delay our receipt
of revenues, if any, from PRTX-100 or any other drug we develop. We cannot
assure you that our clinical trials will demonstrate the safety and efficacy of
PRTX-100 or any other drug we develop or will result in a marketable
product.





No
product can receive FDA approval unless human clinical trials show both safety
and efficacy for each target indication in accordance with FDA and foreign
country standards. A number of companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in late stage clinical trials even
after achieving promising results in early stage development. We therefore
cannot assure you that the results from our clinical trials will be successful
or that the results from our pre-clinical trials for PRTX-100 or any other drug
we develop will be predictive of results obtained in future clinical
trials.





Further,
data obtained from pre-clinical and clinical trial activities are subject to
varying interpretations that could delay, limit or prevent regulatory agency
approval. We cannot assure you that our clinical trials will establish the
safety and efficacy of PRTX-100 or any other drug we develop sufficiently for us
to obtain regulatory approval.





Our
products, if approved, may fail to achieve market acceptance.





There can
be no assurance that any products we successfully develop, if approved for
marketing, will achieve market acceptance or generate significant revenues. We
intend for our products, including PRTX-100, to replace or alter existing
therapies or procedures, and hospitals, physicians or patients may conclude that
these products are less safe or effective or otherwise less attractive than
existing therapies or procedures. If our products do not receive market
acceptance for any reason, it would adversely affect our business, financial
condition and results of operations.





Further,
our competitors may develop new technologies or products that are more effective
or less costly, or that seem more cost-effective, than our products. We can give
no assurance that hospitals, physicians, patients or the medical community in
general will accept and use any products that we may develop.





If
we are unable to obtain, protect, and maintain our proprietary rights in
intellectual property, we may not be able to compete effectively or operate
profitably.





Our
commercial success also depends, in large part, on our ability to obtain and
maintain intellectual property protection for our technology covering our
product candidates and avoiding infringement of the proprietary technology of
others. Our ability to do so will depend on, among other things, complex legal
and factual questions, and it should be noted that the standards regarding
intellectual property rights in our industry are still evolving. However, we
will be able to protect our proprietary rights from unauthorized use by
third-parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade
secrets.





We have
tried to protect our proprietary position by filing a U.S. patent application
related to PRTX-100.  In July 2006, the PTO issued an office action
final rejection.  In August 2006, we met with the patent examiner and
his supervisor and as a result of that meeting, the rejection was
retracted.  In October 2006, the PTO notified us of the allowance of
the patent and in May 2007, the PTO issued US Patent
#7,211,258.  Because the patent position of pharmaceutical companies
involves 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. Thus, any patents that
we own may not provide any protection against competitors. Patents that we may
file in the future or those 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, or designed around any
patents we may have issued to us.  Moreover, the laws of foreign
countries do not protect intellectual property rights to the same extent as the
laws of the United States.





We also
rely on trade secrets, know-how and technology, which are not protected by
patents, to maintain our competitive position. We protect this information by
entering into confidentiality agreements with parties that have access to it,
such as potential investors, advisors employees and consultants. Any of these
parties may breach the 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 was to be
disclosed to or independently developed by a competitor, our business and
financial condition could be adversely affected.




9




If
other companies claim that we infringe their proprietary technology, we may
incur liability for damages or be forced to stop our development and
commercialization efforts.





Competitors
and other third-parties may initiate patent litigation against us in the United
States or in foreign countries based on existing patents or patents that may be
granted in the future. These lawsuits can be expensive and would consume time
and other resources even if unsuccessful or brought without merit. Our
competitors may have sought or may seek patents that cover aspects of our
technology.




We are
aware that a third-party has a pending patent application for technologies
generally related to ours, and more patents for similar technologies may be
filed in the future. In the U.S., patent applications may remain confidential
after filing or published 18 months after filing.





Owners or
licensees of patents may file one or more infringement actions against us. Any
such infringement action could cause us to incur substantial costs defending the
lawsuit and could distract our management from our business, even if the
allegations of infringement or misappropriation are unwarranted. The defense of
multiple claims could have a disproportionately greater impact. Furthermore, an
adverse outcome from this type of claim could subject us to a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from making, using,
selling, offering for sale or importing our products or prevent our customers
from using our products.





Alternatively,
we could be required to license disputed rights from the third party. If a court
determines, or if we independently discover, that any of our products or
manufacturing processes violates third-party proprietary rights, we might not be
able to reengineer the product or processes to avoid those rights, or obtain a
license under those rights on commercially reasonable terms, if at
all.





We
may become involved in lawsuits to protect or enforce our patents that would be
expensive and time consuming.





In order
to protect or enforce our patent rights, we may initiate patent litigation
against third-parties. In addition, we may become subject to interference or
opposition proceedings conducted in patent and trademark offices to determine
the priority of inventions. The defense of intellectual property rights,
including patent rights through lawsuits, interference or opposition
proceedings, and other legal and administrative proceedings, would be costly and
divert our technical and management personnel from their normal
responsibilities. An adverse determination of any litigation or defense
proceedings could put our patent application at risk of not
issuing.





Furthermore,
because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation.
For example, during the course of this kind of litigation, confidential
information may be inadvertently disclosed in the form of documents or testimony
in connection with discovery requests, depositions or trial testimony. This
disclosure could negatively affect our business and financial
results.





If
third-party manufacturers of our products fail to devote sufficient time and
resources to our concerns, or if their performance is substandard, our clinical
trials and product introductions may be delayed and our costs may
rise.





We have
relied on, and intend to rely in the future, in part, on third-party contract
manufacturers to supply, store and distribute PRTX-100 and other potential
products.  Any products we develop may be in competition with other
product candidates and products for access to these facilities.  Thus,
we may not be successful in contracting with third-party manufacturers, or they
may not be able to manufacture these candidates and products in a cost-effective
or timely manner.  Additionally, our reliance on third-party
manufacturers exposes us to the following risks, any of which could delay or
prevent the completion of (x) our clinical trials, (y) the approval of our
products by the FDA or (z) the commercialization of our products, resulting in
higher costs or depriving us of potential product revenues:





·
              Contract
      manufacturers are obliged to operate in accordance with FDA-mandated
      cGMPs.  Their failure to establish and follow cGMPs and to
      document their adherence to such practices may lead to significant delays
      in the availability of material for clinical study and may delay or
      prevent filing or approval of marketing applications for our products.
      Additionally, failure to achieve and maintain high manufacturing
      standards, including the incidence of manufacturing errors, could result
      in patient injury or death, product recalls or withdrawals, delays or
      failures in product testing or delivery, cost overruns or other problems
      that could seriously hurt our
business.


·
              It
      may be difficult or impossible for us to find replacement manufacturers
      quickly on acceptable terms, or at all.  For example, we have
      initially relied on a single contract drug substance manufacturer,
      Eurogentec S.A., to produce PRTX-100.  Changing this
      manufacturer, or changing the manufacturer for any other products we
      develop, may be difficult and expensive.  The number of
      potential manufacturers is limited, and changing manufacturers may require
      confirmation of the analytical methods of the manufacturing processes and
      procedures in accordance with FDA-mandated cGMPs.  Such
      confirmation of the analytical methods may be costly and
      time-consuming.


·
              Our
      contract manufacturers may not perform as agreed or may not remain in the
      contract manufacturing business for the time required to produce, store
      and distribute our products
successfully.





Drug
manufacturers are subject to ongoing periodic unannounced inspection by the FDA,
the U.S. Drug Enforcement Agency, and corresponding state and foreign agencies
to ensure strict compliance with cGMPs, other government regulations and
corresponding foreign standards. While we are obligated to audit the performance
of third-party contractors, we do not have control over our third-party
manufacturers’ compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant market approval of drugs, delays,
suspension or withdrawal of approvals, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business.





We
believe Eurogentec S.A. has the capacity to produce a sufficient inventory of
PRTX-100 to conduct our proposed clinical trials.  If these
inventories are lost or damaged, or if Eurogentec S.A. cannot produce additional
inventory to complete the remaining phases of clinical trials, the clinical
development of our product candidate or its submission for regulatory approval
could be delayed, and our ability to commercialize this product could be
impaired or precluded.




10




Without
adequate additional financing in the third calendar quarter of 2009, the Company
runs the risk of not having adequate clinical trial material available to
complete our clinical trails, which could also lead to a significant delay in
continuing and /or commencing our clinical trial programs.





We
may not be able to manufacture our products in commercial quantities, which
would prevent us from marketing our products.





If any of
our potential products were approved by the FDA or foreign regulatory agencies
for commercial sale, we would need to manufacture them in larger quantities. We
have no manufacturing facilities at this time, and we have no experience in the
commercial manufacturing of drugs and limited experience in designing drug
manufacturing equipment. Thus, we would need to either develop the capability of
manufacturing on a commercial scale or engage third-party manufacturers with
this capability.  Significant scale-up of manufacturing may require
certain additional validation studies, which the FDA must review and
approve.  Moreover, contract manufacturers often encounter
difficulties in achieving volume production, quality control and quality
assurance, as well as shortages of qualified personnel.  For these
reasons, a third-party manufacturer might not be able to manufacture sufficient
quantities of PRTX-100 to allow us to commercialize it.  If we are
unable to increase the manufacturing capacity for PRTX-100, or any other product
we may develop, we may experience delays in or shortages in supply when
launching them commercially.





We
have no experience selling, marketing or distributing our products and no
internal capability to do so.





If we
receive regulatory approval to commence commercial sales of PRTX-100, we will
face competition with respect to commercial sales, marketing and distribution.
These are areas in which we currently have no experience beyond our Board of
Directors due to a lack of management. To market our product directly, we must
develop a direct marketing and sales force with technical expertise and
supporting distribution capability. Alternatively, we may engage a
pharmaceutical or other healthcare company with an existing distribution system
and direct sales force to assist us. There can be no assurance that we will
successfully establish sales and distribution capabilities either on our own or
in collaboration with third-parties or gain market acceptance for our product.
To the extent we enter co-promotion or other licensing arrangements, any
revenues we receive will depend on the efforts of third-parties. Those efforts
may not succeed.





Competition
in the pharmaceutical industry is intense; if we fail to compete effectively,
our financial results will suffer.





We engage
in a business characterized by extensive research efforts, rapid developments
and intense competition. We cannot assure you that our products will compete
successfully or that research and development by others will not render our
products obsolete or uneconomical. Our failure to compete effectively would
negatively affect our business, financial condition and results of operations.
We expect that successful competition will depend, among other things, on
product efficacy, safety, reliability, availability, timing and scope of
regulatory approval and price. Specifically, other factors we expect will impact
our ability to compete include the relative speed with which we can develop
products, complete the clinical, development and laboratory testing and
regulatory approval processes and supply commercial quantities of the product to
the market.





We expect
competition to increase as technological advances are made and commercial
applications broaden. In commercializing PRTX-100 and any additional products we
develop using our technology, we will face substantial competition from large
pharmaceutical, biotechnology and other companies, universities and research
institutions.





Most of
our competitors have substantially greater capital resources, research and
development personnel, facilities and experience in conducting clinical trials
and obtaining regulatory approvals than us.  As well, some of our
competitors have advantages over us in manufacturing and marketing
pharmaceutical products. We are thus at a competitive disadvantage to those
competitors who have greater capital resources and we may not be able to compete
effectively.





If
we are unable to hire additional qualified scientific, sales and marketing, and
other personnel, we  will not be able to achieve our
goals.





We
previously depended on the principal members of our management staff, including
Steven H. Kane, our president and chief executive officer, and Marc L. Rose,
CPA, our vice president of finance, chief financial officer, treasurer and
corporate secretary and consultants such as Edward W. Bernton, MD, who served as
our medical director. With the exception of Mr. Rose, who currently provides
various financial services to the Company as a consultant, none of these
individuals presently provide any services to the Company.  The
Company has also subsequently retained a vendor to provide similar services
previously provided by Dr. Bernton as the Company may request from time to
time.  As previously disclosed in our Form 10-Q filed on April 14,
2009, Messers. Kane and Rose have voluntarily terminated their employment with
the Company. Messers. Kane and Rose remain the CEO and CFO, respectively, of the
Company. As of the date of this Report, while Mr. Rose has not accepted full
time employment elsewhere, Mr. Kane is now also currently the Chairman and CEO
of Patient Safety Technologies, Inc.  The loss of these individuals’
services may significantly delay or prevent the achievement of research,
development or business objectives and could negatively affect our business,
financial condition and results of operations if their replacements are not
promptly retained. We face intense competition for such personnel and
consultants. Such replacements are predicated, among other conditions, on the
Company raising additional funding. We cannot assure you that we will attract
and retain qualified management and scientific personnel in the future, with or
without adequate additional financing. We do not maintain key person life
insurance on any of these individuals.





Further,
we expect that our potential expansion into areas and activities requiring
additional expertise, such as further clinical trials, governmental approvals,
contract manufacturing and marketing, will place additional requirements on our
management, operational and financial resources. We expect these demands will
require an increase in management and scientific personnel and the development
of additional expertise from that which the Company had previously
retained.  The failure to attract and retain such personnel or to
develop such expertise would impact prospects for our success.





Risks
Relating to Our Industry





Even
if we obtain marketing approval, PRTX-100 will be subject to ongoing regulatory
review.





If
regulatory approval of PRTX-100 is granted, that approval may be subject to
limitations on the indicated uses for which it may be marketed or contain
requirements for costly post-marketing follow-up studies. As to products for
which marketing approval is obtained, the manufacturer of the product and the
manufacturing facilities will be subject to continual review and periodic
inspections by the FDA and other regulatory authorities. In addition, the
labeling, packaging, adverse event reporting, storage, advertising, promotion
and record keeping related to the product will remain subject to extensive
regulatory requirements. The subsequent discovery of previously unknown problems
with the product, manufacturer or facility may result in restrictions on the
product or the manufacturer, including withdrawal of the product from the
market. We may be slow to adapt, or we may never adapt, to changes in existing
requirements or adoption of new requirements or policies.




11




If we
fail to comply with applicable regulatory requirements, we may be subject to
fines, suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal
prosecution.





Market
acceptance of PRTX-100 will be limited if users are unable to obtain adequate
reimbursement from third-party payors.





Government
health administration authorities, private health insurers and other
organizations generally provide reimbursement for products like PRTX-100, and
our commercial success will depend in part on these third-party payors agreeing
to reimburse patients for the costs of our product. Even if we succeed in
bringing our proposed products to market, we cannot assure you that third-party
payors will consider it cost-effective or provide reimbursement in whole or in
part for its use.





Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. PRTX-100 is intended to replace or alter existing therapies or
procedures. These third-party payors may conclude that our product is less safe,
effective or cost-effective than existing therapies or procedures. Therefore,
third-party payors may not approve our product for reimbursement.





If
third-party payors do not approve our product for reimbursement or fail to
reimburse them adequately, sales will suffer as some physicians or their
patients will opt for a competing product that is approved for reimbursement or
is adequately reimbursed. Even if third-party payors make reimbursement
available, these payors’ reimbursement policies may adversely affect our ability
to sell our product on a profitable basis.





Moreover,
the trend toward managed healthcare in the United States, the growth of
organizations such as health maintenance organizations and legislative proposals
to reform healthcare and government insurance programs could significantly
influence the purchase of healthcare services and products, resulting in lower
prices and reduced demand for our product, which could adversely affect our
business, financial condition and results of operations.





In
addition, legislation and regulations affecting the pricing of pharmaceuticals
may change in ways adverse to us before or after the FDA or other regulatory
agencies approve PRTX-100 for marketing. While we cannot predict the likelihood
of any of these legislative or regulatory proposals, if any government or
regulatory agencies adopt these proposals they could negatively affect our
business, financial condition and results of operations.





We
may be required to defend lawsuits or pay damages in connection with the alleged
or actual harm caused by our products.





We face
an inherent business risk of exposure to product liability claims in the event
that the use of any of our products is alleged to have resulted in harm to
others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits against
us are successful. Furthermore, product liabilities claims, regardless of their
merits, could be costly and divert our management’s attention from other
business concerns, or adversely affect our reputation and the demand for our
product.  We currently maintain a $2,000,000 general liability
insurance policy, a global $3,000,000 clinical liability insurance policy and as
required, country specific clinical liability insurance will be
procured.  As required by local regulations, an AUD $10,000,000
clinical liability insurance has been procured for the ITP trial in Australia
and New Zealand.  We intend to expand our liability insurance coverage
to any products for which we obtain marketing approval, however, such insurance
may be unavailable, prohibitively expensive or may not fully cover our potential
liabilities. If we are unable to maintain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims or field actions, we may be unable to continue to market our products and
develop new markets.





Developments by competitors may
render our products or technologies obsolete or
non-competitive.





The
biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change.  PRTX-100,
should we obtain regulatory approval, will have to compete with existing
therapies.  In addition, a significant number of companies are
pursuing the development of products that target the same indications that we
are targeting.  We face competition from both domestic and
international companies.  In addition, companies pursuing different
but related fields represent substantial competition.  Many of these
organizations competing with us have substantially greater capital resources,
larger research and development staffs and facilities, long drug development
history in obtaining regulatory approvals and greater manufacturing and
marketing capabilities than we do.  These organizations also compete
with us to attract qualified personnel and parties for acquisitions, joint
ventures or other strategic collaborations.





Risks
Related to Our Common Stock





Our
common stock has experienced in the past, and may experience in the future,
significant price volatility, which substantially increases the risk of loss to
persons owning our common stock.





The stock
market, particularly in recent years, has experienced significant volatility
particularly with respect to pharmaceutical and biotechnology stocks. The
volatility of pharmaceutical and biotechnology stocks often does not relate to
the operating performance of the companies represented by the stock. Factors
that could cause this volatility in the market price of our common stock
include:





·
              announcements
      of the introduction of new products by us or our
    competitors;


·
              market
      conditions in the pharmaceutical and biotechnology
  sectors;


·
              rumors
      relating to us or our
competitors;


·
              litigation
      or public concern about the safety of our potential
    products;


·
              our
      quarterly operating results;


·
              deviations
      in our operating results from the estimates of securities
      analysts;


·
              FDA
      or international regulatory actions;
and




12




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


·
              inability
      to raise adequate financing.





Because
of the limited trading market for our common stock, and because of the
significant price volatility, you may not be able to sell your shares of common
stock when you desire to do so. In the fiscal year ended May 31, 2009, our stock
price ranged from a high of $1.01 to a low of $0.02 per share. The inability to
sell your shares in a rapidly declining market may substantially increase your
risk of loss as a result of such illiquidity and because the price for our
common stock may suffer greater declines due to its price
volatility.





We
may be the subject of securities class action litigation due to future stock
price volatility.





In the
past, when the market price of a stock has been volatile, holders of that stock
have periodically instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.





Future
sales of common stock by our existing stockholders may cause our stock price to
fall.





The
market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market or the perception
that these sales could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem appropriate and
thus inhibit our ability to raise additional capital when it is
needed.





We
have never paid dividends on our capital stock, and we do not anticipate paying
any cash dividends in the foreseeable future.





We have
paid no cash dividends on our capital stock to date and we currently intend to
retain our future earnings, if any, to fund the development and growth of our
business. In addition, the terms of any future debt or credit facility may
preclude us from paying these dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of gain for the foreseeable
future.





Our common stock is quoted on the OTC
Bulletin Board which may have an unfavorable impact on our stock price and
liquidity.





Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a
significantly more limited market than the New York Stock Exchange or NASDAQ
system. The quotation of our shares on the OTC Bulletin Board may result in a
less liquid market available for existing and potential stockholders to trade
shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in the
future.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





Not
Applicable





ITEM 2.
            PROPERTIES





We
originally entered into a three year operating lease in New Hope, PA for 3,795
square feet of office and laboratory space. The lease commenced on January 9,
2004 and was to expire on February 28, 2007.  On November 18, 2005, we
modified the existing lease which added an additional 2,147 square feet and
extended the lease term to January 31, 2008.  In the fiscal third
quarter of 2006, we invested $62,907 in leasehold improvements, which was
amortized through January 2008.On April 30, 2007, we modified the
existing lease and extended the lease term to January 31, 2009 with an option
for an additional one year. In August 2008, we exercised the one year option and
extended the lease term to January 31, 2010.  In July 2009, we
subleased the original 3,795 square feet of office and laboratory space through
January 31, 2010.




ITEM 3.
            LEGAL
PROCEEDINGS





We are
not a party to any pending material legal proceedings and we are not aware of
threatened material legal proceedings to which any person, officer, affiliate of
the Company or any owner of more than 5% of the Company’s stock is an adverse
party to or has a material interest adverse to, the Company.




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




There
were no matters submitted to a vote of security holders in the fourth quarter of
the fiscal year ended May 31, 2009.





PART II




ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES





(a)Market
Information.    Our common stock is traded on Over
the Counter – Bulletin Board (OTCBB) under the symbol “PRTX”. The price range
per share reflected in the table below is the highest and lowest per share sales
price for our stock as reported on the OTCBB during each quarter of the two most
recent fiscal years. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.




High
                      
                      
                      Low2008First
      Quarter
                      
                      $
                      1.85
                      
                      
                      $
                      1.20Second
      Quarter
                      
                      
                      1.50
                      
                      
                      
                      1.05Third
      Quarter
                      
                      
                      1.50
                      
                      
                      
                      1.01Fourth
      Quarter
                      
                      
                      1.18
                      
                      
                      
                      0.682009First
      Quarter
                      
                      $
                      0.92
                      
                      
                      $
                      0.36Second
      Quarter
                      
                      
                      1.01
                      
                      
                      
                      0.16Third
      Quarter
                      
                      
                      0.30
                      
                      
                      
                      0.04Fourth
      Quarter
                      
                      
                      0.30
                      
                      
                      
                      0.02




13




(b)Holders.    As of May 31, 2009, there were
approximately 397 holders of record of our common stock. This does not reflect
beneficial stockholders who hold their stock in nominee or “street” name through
various brokerage firms.





(c)Dividends.    We have never declared or paid cash
dividends on our capital stock, and we do not intend to pay cash dividends in
the foreseeable future. We plan to retain any earnings for use in the operation
of our business and to fund future growth.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





Not
Applicable




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





You
should read this Management’s Discussion and Analysis of Financial Condition and
Results of Operations in conjunction with our 2009 Financial Statements and
accompanying Notes. The matters addressed in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, may contain certain
forward-looking statements involving risks and uncertainties.





Overview





We are a
development stage company engaged in developing a class of biopharmaceutical
drugs for treating autoimmune and inflammatory diseases. Our lead product,
PRTX-100, has demonstrated effectiveness in pre-clinical studies in regulating
the immune system with persisting effects.  However, the effectiveness of
PRTX-100 shown in pre-clinical studies using animal models may not be predictive
of the results that we will see in our clinical trials.  We currently have
no product on the market.  The Company’s initial business model
initially targeted the autoimmune diseases idiopathic thrombocytopenic purpura,
or ITP, and Rheumatoid Arthritis, or RA.





As of the
date of this Report, the Company has no employees and it has insufficient funds
to cover future clinical trials and Chemistry, Manufacturing and Control or CMC
related expenses beyond the third calendar quarter of 2009. If the Company is
unable to raise sufficient additional funds, it will likely be required to
suspend or cease further operations on or about the end of the third calendar
quarter of 2009 until such financing is obtained, if ever. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern.





Favorable
pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid
the foundation for the Investigational New Drug Application or IND, for treating
RA.  We submitted the IND to the United States Food and Drug
Administration or FDA in March 2005 and later in March 2005 the FDA verbally
disclosed to us that it had placed our IND on clinical hold, pending additional
product characterization. In August 2005, we formally replied to the FDA and in
September 2005, the FDA notified us that it had lifted the clinical hold on our
IND and that our proposed study could proceed.  We commenced with our
first Phase I clinical trial in December 2005 and completed the Phase I clinical
trial in March 2006.  This Phase I clinical trial was performed in
healthy volunteers, and was designed primarily to assess the safety and
tolerability of PRTX-100.  The basic safety data demonstrated that
PRTX-100 was safe and well tolerated.  There were no deaths or serious
adverse events.  The pharmacokinetic (PK) profile was favorable and
the pre-clinical PK data were confirmed by the data in this Phase I clinical
trial.  In May 2007, we filed an amendment to the IND with the
FDA.  This amendment included the final Phase I safety study report,
CMC update, and a protocol for another Phase I clinical trial.





RA is an
autoimmune disease that causes the inflammation of the membrane lining multiple
joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed
joint lining, the synovium, can invade and damage bone and cartilage.
Inflammatory cells release enzymes and cytokines that may damage bone and
cartilage. The involved joint can lose its shape and alignment, resulting in
pain and loss of movement.  In July 2007, we commenced with an
additional Phase I clinical trial designed to gain more detailed information on
biomarkers, including gene expression profiling and platelet functional
assessments which will allow for more optimized patient selection and targeting
in the upcoming clinical trials. This second Phase I clinical trial extended the
clinical investigation of PRTX-100 tolerability, PK, and pharmacodynamics, or
PD, at higher dose ranges. Dosing was completed in July 2007 and final results
indicated that the drug was safe and well tolerated.  A Phase Ib
randomized, double-blind, placebo-controlled, multiple dose, dose escalation
safety and tolerability study of PRTX-100 in combination with methotrexate in
patients with active RA in South Africa has been approved and subject to
adequate additional financing, we anticipate starting this clinical
trial.





ITP is an
uncommon autoimmune bleeding disorder characterized by too few platelets in the
blood.  Affected individuals may have bruising, small purple marks on
the skin called petechiae, bleeding from the gums after having dental work,
nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual
bleeding.  Although bleeding in the brain is rare, it can be life
threatening if it occurs.  The affected individuals make antibodies
against their own platelets leading to the platelets' destruction, which in turn
leads to the abnormal bleeding. In ITP, we contracted Trident Clinical Research
Pty Ltd, a leading Australian clinical research organization, to manage and
monitor our first-in-patient ITP clinical trial. This clinical trial is designed
to provide initial multiple dose safety and PK data as well as preliminary
efficacy information. We have been approved for six sites in Australia and one
in New Zealand, all regional referral centers for treatment of chronic ITP, to
conduct a repeated dose study of PRTX-100 in chronic ITP patients. This clinical
trial began enrolling patients in the second calendar quarter of 2008. In
calendar 2008, we enrolled nine patients of which five completed the trial and
final results indicated that the drug was safe and well tolerated, although no
efficacy data was obtained.  Subsequently, the company obtained
approval of the protocol to increase the dose range and continues to actively
solicit patients in calendar 2009; however no patients have been enrolled as of
the date of this report.





As of the
date of this Report, the Company has suspended the further recruitment of
patients for its ITP clinical trials pending the raising of additional
funding, the retention of additional clinical personnel and an evaluation of the
Company's clinical trial programs.





In the
area of intellectual property and derivative drug development, our patent
application was filed in April 2002 and in May 2007 the PTO issued patent
#7,211,258 titled “Protein A Compositions and Methods of
Use.”  Additionally, patent applications relating to the manufacturing
process of PRTX-100 and new compounds are currently in process.




14




Critical
Accounting Policies





Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. Note 2 to the financial
statements describes the significant accounting policies and methods used in the
preparation of our financial statements.





We have
identified the policies below as some of the more critical to our business and
the understanding of our financial position and results of
operations.  These policies may involve a high degree of judgment and
complexity in their application and represent the critical accounting policies
used in the preparation of our financial statements. Although we believe our
judgments and estimates are appropriate and correct, actual future results may
differ from estimates. If different assumptions or conditions were to prevail,
the results could be materially different from these reported results. The
impact and any associated risks related to these policies on our business
operations are discussed throughout this report where such policies affect our
reported and expected financial results.





The
preparation of our financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reporting period. These estimates have a material impact on our financial
statements and are discussed in detail throughout this report.





As part
of the process of preparing our financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax expense together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. In the event that we determine that we would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset valuation allowance would
increase income in the period such determination was made.





Significant
management judgment is required in determining the valuation allowance recorded
against net deferred tax assets, which primarily consist of net operating loss
carry-forwards. We have recorded a full valuation allowance of $18,842,000 as of
May 31, 2009, due to uncertainties related to our ability to utilize such net
operating loss carry-forwards before they expire. The valuation allowance is
based on our estimates of taxable income by jurisdiction in which we operate and
the period over which our deferred tax assets will be recoverable, if at
all.





We
account for our stock option grants under the provisions of SFAS No. 123R,
Share-Based Payments (“SFAS 123R”). SFAS 123R requires the recognition of the
fair value of share-based compensation in the statements of operations. The fair
value of our stock option awards was estimated using a Black-Scholes option
valuation model. This model requires the input of highly subjective assumptions
and elections in adopting and implementing SFAS 123R, including expected stock
price volatility and the estimated life of each award. The fair value of
share-based awards is amortized over the vesting period of the award and we have
elected to use the straight-line method for awards granted after the adoption of
SFAS 123R. Prior to the adoption of SFAS 123R, we accounted for our stock option
grants under the provisions of Accounting Principles Board (“APB”) Opinion
No. 25,  Accounting for Stock Issued to
Employees  (“APB25”) and made pro forma footnote disclosures as
required by SFAS No. 148,  Accounting for Stock-Based
Compensation—Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation.





Results
of Operations





Fiscal
year ended May 31, 2009 compared to fiscal year ended May 31, 2008





Research
and Development Expenses – Research and Development expenses decreased from
$7,657,127 in 2008 to $3,490,956 in 2009.  The decrease of $4,166,171,
or 54%, was primarily the result of fewer personnel along with lower
manufacturing and regulatory consulting related expenses.  Also,
included in Research & Development expenses in 2009 was $223,961 compared to
$334,228 in 2008 for stock option compensation expense subsequent to the
adoption of SFAS No. 123R.





Administrative
Expenses - Administrative expenses increased from $2,759,463 in 2008 to
$3,505,259 in 2009.  The increase of $745,796, or 27%, was primarily
due to the impact of accruing for the severance which totaled $1,185,638, along
with $529,307 compared to $676,797 in 2008 for stock option compensation expense
subsequent to the adoption of SFAS No. 123R.




Professional
Fees - Professional fees decreased from $619,314 in 2007 to $365,670 in 2009.
The decrease of $253,644, or 41%, was due to a decrease in business development
activities pertaining to potential strategic partnerships and investor relations
activity as compared to the same period last year.





Interest
income - Interest income decreased from $549,292 in 2008 to $57,651 in
2009.  The decrease of $491,641 or 90% was attributed to a decrease in
interest bearing cash balances resulting from the use of cash for operations and
lower interest rates as compared to the same period last year.





Fiscal
year ended May 31, 2008 compared to fiscal year ended May 31, 2007





Research
and Development Expenses – Research and Development expenses increased from
$5,562,485 in 2007 to $7,657,127 in 2008.  The increase of $2,094,642,
or 38%, was primarily the result of conducting and planning clinical trials
including regulatory consulting along with product manufacturing, formulation
and qualification related costs. On January 2, 2007, the Company terminated the
employment of Victor S. Sloan, MD, former Senior Vice President and Chief
Medical Officer, under the terms of his employment agreement, which resulted in
an expense related to severance of approximately $290,000.  Also,
included in Research & Development expenses in 2008 was $334,228 compared to
$395,625 in 2007 for stock option compensation expense subsequent to the
adoption of SFAS No. 123R.





Administrative
Expenses - Administrative expenses decreased from $3,360,252 in 2007 to
$2,759,463 in 2008.  The decrease of $600,789, or 18%, was primarily
due to stock option compensation expense.  Included in Administrative
expenses in 2008 was $676,797 for stock option compensation expense compared to
$1,431,255 in 2007.





Professional
Fees - Professional fees increased from $544,903 in 2007 to $619,314 in 2008.
The increase of $74,411, or 14%, was due to an increase in business development
activities pertaining to potential strategic partnerships as compared to the
same period last year.




15




Interest
income - Interest income decreased from $1,020,820 in 2007 to $549,292 in
2008.  The decrease of $471,528, or 46% was attributed to a decrease
in interest bearing cash balances resulting from the use of cash in operations
and lower interest rates as compared to the same period last year.





Liquidity
and Capital Resources





Since
1999, we have incurred significant losses, and we expect to experience operating
losses and negative operating cash flow for the foreseeable future. Our primary
source of cash to meet short-term and long-term liquidity needs is the sale of
shares of our common stock.  If the Company is unable to raise
sufficient additional funds, it  will likely be required to suspend or
cease  further operations on or about the end of the third calendar
quarter of 2009 until such financing is obtained, if ever. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. We issue shares in private placements at a discount to the current
market price, as such the resale of privately-placed shares are restricted under
the Securities Act, which reduces their liquidity and, accordingly, their value
as compared to freely-tradable shares on the open market.





On
September 18, 2003, we raised $12,657,599 through the sale of 7,445,646 shares
of our common stock at $1.70 per share, with warrants to purchase an additional
3,164,395 shares of our common stock, at an exercise price of $2.40 per share.
The warrants expired on September 19, 2008. Net of transaction costs of
$1,301,536, our proceeds were $11,356,063.





On May
25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our
common stock at $1.95 per share, with warrants to purchase an additional 920,121
shares of our common stock, at an exercise price of $2.25 per share. The
warrants expire on May 25, 2010.  As part of this transaction, the
exercise price for the warrants from the September 2003 transaction were lowered
from $2.40 per share to $2.25 per share.  Net of transaction costs of
$206,717, our proceeds were $4,851,168.





On
December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares of
our common stock at $2.25 per share, with warrants to purchase an additional
648,784 shares of our common stock, at an exercise price of $2.99 per share. We
also issued warrants to purchase 227,074 shares of our common stock, at an
exercise price of $2.99 per share, to the placement agent.  All the
warrants expire on December 30, 2010.  Net of transaction costs of
approximately $328,118, our proceeds were $5,510,941.





In the
fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
which resulted in $786,538 in cash proceeds.





On July
7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through
the sale of 6,071,013 shares of our common stock at $2.50 per share, with
warrants to purchase an additional 1,517,753 shares of our common stock, at an
exercise price of $3.85 per share. We also issued warrants to purchase 531,214
shares of our common stock, at an exercise price of $3.85 per share, to the
placement agent.  All the warrants expire on July 7,
2011.





In the
first fiscal quarter of 2007, existing investors and option holders exercised
133,500 warrants and 6,000 options which resulted in $315,574 in cash
proceeds.





To the
extent any further warrants are exercised, we intend to use the proceeds for
general working capital and corporate purposes.  If all warrants are
exercised in cash, our proceeds would be approximately $18.9
million.





The
following is a summary of selected cash flow information for the fiscal years
ended May 31, 2009, 2008 and 2007:





Year
      Ended
                    May
      31, 2009
                  
                  
                  Year
      Ended
                    May
      31, 2008
                  
                  
                  Year
      Ended
                    May
      31, 2007Net
      loss
                  
                  $
                  (7,230,206
                  )
                  
                  $
                  (10,490,758
                  )
                  
                  $
                  (8,451,942
                  )Adjustments
      for non-cash operating items
                  
                  
                  803,067
                  
                  
                  
                  1,188,064
                  
                  
                  
                  1,996,715Net
      cash operating loss
                  
                  $
                  (6,427,139
                  )
                  
                  $
                  (9,302,694
                  )
                  
                  $
                  (6,455,227
                  )Net
      change in assets and liabilities
                  
                  
                  421,622
                  
                  
                  
                  199,349
                  
                  
                  
                  (120,785
                  )Net
      cash used in operating activities
                  
                  $
                  (6,005,517
                  )
                  
                  $
                  (9,103,345
                  )
                  
                  $
                  (6,576,012
                  )Net
      cash provided/(used) in investing activities
                  
                  $
                  200,000
                  
                  
                  $
                  —
                  
                  
                  $
                  (403,674
                  )Net
      cash provided by financing activities
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  14,533,295





Net
Cash Used In Operating Activities and Operating Cash Flow Requirements
Outlook





Our
operating cash outflows for the fiscal years ended May 31, 2009, 2008 and 2007
were primarily for research and development expenditures for PRTX-100 and
administrative operations.  We expect to continue to use cash
resources to fund operating losses and/or the  wind-down of our
operations if additional financing is not obtained . Even with additional
financing, we would expect to continue to incur operating losses in fiscal 2010
and beyond due to continuing research and development activities.





Net
Cash Used In Investing Activities and Investing Requirements
Outlook





Net cash
provided by investing activities for the fiscal year ended May 31, 2009
resulted from the sale of capital equipment and net cash used by investing
activities for fiscal year ended May 31, 2007 relates primarily to the
acquisition of capital equipment.  Subject to adequate additional
financing, we expect to continue to require investments in information
technology, laboratory and office equipment to support our research and
development activities.





Net
Cash Provided by Financing Activities and Financing Requirements
Outlook





Net cash
inflows provided by financing activities for the fiscal years ended May 31, 2007
resulted primarily from the sale of shares of common stock and the exercise of
warrants and stock options.




16





We may
never receive regulatory approval for any of our product candidates, generate
product sales revenues, achieve profitable operations or generate positive cash
flows from operations, and even if profitable operations are achieved, these may
not be sustained on a continuing basis. We have invested a significant portion
of our time and financial resources since our inception in the development of
PRTX-100, and our potential to achieve revenues from product sales in the
foreseeable future is dependent largely upon obtaining regulatory approval for
and successfully commercializing PRTX-100, especially in the United
States.





We expect
to continue to use our cash and investments resources to fund operating and
investing activities. Our existing cash and cash equivalents of $2,637,292 as of
May 31, 2009 will be sufficient to fund operations into the third calendar
quarter of 2009.  We will require substantial future capital in order
to continue to conduct the research and development, clinical and regulatory
activities necessary to bring our products to market and to establish commercial
manufacturing, marketing and sales capabilities. In order to raise additional
capital, we expect to seek financing through the private or public sales of our
securities, which may include common stock, debt and/or warrants to purchase
common stock.





Off
Balance Sheet Arrangements and Contractual Obligations





We have
entered into the following contractual obligations:





·
            Employee
      Agreements-Officers. As previously disclosed in our Form 10-Q filed
      on April 14, 2009, Messers. Kane and Rose voluntarily terminated their
      employment. Messers. Kane and Rose remain the CEO and CFO, respectively,
      of the Company. As of the date of this report, while Mr. Rose has not
      accepted full time employment elsewhere, Mr. Kane is now currently also
      the Chairman and CEO of Patient Safety Technologies,
  Inc.


·
            Directors
      Agreements.  To attract and retain qualified candidates
      to serve on the board of directors, we have previously entered into
      agreements with G. Kirk Raab, Chairman of the Board, Carleton A. Holstrom,
      Chairman of the Audit Committee, Eugene A. Bauer, MD, Peter G. Tombros,
      Frank M. Dougherty and Thomas P. Stagnaro under which Messrs. Raab,
      Holstrom, Dr. Bauer, Mr. Tombros, Mr. Dougherty and Mr. Stagnaro receive
      aggregate annual cash payments aggregating $150,000, $20,000, $20,000,
      $20,000, $20,000 and $20,000 respectively, as directors’
      fees.  Pursuant to a Cash Waiver & Option Termination
      Agreement dated April 10, 2009, each of the outside Directors of the
      Company, G. Kirk Raab, Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G.
      Tombros, Frank M. Dougherty and Thomas P. Stagnaro who are currently
      entitled to a Director's cash fee agreed to waive all such accrued and
      unpaid Director cash fees and terminate any rights for further cash fees.
      For Mr. Raab, those cash fees ceased as of April 1, 2009. For the other
      Directors, those cash fees ceased as of February 1, 2009. In addition,
      each of these Directors agreed to terminate immediately all of their
      existing stock options in the Company (vested and
    unvested).


·
            Operating Lease – Office
      Space. We have entered into a three-year operating lease in New
      Hope, PA for 3,795 square feet of office and laboratory space. The lease
      commenced on January 9, 2004 and was originally to expire on February 28,
      2007.  On November 18, 2005, we modified the existing lease
      which added an additional 2,147 square feet and extended the lease term to
      January 31, 2008 and on April 30, 2007, we modified the existing lease and
      extended the lease term to January 31,
2010.


·
            Operating Lease –
      Copier.  We entered into a sixty-three month operating
      lease for a multi-function copier. The lease commenced on December 16,
      2004 and will expire on March 16,
2010.





Recently
Issued Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles-a replacement of FASB Statement No.162 (“SFAS 168”). SFAS 168
establishes the FASB Accounting Standards Codification as the single source of
authoritative US generally accepted accounting principles recognized by the FASB
to be applied to nongovernmental entities. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of SFAS 168 will not have an impact on the Company’s
financial position, results of operations or cash flow. The Company will update
the disclosures for the appropriate FASB codification reference after adoption
in the second quarter of fiscal 2010.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS
165"). SFAS 165 is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 is effective for interim or annual financial periods ending after June 15,
2009. The Company has evaluated subsequent events after the balance sheet date
of May 31, 2009 through the date this annual report is filed on August 28,
2009.





In
December 2007, the FASB issued SFAS No. 141R (revised 2007) Business Combinations (“SFAS
141R”). SFAS 141R states that all business combinations (whether full, partial
or step acquisitions) will result in all assets and liabilities of an acquired
business being recorded at their fair values. Certain forms of contingent
considerations and certain acquired contingencies will be recorded at fair value
at the acquisition date. SFAS 141R also states acquisition costs will generally
be expensed as incurred and restructuring costs will be expensed in periods
after the acquisition date. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Earlier adoption
is prohibited.  We are currently evaluating the impact, if any, of
SFAS 141R upon adoption on our financial statements.





In
December 2007, the FASB ratified the Emerging Issue Task Force (“EITF”) Issue
07-01, Accounting for
Collaborative Arrangements(“EITF 07-01”). EITF 07-01 clarifies the
accounting for contractual arrangements wherein two or more parties come
together to participate in a joint operating activity which is conducted based
on provisions of a contract. EITF 07-01 provides guidance on income statement
classification of revenues and expenses related to such activities, and
specifies disclosures that should be made with respect to such activities. EITF
07-01 is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the potential impact, if any, of the adoption of
EITF 07-01 on its financial statements.


17


The
Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes.  Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for
Contingencies. As required by Interpretation 48, which clarifies
Statement 109, Accounting for
Income Taxes, the Company recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-notthreshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company applied Interpretation
48 to all tax positions for which the statute of limitations remained open. The
impact of adopting FIN 48 was not material as of the date of adoption or in
subsequent periods. As a result of the implementation of Interpretation 48, the
Company did not recognize any change in the liability for unrecognized tax
benefits and there was no change to the June 1, 2007 balance of retained
earnings.





The
Company is subject to US federal income tax as well as income taxes of state
jurisdiction. The Company is not currently under examination by any Federal or
state jurisdiction. The federal statute of limitations and state are opened from
inceptionforward.
Management believes that the accrual for tax liabilities is adequate for all
open years. This assessment relies on estimates and assumptions and may involve
a series of complex judgments about future events. On the basis of present
information, it is the opinion of the Company’s management that there are no
pending assessments that will result in a material adverse effect on the
Company’s financial statements over the next twelve months. The Company
recognizes any interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses for all periods presented. The
Company has not recorded any material interest or penalties during any of the
years presented.





ITEM 7A.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





Not
Applicable.





ITEM 8.           FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





The
financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K and incorporated by reference
herein.





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




None.





ITEM 9A.        CONTROLS
AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Management
of our company is responsible for establishing and maintaining effective
disclosure controls and procedures as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934. As of May 31, 2009, an
evaluation was performed, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2009, our disclosure controls and
procedures were effective at the reasonable assurance level to ensure that
information required to be disclosed by the Company in reports filed under the
Exchange Act was recorded, processed, summarized and reported within the time
period required by the Securities and Exchange Commission’s rules and forms and
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.





As
previously disclosed in our Form 10-Q filed on April 14, 2009, Messers. Kane and
Rose voluntarily terminated their employment. Messers. Kane and Rose remain the
CEO and CFO, respectively, of the Company. As of the date of this report, while
Mr. Rose has not accepted full time employment elsewhere, Mr. Kane is now
currently also the Chairman and CEO of Patient Safety Technologies,
Inc.





Changes
in Internal Control Over Financial Reporting





During
the quarter ended May 31, 2009 and thereafter, there have been no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Management’s Report on Internal
Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. Our internal control
system was designed to provide reasonable assurance to our management and board
of directors regarding the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our
evaluation under the framework in Internal Control—Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of May 31, 2009.


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.





ITEM 9B.        OTHER
INFORMATION




As of the
date of this Report, the Company and each of its current directors and executive
officers have agreed to enter into an indemnification agreement (the
“Indemnification Agreement”). It is anticipated that future directors and
officers of the Company will enter into an Indemnification Agreement with the
Company in substantially similar form. The Indemnification Agreement provides,
among other things, that the Company will indemnify and hold harmless each
person subject to an Indemnification Agreement (each, an “Indemnified Party”) to
the fullest extent permitted by applicable law from and against all losses,
costs, liabilities, judgments, penalties, fines, expenses and other matters that
may result or arise in connection with such Indemnified Party serving in his or
her capacity as a director of the Company or serving at the request of the
Company as a director, officer, employee, fiduciary or agent of another entity.
The Indemnification Agreement further provides that, upon an Indemnified Party’s
request, the Company will advance expenses to the Indemnified Party to the
fullest extent permitted by applicable law. Pursuant to the Indemnification
Agreement, an Indemnified Party is presumed to be entitled to indemnification
and the Company has the burden of proving otherwise. The Indemnification
Agreement also requires the Company to maintain in full force and effect
directors’ liability insurance on the terms described in the Indemnification
Agreement. If indemnification under the Indemnification Agreement is unavailable
to an Indemnified Party for any reason, the Company, in lieu of indemnifying the
Indemnified Party, will contribute to any amounts incurred by the Indemnified
Party in connection with any claim relating to an indemnifiable event in such
proportion as is deemed fair and reasonable in light of all of the circumstances
to reflect the relative benefits received or relative fault of the parties in
connection with such event.


18




The
foregoing summary of the Indemnification Agreement does not purport to be
complete and is qualified in its entirety by reference to the form of
Indemnification Agreement attached as Exhibit 10.21 and incorporated herein by
reference.




PART
III




ITEM 10.         DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Executive
Officers and Directors





Our
current directors and executive officers are as follows:





Name
              
              Age
              
              Position
      and Offices Held with the CompanyG.
      Kirk Raab + #
              
              73
              
              Chairman
      of the BoardSteven
      H. Kane +
              
              56
              
              President,
      Chief Executive Officer and DirectorMarc
      L. Rose, CPA
              
              44
              
              Vice
      President, Chief Financial Officer, Treasurer and Corporate
      SecretaryEugene
      A. Bauer, M.D. #
              
              67
              
              DirectorFrank
      M. Dougherty + #
              
              61
              
              DirectorCarleton
      A. Holstrom *
              
              73
              
              DirectorDinesh
      Patel, Ph.D. *
              
              58
              
              DirectorThomas
      P. Stagnaro *
              
              66
              
              DirectorPeter
      G. Tombros #
              
              67
              
              Director





*   Member
of the Audit Committee


#   Member
of Compensation Committee


+   Member
of the Nominating and Corporate Governance Committee





G. Kirk Raab has served as
Chairman of the Company’s Board of Directors since August 2003.  Mr.
Raab currently sits on the Boards and serves as Chairman of Transcept
Pharmaceuticals, Inc., Follica, Inc., Velos Medical Informatics, Inc., and BiPar
Sciences, Inc. Mr. Raab also serves on the board of The National Foundation for
Science and Technology Medals.  From February 1990 to July 1995, Mr.
Raab served as the President and Chief Executive Officer of
Genentech.  He originally joined Genentech in February 1985, as
President and Chief Operating Officer. Prior to joining Genentech, Mr. Raab
worked for Abbott Laboratories for 10 years, most recently as President, Chief
Operating Officer and a director. Mr. Raab served as the first Chairman of the
Biotechnology Industry Organization and the California Health Care
Institute.  Mr. Raab graduated from Colgate University in 1959, and is
a Trustee Emeritus.  He is a former trustee of the San Francisco
Ballet, the San Francisco Symphony, UCSF Foundation and Golden Gate Planned
Parenthood.





Steven H. Kane has served on
the Company’s board of directors since December 2002. He is currently the
Chairman and CEO of Patient Saftey Technologies, Inc., and President and Chief
Executive Officer of the Company. He has over 25 years experience in the health
care industry. From  April 1997 to August 2000, Mr. Kane served as
Vice President of North American Sales & Field Operations for Aspect
Medical. While at Aspect, he helped guide the company to a successful initial
public offering in January 2000. Prior to Aspect, Mr. Kane was Eastern Area Vice
President for Pyxis Corporation, where he was instrumental in positioning the
company for its successful initial public offering in 1992. Pyxis later was
acquired by Cardinal Health for $1 billion. Prior to that Mr. Kane worked in
sales management with Eli-Lilly and Becton Dickinson.





Marc L. Rose, CPA, has served
as the Company’s Vice President of Finance, Chief Financial Officer and
Treasurer since November 2004 and in April 2005 Mr. Rose was elected Corporate
Secretary.  From March 2001 to November 2004, Mr. Rose served as Vice
President and Chief Financial Officer of the DentalEZ Group, a privately held
manufacturer of dental equipment and dental handpieces located in Malvern,
PA.  From January 1998 to March 2001, Mr. Rose was Practice Manager of
Oracle Consulting Services for Oracle Corporation responsible for designing and
implementing Oracle financial and project applications.  From
September 1990 to January 1998, Mr. Rose held several positions with the
controllership organization of Waste Management, Inc and from June 1988 to
September 1990, was an auditor with Ernst & Young in
Philadelphia.  Mr. Rose is a Certified Public Accountant in the
Commonwealth of Pennsylvania and received his BA in Accounting/Finance from
Drexel University.





Eugene A. Bauer, M.D.has served on the Company’s
Board of Directors since February 2005.  Dr, Bauer is President & Chief
Medical Officer and member of the Board of Directors of Peplin, Inc., a public
company traded on the ASX in Australia. From 2004 to 2008 he was Chief Executive
Officer and board member of Neosil Incorporated, a privately held biotechnology
company that was acquired by Peplin in 2008.  From 2002 to 2004 Dr. Bauer
was a Senior Client Partner with Korn/ Ferry International. Dr. Bauer served as
Vice President for the Stanford University Medical Center from 1997 to 2001, and
as Dean of the Stanford University School of Medicine from 1995 through 2001.
Dr. Bauer was a founder of Connetics and served as an Emeritus Director of
Connetics Corp until its sale to Stiefel Laboratories in 2006. Since 1988 he has
been Professor, Department of Dermatology, Stanford University School of
Medicine, and was Chief of the Dermatology Service at Stanford University
Hospital from 1988 to 1995. From 1982 to 1988, he was a professor at Washington
University School of Medicine. Dr. Bauer has served as Chairman of two National
Institutes of Health study sections of the National Institute of Arthritis and
Musculoskeletal and Skin Diseases and has served on a board of scientific
counselors for the National Cancer Institute. Dr. Bauer also serves as a
director of Medgenics, Inc., a development stage biotechnology company listed on
the LSE/AIM.  Dr. Bauer is a director of two privately held companies,
Arbor Vita Corporation and Medisync Bioscience, Inc., and he is a director of
the American Dermatological Association, a non-profit professional
society.  Dr. Bauer holds B.S. and M.D. degrees from Northwestern
University.


19


Frank M. Dougherty has served
on the Company’s Board of Director since October 2001, and served as the
Company’s Corporate Secretary from June 2002 to December 2002. From January 2004
to April 2005, Mr. Dougherty served as the Corporate Secretary and Treasurer of
the Company. Mr. Dougherty is a practicing attorney and founder and owner of
Frank M. Dougherty P.C., a law firm in Albuquerque, New Mexico. He has practiced
law since 1982, and founded his current law firm in November 2001. Prior to
becoming a lawyer, Mr. Dougherty practiced as a CPA in Santa Fe, New Mexico. He
has an undergraduate degree in economics from the University of Colorado, a
graduate degree in accounting from the University of Arizona and a law degree
from Texas Tech University.





Carleton A. Holstrom has
served on the Company’s Board of Directors since October 2004. From 1977 through
1987, Mr. Holstrom was the Chief Financial Officer of Bear, Stearns & Co.
and its successor, The Bear Stearns Companies, Inc., and from 1987 until 2008
was the Managing Director Emeritus. From 1996 to 1997, Mr. Holstrom was the
Chief Financial Officer of Scientific Learning Corporation. From 1983 until
2009, Mr. Holstrom served on the Board of Directors of Custodial Trust Company
of Princeton, New Jersey, and from 1995 until 2009 was a director of Scientific
Learning Corporation of Oakland, California.  Since 2008, Mr. Holstrom
has served on the board of Carl Marks & Co. LLC.





Dinesh Patel, PhD has served
on the Company’s Board of Director since September 2003. He is a Managing
Director and Founding Partner of vSpring Capital, an early stage venture capital
fund with $400 million under management. From 1999 to 2004 Dr. Patel was also
the Founder, Chairman, President  & CEO of Ashni Naturaceuticals, Inc.
a company that specializes in the research, development and marketing of
clinically tested and patent-protected naturaceutical products. In 1999, Dr.
Patel co-founded and was the Chairman of Salus Therapeutics, Inc., a
biotechnology company focused on the research and development of nucleic
acid-based therapeutics, including antisense and gene therapy drugs.. From 1985
through 1999, Dr. Patel served as Co-founder, Chairman of the Board of
Directors, President & CEO, of Thera Tech, Inc., a Salt Lake City, Utah
based company, that has been a pioneer in the development and manufacture of
innovative drug delivery products.. Dr. Patel has been the recipient of numerous
awards, including US Small Business Administration’s Business Achiever Award,
and Scientific and Technology Award (State of Utah) and Entrepreneur of the Year
Award (Mountain West Venture Group). Dr. Patel got his undergraduate degree from
India and his doctorate degree from University of Michigan. Dr. Patel is active
in the Indian and local community serving on several boards and as an active
donor for various charitable causes.





Thomas P. Stagnaro has served
on the Company’s Board of Directors since July 2002.  He is President
& Chief Executive Officer of Americas Biotech Distributor (ABD), which he
founded in June 2004.  Previously, Mr. Stagnaro was President and
Chief Executive Officer of Agile Therapeutics, a private company focused on
developing women's healthcare products from September 2000 to August 2004. He
also served as a director on the board of Life Science Research Organization and
the National Science Foundation - Singapore.  Mr. Stagnaro formerly
was President and Chief Executive Officer of 3-Dimensional Pharmaceuticals and
Univax Biologics. He began his career with Searle Laboratories and held
increasingly important positions during his 30 years in the pharmaceutical
industry. Mr. Stagnaro has raised over $200 million for three development stage
companies and took Univax Biologics public in 1972. He holds three patents and
has published numerous articles.





Peter G. Tombros has served on
the Company’s Board of Directors since November 2005.  Mr. Tombros is
currently Professor and Executive in Residence in the Eberly College of Science
BS/MBA Program at the Pennsylvania State University.  From 2002 to
2005, Mr. Tombros served as CEO and Chairman of the Board of VivoQuest, a
private drug discovery company which combined proprietary natural product
chemistry and proprietary biological assays to develop small molecule products
for antiviral diseases. VivoQuest was sold to XTL Biosciences in September,
2005.  Prior to that, Mr. Tombros served as President and CEO of Enzon
Pharma.  From 1968 to 1994 Mr. Tombros was at Pfizer Inc. where he
helped to build the Pharmaceutical Business in a variety of positions including
Vice President of Marketing, Senior Vice President and General Manager and
Executive Vice President, Pfizer Pharmaceuticals. Mr. Tombros presently serves
on two other public company boards including Cambrex (NYSE), and NPS
Pharmaceuticals (NASDQ).  Mr. Tombros received his BS and MS degrees
from Penn State and his MBA from the University Of Pennsylvania Wharton School
Of Business.





Director
Independence





Each of
the following directors are “independent” under NASDAQ Stock Market LLC rules:
Messers. Raab, Dougherty, Holstrom, Stagnaro, and Tombros; and Drs. Bauer and
Patel.  These persons represent a majority of the board of
directors.  All members of the Compensation and Audit Committees are
independent.  Mr. Kane, a director and the Company’s President and
Chief Executive Officer is a member of the Nominating and Corporate Governance
Committee and is not considered independent. The other two members of the
Nominating and Corporate Governance Committee are independent
directors.





Audit
Committee





The
members of the Audit Committee are Messrs. Holstrom, Stagnaro and Dr.
Patel.  As of May 31, 2009, the chair of the Audit Committee was Mr.
Holstrom. The Company believes Mr. Holstrom is qualified as an audit committee
financial expert within the meaning of Securities and Exchange Commission
regulations. In addition, the Board has determined, in accordance with the
listing standards of the NASDAQ Capital Market that Mr. Holstrom meets the
standards of financial sophistication set forth therein and that each other
member of the audit committee is able to read and understand fundamental
financial statements.





The Audit
Committee meets with our management periodically to consider the adequacy of our
internal controls and the objectivity of our financial reporting. The Audit
Committee also meets with the independent auditors and with our own appropriate
financial personnel and internal auditors regarding these matters. The
independent auditors meet privately with the Audit Committee and have
unrestricted access to this committee. The Audit Committee recommends to our
Board the appointment of the independent auditors. The Audit Committee is also
responsible for the pre-approval of any non-audit services provided to the
Company by the independent auditors, as described in more detail in the Audit
Committee Charter.  The Audit Committee held four meetings during the
fiscal year ended May 31, 2009. The charter of the Audit Committee is available
on the Investor Information section of the Company’s website
(www.protalex.com).


20


Nominating
and Corporate Governance Committee





The
Corporate Governance and Nominating Committee is responsible for developing and
implementing policies and practices relating to corporate governance, including
reviewing and monitoring implementation of the Company’s Corporate Governance
Guidelines. In addition, the Committee develops and reviews background
information on candidates for the Board and makes recommendations to the Board
regarding such candidates. The Committee also prepares and supervises the
Board’s annual review of director independence and the Board’s performance
evaluation. The Nominating and Corporate Goverence Committee met two times
during fiscal 2009.  The charter of the Corporate Governance and
Nominating Committee is available on the Investor Information section of the
Company’s website (www.protalex.com).





The
members of the Nominating and Corporate Governance Committee are Messrs. Raab,
Kane and Dougherty.  Mr. Kane is not considered independent because he
is the Company’s President and Chief Executive Officer.  As of May 31,
2009, the chair of the Nominating and Corporate Governance Committee was Mr.
Dougherty.  The functions of this committee include recommending to
our full Board nominees for election as Directors.  Prior to the
establishment of the Nominating and Corporate Governance Committee, its
functions were performed by the entire Board.





Although
there is no formal procedure for stockholders to recommend nominees for the
Board, the Nominating and Corporate Governance Committee will consider such
recommendations if received at least 120 days in advance of the Annual Meeting
of Stockholders. Such recommendations should be addressed to the Nominating and
Corporate Governance Committee at our address and provide all information
relating to such person that the stockholder desires to nominate that is
required to be disclosed in solicitation of proxies pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (“Exchange
Act”).





Compensation
Committee





The
Compensation Committee annually reviews the performance and total compensation
package for the Company’s executive officers, including the Chief Executive
Officer; considers the modification of existing compensation and employee
benefit programs, and the adoption of new plans; administers the terms and
provisions of the Company’s equity compensation plans; and reviews the
compensation and benefits of non-employee directors. The Compensation Committee
met three times during fiscal 2009. The charter of the Compensation Committee is
available on the Investor Information section of the Company’s website
(www.protalex.com).





The
members of the Compensation Committee are Messrs. Raab, Dougherty, Tombros and
Dr. Bauer.  As of May 31, 2009, the chair of the Compensation
Committee was Mr. Raab.  Except for our CEO and Director, Mr. Steven
H. Kane, who also serves as the CEO and a Board member of Patient Safety
Technologies, Inc., none of our executive officers serves as a member of the
Board of Directors or compensation committee of an entity that has an executive
officer serving as a member of our Board or our Compensation
Committee.




Code
of Ethics




Our board
of directors adopted a code of ethics that applies to its directors, officers
and employees as well as those of its subsidiaries. Copies of our codes of
ethics are publicly available on our website at www.protalex.com. Requests for
copies of our codes of ethics should be sent in writing to Protalex, Inc., 145
Union Square Drive, New Hope, PA 18938.







Family
Relationships





There are
no family relationships between or among any officer or director of the
Company.







ITEM 11.         EXECUTIVE
COMPENSATION





SummaryCompensationTable





The table
below summarizes the total compensation paid to or earned by each of the named
executive officers for the fiscal years ended May 31, 2009 and
2008:





Name and Principal
                              Position
                            
                            Year
                            
                            Salary
                              ($) (1)
                            
                            
                            Bonus
                              ($)
                            
                            
                            Stock
                              Awards
                              ($)
                            
                            
                            Option
                              Awards
                              ($) (2)
                              (3)
                            
                            
                            Non-Equity
                              Incentive
                              Plan
                              Compensation
                              ($)
                            
                            
                            Change in
                              Pension Value
                              and
                              Nonqualified
                              Deferred
                              Compensation
                              Earnings
                            
                            
                            All
                              Other
                              Compensation
                              (4)
                            
                            
                            Total
                              ($)Steven
      H. Kane,President
      and
                            
                            2009
                            
                            
                            350,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            107,040
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            30,021
                            
                            
                            
                            487,061Chief
      Executive Officer
                            
                            2008
                            
                            
                            400,000
                            
                            
                            
                            75,000
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            29,745
                            
                            
                            
                            504,745Marc
      L. Rose, CPA,Vice
      President and
                            
                            2009
                            
                            
                            201,250
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            35,680
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            236,930Chief
      Financial Officer
                            
                            2008
                            
                            
                            230,000
                            
                            
                            
                            40,000
                            
                            
                            
                            —
                            
                            
                            
                            37,644
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            307,644




21


(1)
            In
      January 2008 and 2009, the Compensation Committee did not authorize salary
      increases for Messrs. Kane and Rose for calendar years 2008 or 2009,
      respectively.  Effective, April 16, 2009, salary payments ceased
      under Messrs. Kane and Rose Employment Agreements pursuant to Settlement
      Agreements as disclosed in our Form 10-Q filed on April 14,
      2009.





(2)
            In
      July 2008, the Compensation Committee granted the following option awards:
      Mr. Kane 300,000 and Mr. Rose 100,000. In January 2008, the Compensation
      Committee granted the following option awards: Mr. Rose
      40,000.





(3)
            Amounts
      are calculated in accordance with the provisions of Statement of Financial
      Accounting Standards (“SFAS”) No. 123R “Share-based Payment.” See
      Note 3. of the financial statements of the Company’s Annual Report for the
      year ended May 31, 2009 regarding assumptions underlying valuation of
      equity awards.





(4)
            This
      column represents the dollar amount for the Company paid portion of Mr.
      Kane’s health insurance that is outside the Company’s standard insurance
      provided to all other employees.





Employment
Contracts, Termination of Employment and Change in Control
Arrangements





Effective
April 15, 2009, the Company’s President and Chief Executive Officer, Steven H.
Kane, pursuant to a Settlement Agreement voluntarily resigned and terminated his
employment with the Company. Mr. Kane however, continues to serve as the
President and Chief Executive Officer for the Company at the pleasure of the
Board of Directors without any further compensation except his severance. Mr.
Kane remains on the Board of Directors as of the date of this Report.  On
April 30, 2009, the Company commenced paying Mr. Kane pursuant to his existing
severance arrangement thirty-six (36) equal bi-weekly installments of pay
totaling Six Hundred Thousand Dollars ($600,000) together with a sum during this
period equal to the existing premiums previously paid by the Company for Mr.
Kane’s health and dental insurance coverage. Mr. Kane agreed to cooperate with
and assist the Company until he otherwise notifies the Company’s Chairman, G.
Kirk Raab, that he is ceasing such assistance, to achieve and to participate in
the following for the Company: (1) oversight of the clinical trials in
Australia; (2) assist with Securities and Exchange Commission filings; (3)
facilitate accounts payable; and (4) otherwise cooperate with the reasonable
requests of the Company's Chairman to provide information and assistance to the
Company related to the performance of his former duties. In partial
consideration of the compensation paid to Mr. Kane under his Settlement
Agreement, Mr. Kane agreed that, not withstanding his entitlement to the
immediate vesting of all unvested stock options currently held by Mr. Kane, all
such stock options  would not immediately vest but  rather
vest in accordance with their current vesting schedules until such time that Mr.
Kane or Mr. Raab inform the other that Mr. Kane shall no longer provide the
Company with the assistance described above.  At such time, all further
vesting of Mr. Kane’s stock options will cease.





Effective
April 15, 2009, the Company’s Chief Financial Officer, Marc L. Rose, pursuant to
a Settlement Agreement voluntarily resigned and terminated his employment with
the Company. Mr. Rose, however, continues to serve as the Chief Financial
Officer for the Company at the pleasure of the Board of Directors pursuant to a
Consulting Agreement previously disclosed by the Company’s 8-K filed on July 2,
2009 with the SEC. On April 30, 2009, the Company commenced paying Mr. Rose
pursuant to his existing severance arrangement twenty-four (24) equal bi-weekly
installments of severance pay totaling Two Hundred Thirty Thousand Dollars
($230,000) together with a sum equal to the existing premiums previously paid by
the Company for Mr. Rose’s health and dental coverage (“Severance
Payments”).  Any such Severance Payments will be offset by income
which Mr. Rose may earn from third-parties as an employee or consultant during
this period. In addition to his consulting arrangement, Mr. Rose has agreed to
cooperate with and assist the Company until he resigns as the Company’s Chief
Financial Officer or otherwise obtains other full-time employment or his
Severance Payments have been paid in full, whichever occurs first,  to
achieve and to participate in the following for the Company: (1) assist with
Securities and Exchange Commission filings; (2) facilitate accounts
payable;  (3) work with the Company’s accountants on tax issues and
(4) otherwise cooperate with the reasonable requests of the Company’s Chief
Executive Officer to provide information and assistance to the Company related
to the performance of Mr. Rose’s former duties.





OutstandingEquity Awards at Fiscal
Year-End





Option Awards
                                              
                                              Stock AwardsName
                                              
                                              Number of
                                                Securities
                                                Underlying
                                                Unexercised
                                                Options
                                                (#)
                                                Exercisable
                                              
                                              
                                              Number of
                                                Securities
                                                Underlying
                                                Unexercised
                                                Options
                                                (#)
                                                Unexercisable
                                              
                                              
                                              Equity
                                                Incentive
                                                Plan Awards:
                                                Number of
                                                Securities
                                                Underlying
                                                Unexercised
                                                Unearned
                                                Options
                                                (#)
                                              
                                              
                                              Option
                                                Exercise
                                                Price ($)
                                              
                                              Option
                                                Expiration
                                                Date
                                              
                                              Number of
                                                Shares or
                                                Units of
                                                Stock That
                                                Have Not
                                                Vested (#)
                                              
                                              
                                              Market
                                                Value of
                                                Shares or
                                                Units of
                                                Stock That
                                                Have Not
                                                Vested ($)(1)
                                              
                                              
                                              Equity Incentive
                                                Plan Awards:
                                                Number of
                                                Unearned
                                                Shares, Units
                                                or Other
                                                Rights That
                                                Have Not
                                                Vested (#)
                                              
                                              
                                              Equity
                                                Incentive
                                                Plan Awards:
                                                Market or
                                                Payout Value
                                                of Unearned
                                                Shares, Units
                                                or Other
                                                Rights That
                                                Have Not
                                                VestedSteven
      H. Kane, President and Chief Executive Officer
                                              
                                              
                                              863,242
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              1.50
                                              
                                              12/16/2012
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —100,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1.50
                                              
                                              8/13/2013
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —75,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.13
                                              
                                              1/22/2014
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —175,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.55
                                              
                                              1/13/2015
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —25,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.65
                                              
                                              10/25/2015
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —25,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.87
                                              
                                              10/24/2016
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —100,000
                                              
                                              
                                              
                                              41,668
                                              (1)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.30
                                              
                                              1/18/2017
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —300,000
                                              
                                              
                                              
                                              237,500
                                              (2)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              0.45
                                              
                                              7/24/2018
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Marc
      L. Rose, CPA, Vice President and Chief Financial Officer
                                              
                                              
                                              100,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.55
                                              
                                              1/13/2015
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —13,571
                                              
                                              
                                              
                                              566
                                              (3)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.80
                                              
                                              7/29/2015
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —30,000
                                              
                                              
                                              
                                              5,001
                                              (4)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.85
                                              
                                              1/11/2016
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —50,000
                                              
                                              
                                              
                                              17,709
                                              (5)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.87
                                              
                                              10/24/2016
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —50,000
                                              
                                              
                                              
                                              20,834
                                              (6)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              2.30
                                              
                                              1/18/2017
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —40,000
                                              
                                              
                                              
                                              26,664
                                              (7)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1.30
                                              
                                              1/17/2018
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —100,000
                                              
                                              
                                              
                                              79,165
                                              (8)
                                              
                                              
                                              —
                                              
                                              
                                              
                                              0.45
                                              
                                              7/24/2018
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —


22


(1)
            These
      stock options, granted on January 18, 2007, vest over four years at the
      rate of 1/48th
      per month.


(2)
            These
      stock options, granted on July 24, 2008, vest over four years at the rate
      of 1/48th
      per month.


(3)
            These
      stock options, granted on July 29, 2005 vest over four years at the rate
      of 1/48th
      per month.


(4)
            These
      stock options, granted on January 11, 2006, vest over four years at the
      rate of 1/48th
      per month.


(5)
            These
      stock options, granted on October 24, 2006, vest over four years at the
      rate of 1/48th
      per month.


(6)
            These
      stock options, granted on January 18, 2007, vest over four years at the
      rate of 1/48th
      per month.


(7)
            These
      stock options, granted on January 17, 2008, vest over four years at the
      rate of 1/48th
      per month.


(8)
            These
      stock options, granted on July 24, 2008, vest over four years at the rate
      of 1/48th
      per month.





Compensation
of Directors





The table
below summaries the compensation paid by the Company to our Directors for the
fiscal year ended May 31, 2009:





Name
                              
                              Fees Earned
                                or
                                Paid in Cash
                                ($)
                              
                              
                              Stock
                                Awards
                                ($)
                              
                              
                              Option
                                Awards
                                ($) (1)
                              
                              
                              Non-Equity
                                Incentive Plan
                                Compensation
                                ($)
                              
                              
                              Change in
                                Pension Value
                                and
                                Nonqualified
                                Deferred
                                Compensation
                                Earnings
                              
                              
                              All
                                Other
                                Compensation
                                ($)
                              
                              
                              Total
                                ($)G.
      Kirk Raab (2)
                              
                              
                              125,000
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              178,520Eugene
      A. Bauer, M.D.(3)
                              
                              
                              13,336
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              66,856Frank
      M. Dougherty (4)
                              
                              
                              8,335
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              61,855Carleton
      A. Holstrom (5)
                              
                              
                              13,336
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              66,856Dinesh
      Patel, Ph.D. (6)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              108,870
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              108,870Thomas
      P. Stagnaro (7)
                              
                              
                              8,335
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              61,855Peter
      G. Tombros (8)
                              
                              
                              13,336
                              
                              
                              
                              —
                              
                              
                              
                              53,520
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              66,856


(1)
            These
      stock options, granted on July 24, 2008, 25% vested immediately and the
      remainder were scheduled to vest at 1/36th
      per moth starting in July 2009. and are determined in accordance with FAS
      123R.


23


(2)
            As
      of May 31, 2009, Mr. Raab has 0 stock options
  outstanding.


(3)
            As
      of May 31, 2009, Dr. Bauer has 0 stock options
  outstanding.


(4)
            As
      of May 31, 2009, Mr. Dougherty has 0 stock options
      outstanding.


(5)
            As
      of May 31, 2009, Mr. Holstrom has 0 stock options
    outstanding.


(6)
            As
      of May 31, 2009, Dr. Patel has 150,000 stock options outstanding and
      37,500 are vested and exercisable.


(7)
            As
      of May 31, 2009, Mr. Stagnaro has 0 stock options
    outstanding.


(8)
            As
      of May 31, 2009, Mr. Tombros has 0 stock options
    outstanding.





Directors
received stock-based compensation for their services as directors during the
fiscal year ended May 31, 2009. The Company issued 1,050,000 stock options
to non-employee directors during such fiscal year, at an weighted average
exercise price of $0.41 and aggregate expense in accordance with SFAS 123R of
$429,990.  Directors do not receive separate meeting fees, but are
reimbursed for out-of-pocket expenses. We do not provide a retirement plan for
our non-employee directors.





The
Company had an agreement with its Chairman to pay $12,500 per month as a
director fee.  For the fiscal year ended May 31, 2009, the Company
incurred $125,000 for this director’s fee. The Company had an agreement with
Carleton A. Holstrom, Eugene A. Bauer, MD , Peter G. Tombros, Frank M. Dougherty
and Thomas P. Stagnaro to pay each of them $1,667 per month on a quarterly basis
payable in arrears as a director fee. For the fiscal year ended May 31, 2009,
the Company incurred $56,678 for these directors’ fees.





Pursuant
to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each
of the outside Directors of the Company, G. Kirk Raab, Carleton A. Holstrom,
Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro
who were entitled to a Director's cash fee agreed to waive all such accrued and
unpaid Director cash fees and terminate any rights for further cash fees. For
Mr. Raab, those cash fees ceased as of April 1, 2009. For the other Directors,
those cash fees ceased as of February 1, 2009. In addition, each of these
Directors  agreed to terminate immediately all of their existing stock
options in the Company (vested and unvested).





Compensation
Committee Interlocks and Insider Participation





The
members of the Compensation Committee are Messrs. Raab, Dougherty, Tombros
and Dr. Bauer.  As of May 31, 2009, the chair of the Compensation
Committee was Mr. Raab.  The functions of this committee include
administering management incentive compensation plans, establishing the
compensation of officers and reviewing the compensation of Directors. None of
the Compensation Committee members has ever served as an executive officer of
the Company.  Except for our CEO and Director, Mr. Steven H. Kane, who
also serves as the CEO and a Board member of  Patient Safety
Technologies, Inc.,, no executive officers of the Company served as a director
or a member of the Compensation Committee of another entity, one of whose
executive officers either served on our Board of Directors or on its
Compensation Committee.




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





Set forth
in the following table is the beneficial ownership of common stock as of August
24, 2009 for our directors, the named executive officers listed in the Summary
Compensation Table, our directors and executive officers as a group and each
person or entity known by us to beneficially own more than five percent of the
outstanding shares of our common stock.





Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person or a group and the
percentage ownership of that person or group, shares of our common stock
issuable currently or within 60 days of August 24, 2009, upon exercise of
options or warrants held by that person or group is deemed outstanding. These
shares, however, are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the stockholders named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Percentage ownership is based on
28,600,464 shares of common stock outstanding as of August 24, 2009, together
with applicable options and warrants for each stockholder. Unless otherwise
indicated, the address of each person listed below is in the care of Protalex,
Inc., 145 Union Square Drive, New Hope, PA 18938.





Shares Beneficially OwnedName and Title
                
                Number
                
                
                PercentG.
      Kirk Raab, Chairman of the Board and Director
                
                
                —
                
                
                
                *Steven
      H. Kane, Chief Executive Officer, President and Director
                
                
                1,647,080
                (1)
                
                
                5.5
                %Marc
      L. Rose, CPA, Vice President, Chief Financial Officer, Treasurer and
      Corporate Secretary
                
                
                302,827
                (2)
                
                
                1.0
                %Eugene
      A. Bauer, M.D., Director
                
                
                —
                
                
                
                *Frank
      M. Dougherty, Director
                
                
                360,581
                (3)
                
                
                1.3
                %Carleton
      A. Holstrom, Director
                
                
                20,000
                
                
                
                *Thomas
      P. Stagnaro, Director
                
                
                4,000
                
                
                
                *Peter
      G. Tombros, Director
                
                
                50,000
                (4)
                
                
                *Dinesh
      Patel, Ph.D., Director
                
                
                3,749,914
                (5)
                
                
                12.9
                %vSpring
      SBIC, L.P.
                  Attn:
      Dinesh Patel
                  2795
      E. Cottonwood Pkwy, Suite 360
                  Salt
      Lake City, UT 84121
                
                
                3,749,914
                (6)
                
                
                12.9
                %John
      E. Doherty, Former Director
                
                
                2,961,549
                (7)
                
                
                10.3
                %All
      officers and directors as a group (7 persons)
                
                
                6,134,402
                (8)
                
                
                20.0
                %


*Indicates
less than 1%.




(1)
            Includes
      options to purchase 1,423,659 shares of our common stock and warrants to
      purchase 7,778 shares of our common stock exercisable within 60 days of
      August 24, 2009.





(2)
            Includes
      options to purchase 287,827 shares of our common stock exercisable within
      60 days of August 24, 2009.


24


(3)
            Includes
      warrants to purchase 3,778 shares of our common stock exercisable within
      60 days of August 24, 2009.





(4)
            Includes
      warrants to purchase 10,000 shares of our common stock exercisable within
      60 days of August 24, 2009.





(5)
            Includes
      options to purchase 37,500 shares of our common stock and warrants to
      purchase 376,667 shares of our common stock exercisable within 60 days of
      August 24, 2009.





(6)
            Includes
      options to purchase 37,500 shares of our common stock and warrants to
      purchase 376,667 shares of our common stock exercisable within 60 days of
      August 24, 2009.





(7)
            Includes
      options to purchase 10,000 shares of our common stock and warrants to
      purchase 27,778 shares of our common stock exercisable within 60 days of
      August 24, 2009.





(8)
            Includes
      options to purchase 1,748,986 shares of our common stock and warrants to
      purchase 398,223 shares of our common stock exercisable within 60 days of
      August 24, 2009.





Securities
Authorized for Issuance under Equity Compensation Plans





Equity
Compensation Plan Information





Plan category
                
                Number of securities to be
                  issued upon exercise of
                  outstanding options, warrants
                  and rights
                
                
                Weighted-average exercise
                  price of outstanding options,
                  warrants and rights
                
                
                Number of securities remaining
                  available for future issuance
                  under equity compensation
                  plans (excluding securities
                  reflected in column (a)(a)
                
                
                (b)
                
                
                (c)Equity
      compensation plans approved by security holders – 2003 Stock Option
      Plan
                
                
                1,939,890
                
                
                $
                1.63
                
                
                
                2,556,110Equity
      compensation plans not approved by security holders – Stand Alone Option
      Grants
                
                
                1,356,922
                
                
                $
                1.48
                
                
                
                —Total
                
                
                3,296,812
                
                
                $
                1.57
                
                
                
                2,556,110





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





During
the years ended May 31, 2009, May 31, 2008 and May 31, 2007, the Company
incurred $7,677, 48,633, and $81,352 respectively, of expenses related to air
travel to a partnership principally owned by the Chief Executive Officer of the
Company.





Currently
the Company does not have written policies and procedures for the review,
approval or ratification of related person transactions. However, given the
Company’s small size, senior management and the audit committee is able to
review all transactions consistent with applicable securities rules governing
Company transactions and proposed transactions exceeding $120,000 in which a
related person has a direct or indirect material interest.  Currently the
Board of Directors reviews related person transactions and has approval
authority with respect to whether a related person transaction is within the
Company's best interest.





Director
Independence





Each of
the following directors are “independent” under NASDAQ Stock Market LLC rules:
Messers. Raab, Dougherty, Holstrom, Stagnaro, and Tombros; and Drs. Bauer and
Patel.  These persons represent a majority of the board of
directors.  All members of the Compensation and Audit Committees are
independent.  Mr. Kane, a director and the Company’s President and
Chief Executive Officer is a member of the Nominating and Corporate Governance
Committee and is not considered independent. The other two members of the
Nominating and Corporate Governance Committee are independent
directors.





ITEM 14.         PRINCIPAL
ACCOUNTING FEES AND SERVICES





Grant
Thornton LLP served as our registered independent auditor for the most recently
completed fiscal year, and has served in that role since its appointment by the
Audit Committee on February 24, 2003.





Pre-Approval
of Audit and Permissible Non-Audit Services





The Audit
Committee pre-approves all audit and permissible non-audit services provided by
the independent auditors.  The services may include audit services,
audit-related services, tax services and other services.  The
independent auditors and management are required are required to periodically
report to the Audit Committee regarding the extent of services provided by the
independent auditors in accordance with this pre-approval, and the fees for the
services performed to date.  The Audit Committee may also pre-approve
particular services on a case-by-case basis.


25


Audit
Fees





The
aggregate fees  billed or to be billed  by Grant Thornton
LLP for professional services rendered for the audit of the Company’s annual
financial statements for the fiscal year ended May 31, 2009 and review of
the financial statements included in the Company’s Form 10-Qs for the fiscal
year ended May 31, 2009 totaled $79,351. The aggregate
fees  billed  by Grant Thornton LLP for professional
services rendered for the audit of the Company’s annual financial statements for
the fiscal year ended May 31, 2008 and review of the financial statements
included in the Company’s Form 10-Qs for the fiscal year ended May 31, 2008
totaled $129,400.





Audit-Related
Fees





The
aggregate fees  billed by Grant Thornton LLP for professional services
rendered for the audit of the Company’s registration statements on Form S-1
during the fiscal year ended May 31, 2008 totaled $12,000.





Tax
Fees





Grant Thornton LLP did not bill any
fees for professional services rendered for tax compliance, tax advice
or  tax planning for the fiscal years ended May 31, 2008 and
May 31, 2009.





All
Other Fees





Except as
described above, no other fees were billed by Grant Thornton LLP for any other
services during the last two fiscal years.





PART
IV




ITEM 15.         EXHIBITS,
FINANCIAL STATEMENT SCHEDULES




(a)
            1.
      Financial Statements





Reference
is made to the Index to Financial Statements on page F-1 of this Annual Report
which is filed as part of this Annual Report and incorporated by reference
herein.




2.
Financial Statement Schedules





None




(b)
            Exhibits





The
following exhibits are filed a part of, or incorporated by reference into this
Annual Report.


26


EXHIBIT
INDEX





2.1
                Stock
      Purchase Agreement among the Company, Don Hanosh and Enerdyne Corporation,
      dated December 1999
                
                Incorporated
      by reference, to Exhibit 2.1 to the Company’s 10-SB filing on December 6,
      19992.2
                Merger
      Agreement and Plan of Re-organization between the Company and Enerdyne
      Corporation
                
                Incorporated
      by reference, to Exhibit 2.2 to the Company’s 10-SB filing on December 6,
      19992.3
                Plan
      of Merger and Agreement between Protalex, Inc., a New Mexico corporation
      and Protalex, Inc. a Delaware Corporation
                
                Incorporated
      by reference, to Exhibit 2.1 to the Company’s 8-K filing on December 6,
      20043.1
                Certificate
      of Incorporation of the Company
                
                Incorporated
      by reference, to Exhibit 3.1 to the Company’s 8-K filing on December 6,
      20043.2
                Bylaws
      of the Company
                
                Incorporated
      by reference, to Exhibit 3.2 to the Company’s 8-K filing on December 6,
      20043.3
                State
      of Delaware, Certificate of Amendment of Certificate of
      Incorporation
                
                Incorporated
      by reference, to Exhibit 3.3 to the Company 10-QSB filed on January 13,
      20064.1
                Letter
      Agreement with Pembroke Financial Ltd. Dated July 9, 2001
                
                Incorporated
      by reference, to Exhibit 10.9 to the Company’s 10-KSB/A filed on September
      24, 20034.2
                Securities
      Purchase Agreement dated September 18, 2003 between the Company and
      certain of the Selling Stockholders
                
                Incorporated
      by reference, to Exhibit 4.3 to the Company’s SB-2 filed on October 20,
      2003.4.3
                Investor
      Rights Agreement dated September 18, 2003 between the Company and certain
      of the Selling Stockholders
                
                Incorporated
      by reference, to Exhibit 4.3 to the Company’s SB-2 filed on October 20,
      2003.4.4
                Form
      of Common Stock Purchase Warrant issued by the Company to the Selling
      Stockholders
                
                Incorporated
      by reference, to Exhibit 4.4 to Company’s SB-2 filed on October 20,
      2003.4.5
                Warrant
      and Common Stock Purchase Agreement dated May 25, 2005 among the Company
      and the several purchasers thereunder
                
                Incorporated
      by reference to Exhibit 4.5 to the Company’s Form SB-2 filed on June 16,
      20054.6
                Registration
      Rights Agreement dated May 25, 2005 among the purchasers under the Warrant
      and Common Stock Purchase Agreement of even date therewith
                
                Incorporated
      by reference to Exhibit 4.6 to the Company’s Form SB-2 filed on June 16,
      20054.7
                Addendum
      1 to Subscription Agreement and Questionnaire of vSpring SBIC, LP dated
      May 25, 2005
                
                Incorporated
      by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-KSB
      filed on August 26, 20054.8
                Warrant
      and Common Stock Purchase Agreement dated December 22, 2005 among the
      Company and the several purchasers thereunder
                
                Incorporated
      by reference, to Exhibit 4.5 to the Company’s SB-2 filed on January 27,
      20064.9
                Registration
      Rights Agreement dated December 22, 2005 among the purchasers under the
      Warrant and Common Stock Purchase Agreement of even date
      therewith
                
                Incorporated
      by reference, to Exhibit 4.6 to the Company’s SB-2 filed on January 27,
      20064.10
                Form
      of Warrant issued by the Company to the Selling Stockholders dated
      December 22, 2005 of even date therewith
                
                Incorporated
      by reference, to Exhibit 4.7 to the Company’s SB-2 filed on January 27,
      20064.11
                Warrant
      and Common Stock Purchase Agreement dated June 30, 2006 among the Company
      and the several purchasers thereunder
                
                Incorporated
      by reference, to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on July 10, 2006.4.12
                Registration
      Rights Agreement dated June 30, 2006 among the purchasers under the
      Warrant and Common Stock Purchase Agreement of even date
      therewith
                
                Incorporated
      by reference, to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on July 10, 20064.13
                Form
      of Warrant issued by the Company to the Selling Stockholders dated June
      30, 2006 of even date therewith
                
                Incorporated
      by reference, to Exhibit 10.3 to the Company’s Current Report on Form 8-K
      filed on July 10, 200610.1
                Employment
      offer letter executed by Steven H. Kane
                
                Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-QSB filed on January 13, 2006.10.2
                Board
      appointment executed by G. Kirk Raab
                
                Incorporated
      by reference, to Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.3
                Form
      of Option Agreement
                
                Incorporated
      by reference, to Exhibit 10.6 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 200310.4
                Frame
      Contract between the Company and Eurogentec S.A.
                
                Incorporated
      by reference, to Exhibit 10.5 to the Company’s 10-KSB/A filed on September
      24, 200310.5
                Assignment
      of Intellectual Property from Alex LLC to the Company
                
                Incorporated
      by reference, to Exhibit 10.8 to the Company’s 10-KSB/A filed on September
      24, 2003.10.6
                Assignment
      of Intellectual Property from Dr. Paul Mann to the Company
                
                Incorporated
      by reference, to Exhibit 10.8 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.7
                Stock
      Redemption Agreement dated August 15, 2003, by and between the Company,
      Paul L. Mann, Leslie A. McCament-Mann, Gail Stewe and Elizabeth Sarah Anne
      Wiley
                
                Incorporated
      by reference, to Exhibit 10.10 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.8
                Letter
      dated August 21, 2003 from Paul L. Mann to the Company
                
                Incorporated
      by reference, to Exhibit 10.11 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.9
                Technology
      License Agreement dated November 17, 1999, between the Company and Alex,
      LLC
                
                Incorporated
      by reference, to Exhibit 10.4 to the Company’s Registration of Securities
      on Form 10-QSB filed on December 6, 1999.10.10
                Letter
      Agreement, dated March 16, 2005, effective October 26, 2004, between the
      Company and Carleton A. Holstrom
                
                Incorporated
      by reference, to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-QSB/A filed on April 14, 2005.10.11
                Description
      of the verbal agreement between the Company and Eugene A. Bauer,
      M.D.
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on February
      22, 2005.


27





10.12
                Protalex,
      Inc. 2003 Stock Option Plan Amended and Restated as of July 29,
      2005
                
                Incorporated
      by reference to Appendix B to the Company’s Proxy Statement filed on
      September 23, 2005.10.13
                Description
      of the verbal agreement between the Company and Peter G.
      Tombros
                
                Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on November
      14, 2005.10.14
                Modified
      lease agreement with Union Square LP, dated November 18,
    2005
                
                Incorporate
      by reference to Exhibit 99.1 to the Company’s Current Report Form 8-K
      filed on November 22, 2005.10.15
                Employment
      offer letter executed by Marc L. Rose, CPA, Vice President, Chief
      Financial Officer, Treasurer and Corporate Secretary
                
                Incorporated
      by reference, to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-QSB filed on January 14, 2005.10.16†
                Service
      Contract with AAIPharma Inc., dated January 29, 2007
                
                Incorporated
      by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form
      10-QSB filed on April 13, 2007.10.17
                Modified
      lease agreement with Union Square LP, dated April 30, 2007
                
                Incorporate
      by reference to Exhibit 99.1 to the Company’s Current Report Form 8-K
      filed on May 3, 2007.10.18
                Settlement
      Agreement with Steven H. Kane, President, Chief Executive Officer and
      Director dated April 14, 2009
                
                Filed
      herewith10.19
                Settlement
      Agreement with Marc L. Rose, Vice President, Finance, Chief Financial
      Officer, Secretary and Treasurer dated April 14, 2009
                
                Filed
      herewith10.20
                Cash
      Waiver & Option Termination Agreement dated April 10, 2009 with G.
      Kirk Raab, Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G. Tombros,
      Frank M. Dougherty and Thomas P. Stagnaro
                
                Filed
      herewith10.21
                Indemnification
      Agreement with Directors and  Executive Officers dated August
      28, 2009
                
                Filed
      herewith23.1
                Consent
      of Grant Thornton LLP
                
                Filed
      herewith31.1
                Certification
      of Chief Executive Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act
                
                Filed
      herewith31.2
                Certification
      of Chief Financial Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act
                
                Filed
      herewith32.1
                Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act
                
                Filed
      herewith32.2
                Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act
                
                Filed
      herewith





†Portions
of the exhibit have been omitted pursuant to a request for confidential
treatment.  The confidential portions have been filed with the
SEC.


28


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Security Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Date:
August 28, 2009




Protalex,
      Inc.By:
                /s/
      Steven H. KaneName:
                Steven
      H. KaneTitle:
                President,
      Chief Executive Officer and
Director





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





/s/ G. Kirk Raab
                  
                  Chairman
      of the Board and Director
                  
                  August 28, 2009G.
      Kirk Raab/s/ Steven H. Kane
                  
                  President, Chief Executive Officer and Director (Principal
                  
                  August
      28, 2009Steven
      H. Kane
                  
                  Executive
      Officer)/s/ Marc L. Rose, CPA
                  
                  Vice President of Finance, Chief Financial Officer, Treasurer
                  
                  August
      28, 2009Marc
      L. Rose
                  
                  and Corporate Secretary (Principal Financial and Accounting Officer)/s/ Eugene A. Bauer, MD
                  
                  Director
                  
                  August
      28, 2009Eugene
      A. Bauer/s/ Frank M. Dougherty
                  
                  Director
                  
                  August
      28, 2009Frank
      M. Dougherty/s/ Carleton A. Holstrom
                  
                  Director
                  
                  August
      28, 2009Carleton
      A. Holstrom/s/ Dinesh Patel, PhD
                  
                  Director
                  
                  August
      28, 2009Dinesh
      Patel/s/ Thomas P. Stagnaro
                  
                  Director
                  
                  August
      28, 2009Thomas
      P. Stagnaro/s/ Peter G. Tombros
                  
                  Director
                  
                  August
      28, 2009Peter
      G. Tombros




29


INDEX
TO FINANCIAL STATEMENTS





The
following Financial Statements, and the related Notes thereto, of Protalex, Inc.
and the Report of Independent Registered Public Accounting Firm are filed as a
part of this Annual Report on Form 10-K.




PageFinancial
      StatementsBalance
      Sheets at May 31, 2009 and 2008
                3Statements
      of Operations for the Years Ended May 31, 2009, 2008 and 2007, and from
      Inception (September 17, 1999) through May 31, 2009
                4Statement
      of Changes in Stockholders’ Equity from Inception (September 17, 1999)
      through May 31, 2009
                5Statements
      of Cash Flows for the Years Ended May 31, 2009, 2008 and 2007 and from
      Inception (September 17, 1999) through May 31, 2009
                9NOTES
      TO FINANCIAL STATEMENTS
                10




F-1


Report
of Independent Registered Public Accounting Firm





The Board
of Directors


Protalex,
Inc.





We have
audited the accompanying balance sheets of Protalex, Inc. (a Delaware
corporation in the development stage) (the Company) as of May 31, 2009 and 2008,
and the related statements of operations, changes in stockholders’ equity, and
cash flows for the years ended May 31, 2009, 2008, and 2007 and for the
cumulative period from inception through May 31, 2009, as it relates to the
fiscal years ended May 31, 2009, 2008, and 2007. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Protalex, Inc. as of May 31, 2009
and 2008, and the results of its operations and its cash flows for each of the
three years ended May 31, 2009, 2008, and 2007, and for the cumulative period
from inception through May 31, 2009, as it relates to the fiscal years ended May
31, 2009, 2008, and 2007, in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Notes 1 and 2 to the financial
statements, the Company is in the development stage and has not commenced
operations and thus since inception has incurred an accumulated deficit of
$44,584,511 through May 31, 2009. Its ability to continue as a going concern is
dependent upon developing products that are regulatory approved and market
accepted. To achieve this successfully, additional sources of capital are needed
to fund operations. These factors, among others, 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 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





/s/Grant
Thornton LLP





Philadelphia,
Pennsylvania





August
28, 2009


F-2


PROTALEX,
INC.


(A
Company in the Development Stage)





BALANCE
SHEETS





May 31,




2009
                
                
                2008CURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                2,637,292
                
                
                $
                8,442,809Prepaid
expenses
                
                
                193,757
                
                
                
                429,207Total
      current assets
                
                
                2,831,049
                
                
                
                8,872,016PROPERTY
      & EQUIPMENT:Lab equipment
                
                
                327,287
                
                
                
                692,761Office and computer
      equipment
                
                
                195,987
                
                
                
                195,987Furniture &
      fixtures
                
                
                40,701
                
                
                
                40,701Leasehold
      improvements
                
                
                89,967
                
                
                
                89,967653,942
                
                
                
                1,019,416Less
      accumulated depreciation
                
                
                (628,780
                )
                
                
                (823,649
                )25,162
                
                
                
                195,767OTHER
      ASSETS:Deposits
                
                
                7,990
                
                
                
                7,990Intellectual technology
      property, net of accumulated amortization of $9,753 and $8,733 as of May
      31, 2009 and May 31, 2008, respectively
                
                
                10,547
                
                
                
                11,567Total
      other assets
                
                
                18,537
                
                
                
                19,557Total
      assets
                
                $
                2,874,748
                
                
                $
                9,087,340LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                398,734
                
                
                $
                1,277,555Payroll
      and related liabilities
                
                
                1,185,638
                
                
                
                35,262Accrued
      expenses
                
                
                8,057
                
                
                
                15,000Deferred
      rent
                
                
                1,192
                
                
                
                1,458Total  liabilities
                
                
                1,593,621
                
                
                
                1,329,275STOCKHOLDERS’
      EQUITYCommon stock, par value
      $0.00001, 100,000,000 shares authorized 28,600,464 shares issued and
      outstanding
                
                
                286
                
                
                
                286Additional paid in
      capital
                
                
                45,865,352
                
                
                
                45,112,084Deficit accumulated during the
      development stage
                
                
                (44,584,511
                )
                
                
                (37,354,305
                )Total stockholders’
      equity
                
                
                1,281,127
                
                
                
                7,758,065Total
      liabilities and stockholders’ equity
                
                $
                2,874,748
                
                
                $
                9,087,340





The
accompanying notes are an integral part of the financial
statements.


F-3


PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENTS
OF OPERATIONS





For the
Years Ended May 31, 2009, 2008 and 2007, and


From
Inception (September 17, 1999) through May 31, 2009





From InceptionYear Ended
                
                
                Year Ended
                
                
                Year Ended
                
                
                ThroughMay 31, 2009
                
                
                May 31, 2008
                
                
                May 31, 2007
                
                
                May 31, 2009REVENUES
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -OPERATING
      EXPENSES:Research and development
      (including depreciation and amortization)
                
                
                (3,490,956
                )
                
                
                (7,657,127
                )
                
                
                (5,562,485
                )
                
                
                (27,753,874
                )Administrative (including
      depreciation and amortization)
                
                
                (3,505,259
                )
                
                
                (2,759,463
                )
                
                
                (3,360,252
                )
                
                
                (15,614,637
                )Professional
    fees
                
                
                (365,670
                )
                
                
                (619,314
                )
                
                
                (544,903
                )
                
                
                (3,245,134
                )Depreciation and
      amortization
                
                
                (4,146
                )
                
                
                (4,146
                )
                
                
                (5,122
                )
                
                
                (163,816
                )Operating
      Loss
                
                
                (7,366,031
                )
                
                
                (11,040,050
                )
                
                
                (9,472,762
                )
                
                
                (46,777,371
                )Other
      income (expense)Interest income
                
                
                57,651
                
                
                
                549,292
                
                
                
                1,020,820
                
                
                
                2,195,878Interest
expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (70,612
                )Gain on disposal of
      equipment
                
                
                78,174
                
                
                
                -
                
                
                
                -
                
                
                
                67,594Net
      Loss
                
                $
                (7,230,206
                )
                
                $
                (10,490,758
                )
                
                $
                (8,451,942
                )
                
                $
                (44,584,511
                )Weighted
      average number of common shares outstanding
                
                
                28,600,464
                
                
                
                28,600,464
                
                
                
                28,083,103
                
                
                
                18,392,537Loss
      per common share – basic and diluted
                
                $
                (.25
                )
                
                $
                (.37
                )
                
                $
                (.30
                )
                
                $
                (2.42
                )





The
accompanying notes are an integral part of the financial
statements.


F-4


PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY





From
Inception (September 17, 1999) through May 31, 2009





DeficitAccumulatedAdditional
                    
                    
                    Common
                    
                    
                    During TheCommon Stock
                    
                    
                    Paid in
                    
                    
                    Stock-
                    
                    
                    DevelopmentShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Contra
                    
                    
                    Stage
                    
                    
                    TotalSeptember 17,
      1999 — initial issuance of 10,000 shares for intellectual technology
      license at $.03 per share
                    
                    
                    10,000
                    
                    
                    $
                    300
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    300September 30,
      1999 — cost of public shell acquisition over net assets acquired to be
      accounted for as a Recapitalization
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (250,000
                    )
                    
                    
                    —
                    
                    
                    
                    (250,000
                    )October 27,
      1999 — issuance of 84 shares to individual for $25,000
                    
                    
                    84
                    
                    
                    
                    25,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    25,000November 15,
      1999 — reverse merger transaction with Enerdyne Corporation, net
      transaction amounts
                    
                    
                    8,972,463
                    
                    
                    
                    118,547
                    
                    
                    
                    —
                    
                    
                    
                    (118,547
                    )
                    
                    
                    —
                    
                    
                    
                    —November 18,
      1999 — February 7, 2000 — issuance of 459,444 shares to various
      investors at $0.36 per share
                    
                    
                    459,444
                    
                    
                    
                    165,400
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    165,400January 1,
      2000 — issuance of 100,000 shares in exchange for legal
      services
                    
                    
                    100,000
                    
                    
                    
                    15,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    15,000May
      1 - 27, 2000 — issuance of 640,000 shares to various investors at $1.00
      per share
                    
                    
                    640,000
                    
                    
                    
                    640,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    640,000May 27,
      2000 — issuance of 1,644 shares to individual in exchange for interest
      Due
                    
                    
                    1,644
                    
                    
                    
                    1,644
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,644Net
      loss for the year ended May 31, 2000
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (250,689
                    )
                    
                    
                    (250,689
                    )Balance,
      May 31, 2000
                    
                    
                    10,183,635
                    
                    
                    
                    965,891
                    
                    
                    
                    —
                    
                    
                    
                    (368,547
                    )
                    
                    
                    (250,689
                    )
                    
                    
                    346,655December 7,
      2000 — issuance of 425,000 shares to various investors at $1.00 per
      share
                    
                    
                    425,000
                    
                    
                    
                    425,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    425,000May 31,
      2001 — Forgiveness of debt owed to shareholder
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    40,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    40,000Net
      loss for the year ended May 31, 2001
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (553,866
                    )
                    
                    
                    (553,866
                    )Balance,
      May 31, 2001
                    
                    
                    10,608,635
                    
                    
                    
                    1,390,891
                    
                    
                    
                    40,000
                    
                    
                    
                    (368,547
                    )
                    
                    
                    (804,555
                    )
                    
                    
                    257,789





The
accompanying notes are an integral part of the financial
statements.


F-5


PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)





From
Inception (September 17, 1999) through May 31, 2009





DeficitAccumulatedAdditional
                  
                  
                  Common
                  
                  
                  During
      TheCommon
      Stock
                  
                  
                  Paid
      in
                  
                  
                  Stock-
                  
                  
                  DevelopmentShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Contra
                  
                  
                  Stage
                  
                  
                  TotalAugust 13,
      2001 — Contribution by Shareholders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  143,569
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  143,569November 7,
      2001 — issuance of 881,600 Shares at $1.25 per share
                  
                  
                  881,600
                  
                  
                  
                  1,102,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,102,000November 26,
      2001 — options issued to board member
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  133,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  133,000Net
      loss for the year ended May 31, 2002
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,280,465
                  )
                  
                  
                  (1,280,465
                  )Balance,
      May 31, 2002
                  
                  
                  11,490,235
                  
                  
                  
                  2,492,891
                  
                  
                  
                  316,569
                  
                  
                  
                  (368,547
                  )
                  
                  
                  (2,085,020
                  )
                  
                  
                  355,893July 5,
      2002 — issuance of 842,000 shares at $1.50 per share
                  
                  
                  842,000
                  
                  
                  
                  1,263,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,263,000July 1,
      2002 - May 1, 2003 – purchase of common stock from shareholder at
      $.70 per share
                  
                  
                  (130,955
                  )
                  
                  
                  (91,667
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (91,667
                  )January 15,
      2003 - May 15, 2003 — common stock issued to Company
      president
                  
                  
                  41,670
                  
                  
                  
                  82,841
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  82,841May 14,
      2003 — common stock issued to employee
                  
                  
                  5,000
                  
                  
                  
                  11,250
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  11,250June 1,
      2002 - May 31, 2003 – compensation related to stock options issued to
      board members, employees and consultants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  287,343
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  287,343Net
      loss for the year ended May 31, 2003
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,665,090
                  )
                  
                  
                  (1,665,090
                  )Balance,
      May 31, 2003
                  
                  
                  12,247,950
                  
                  
                  
                  3,758,315
                  
                  
                  
                  603,912
                  
                  
                  
                  (368,547
                  )
                  
                  
                  (3,750,110
                  )
                  
                  
                  243,570June 15,
      2003, common stock issued to Company president
                  
                  
                  8,334
                  
                  
                  
                  16,418
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  16,418June 15,
      2003, purchase of common stock from shareholder
                  
                  
                  (12,093
                  )
                  
                  
                  (8,333
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (8,333
                  )September 18,
      2003 – issuance of 7,445,646 of common stock issued in private placement
      At $1.70 per share, net of transaction costs
                  
                  
                  7,445,646
                  
                  
                  
                  11,356,063
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  11,356,063September 19,
      2003 – repurchase and retired 2,994,803 shares for
$300,000
                  
                  
                  (2,994,803
                  )
                  
                  
                  (300,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (300,000
                  )December 12,
      2003 – issuance of 39,399 shares to terminated employees at $2.60 per
      share
                  
                  
                  39,399
                  
                  
                  
                  102,438
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  102,438March 1,
      2004 – common stock issued to employee at $2.55 per share
                  
                  
                  50,000
                  
                  
                  
                  127,500
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  127,500May 31,
      2004 – reclassify common stock contra to common stock
                  
                  
                  —
                  
                  
                  
                  (368,547
                  )
                  
                  
                  —
                  
                  
                  
                  368,547
                  
                  
                  
                  —
                  
                  
                  
                  —




The
accompanying notes are an integral part of the financial
statements.




F-6




PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)





From
Inception (September 17, 1999) through May 31, 2009





DeficitAccumulatedAdditional
                    
                    
                    Common
                    
                    
                    During
      TheCommon
      Stock
                    
                    
                    Paid
      in
                    
                    
                    Stock-
                    
                    
                    DevelopmentShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Contra
                    
                    
                    Stage
                    
                    
                    TotalJune
      1, 2003 – May 31, 2004 – compensation related to stock options issued
      to board members, employees and consultants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    448,096
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    448,096Net
      loss for the year ended May 31, 2004
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,989,364
                    )
                    
                    
                    (2,989,364
                    )Balance,
      May 31, 2004
                    
                    
                    16,784,433
                    
                    
                    $
                    14,683,854
                    
                    
                    $
                    1,052,008
                    
                    
                    
                    —
                    
                    
                    $
                    (6,739,474
                    )
                    
                    $
                    8,996,388November
      30, 2004 – adjust March 1, 2004 common stock issued to
      employee
                    
                    
                    
                    
                    
                    
                    (20,000
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (20,000
                    )January
      13, 2005 – common stock issued to employee at $2.55 per
    share
                    
                    
                    15,000
                    
                    
                    
                    38,250
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    38,250February
      28, 2005 – Reclass Par Value for Reincorporation into DE as of
      12/1/04
                    
                    
                    
                    
                    
                    
                    (14,701,935
                    )
                    
                    
                    14,701,935
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    0May
      25, 2005 - issuance of 2,593,788 shares of common stock issued in private
      placement At $1.95 per share, net of transaction costs
                    
                    
                    2,593,788
                    
                    
                    
                    25
                    
                    
                    
                    4,851,168
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4,851,193June
      1, 2004 – May 31, 2005 – compensation related to stock options issued
      to board members, employees and consultants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    308,711
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    308,711Net
      loss for the year ended May 31, 2005
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,567,729
                    )
                    
                    
                    (5,567,729
                    )Balance,
      May 31, 2005
                    
                    
                    19,393,221
                    
                    
                    $
                    194
                    
                    
                    $
                    20,913,822
                    
                    
                    
                    —
                    
                    
                    $
                    (12,307,203
                    )
                    
                    $
                    8,606,813August
      23, 2005 – common stock issued to employee
                    
                    
                    40,000
                    
                    
                    
                    0
                    
                    
                    
                    100,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    100,000October
      19, 2005 – common stock issued to employee
                    
                    
                    10,000
                    
                    
                    
                    0
                    
                    
                    
                    25,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    25,000December
      30, 2005 – issuance of 2,595,132      shares
      of common stock issued in private placement at $2.25 per share, net of
      transaction costs
                    
                    
                    2,595,132
                    
                    
                    
                    26
                    
                    
                    
                    5,510,941
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,510,967June
      1, 2005 – May 31, 2006 – warrants exercised
                    
                    
                    351,598
                    
                    
                    
                    4
                    
                    
                    
                    786,534
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    786,538June
      1, 2005– May 31, 2006 – compensation related to stock options issued
      to board members, employees and consultants
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    404,679
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    404,679Net
      loss for the year ended May 31, 2006
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (6,104,402
                    )
                    
                    
                    (6,104,402
                    )Balance,
      May 31, 2006
                    
                    
                    22,389,951
                    
                    
                    $
                    224
                    
                    
                    $
                    27,740,976
                    
                    
                    
                    —
                    
                    
                    $
                    (18,411,605
                    )
                    
                    $
                    9,329,595





The
accompanying notes are an integral part of the financial
statements.




F-7




PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)





From
Inception (September 17, 1999) through May 31, 2009





DeficitAccumulatedAdditional
                      
                      
                      Common
                      
                      
                      During
      TheCommon
      Stock
                      
                      
                      Paid
      in
                      
                      
                      Stock-
                      
                      
                      DevelopmentShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Contra
                      
                      
                      Stage
                      
                      
                      TotalJuly
      7, 2006 – issuance of 6,071,013 shares of common stock issued in private
      placement at $2.50 per share, net of transaction costs
                      
                      
                      6,071,013
                      
                      
                      
                      61
                      
                      
                      
                      14,217,660
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      14,217,721June
      1, 2006 – May 31, 2007 – warrants exercised
                      
                      
                      133,500
                      
                      
                      
                      1
                      
                      
                      
                      300,373
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      300,374June
      1, 2006 – May 31, 2007 – stock options exercised
                      
                      
                      6,000
                      
                      
                      
                      0
                      
                      
                      
                      15,200
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      15,200June
      1, 2006 – May 31, 2007 – shared-based compensation to board members,
      employees and consultants
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,826,850
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,826,850Net
      loss for the year ended May 31, 2007
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (8,451,942
                      )
                      
                      
                      (8,451,942
                      )Balance,
      May 31, 2007
                      
                      
                      28,600,464
                      
                      
                      $
                      286
                      
                      
                      $
                      44,101,059
                      
                      
                      $
                      —
                      
                      
                      $
                      (26,863,547
                      )
                      
                      $
                      17,237,798June
      1, 2007 – May 31, 2008 – shared-based compensation to board members,
      employees and consultants
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,011,025
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,011,025Net
      loss for the year ended May 31, 2008
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (10,490,758
                      )
                      
                      
                      (10,490,758
                      )Balance,
      May 31, 2008
                      
                      
                      28,600,464
                      
                      
                      $
                      286
                      
                      
                      $
                      45,112,084
                      
                      
                      $
                      —
                      
                      
                      $
                      (37,354,305
                      )
                      
                      $
                      7,758,065June
      1, 2008 – May 31, 2009 – shared-based compensation to board members,
      employees and consultants
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      753,268
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      753,268Net
      loss for the year ended May 31, 2009
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (7,230,206
                      )
                      
                      
                      (7,230,206
                      )Balance,
      May 31, 2009
                      
                      
                      28,600,464
                      
                      
                      $
                      286
                      
                      
                      $
                      45,865,352
                      
                      
                      $
                      —
                      
                      
                      $
                      (44,584,511
                      )
                      
                      $
                      1,281,127





The
accompanying notes are an integral part of the financial
statements.




F-8




PROTALEX,
INC.


(A
Company in the Development Stage)





STATEMENTS
OF CASH FLOWS





For the
Years Ended May 31, 2009, 2008 and 2007 and From


Inception
(September 17, 1999) through May 31, 2009





From
                      InceptionYear Ended
                    
                    
                    Year Ended
                    
                    
                    Year Ended
                    
                    
                    ThroughMay 31, 2009
                    
                    
                    May 31, 2008
                    
                    
                    May 31, 2007
                    
                    
                    May 31, 2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (7,230,206
                    )
                    
                    $
                    (10,490,758
                    )
                    
                    $
                    (8,451,942
                    )
                    
                    $
                    (44,584,511
                    )Adjustments
      to reconcile net loss to net cash and cash equivalents used in operating
      activitiesGain
      on disposal of equipment
                    
                    
                    (78,174
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (67,594
                    )Depreciation
      and amortization
                    
                    
                    49,799
                    
                    
                    
                    177,039
                    
                    
                    
                    169,865
                    
                    
                    
                    904,702Share-based
      compensation
                    
                    
                    753,268
                    
                    
                    
                    1,011,025
                    
                    
                    
                    1,826,850
                    
                    
                    
                    5,656,668Non
      cash expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    16,644(Increase)
      decrease in:Prepaid
      expenses and deposits
                    
                    
                    235,450
                    
                    
                    
                    (158,156
                    )
                    
                    
                    (49,864
                    )
                    
                    
                    (201,747
                    )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                    
                    
                    (885,764
                    )
                    
                    
                    344,442
                    
                    
                    
                    (23,467
                    )
                    
                    
                    406,791Payroll
      and related liabilities
                    
                    
                    1,150,376
                    
                    
                    
                    14,601
                    
                    
                    
                    (46,754
                    )
                    
                    
                    1,185,638Other
      liabilities
                    
                    
                    (266
                    )
                    
                    
                    (1,538
                    )
                    
                    
                    (700
                    )
                    
                    
                    1,192Net
      cash and cash equivalents used in operating activities
                    
                    
                    (6,005,517
                    )
                    
                    
                    (9,103,345
                    )
                    
                    
                    (6,576,012
                    )
                    
                    
                    (36,682,217
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of intellectual technology license – fee portion
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (20,000
                    )Acquisition
      of equipment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (403,674
                    )
                    
                    
                    (905,936
                    )Excess
      of amounts paid for public shell over assets acquired to be accounted
      for as a recapitalization
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (250,000
                    )Proceeds
      from disposal of equipment
                    
                    
                    200,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    206,000Net
      cash and cash equivalents provided by/(used) in investing
      activities
                    
                    
                    200,000
                    
                    
                    
                    —
                    
                    
                    
                    (403,674
                    )
                    
                    
                    (969,936
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from stock issuance, including options and warrants
    exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    14,533,295
                    
                    
                    
                    40,658,458Principal
      payment on equipment notes payable and capital leases
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (295,411
                    )Contribution
      by shareholders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    183,569Principal
      payment on note payable to individuals
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (225,717
                    )Issuance
      of note payable to individuals
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    368,546Acquisition
      of common stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (400,000
                    )Net
      cash and cash equivalents provided by financing activities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    14,533,295
                    
                    
                    
                    40,289,445NET
      (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (5,805,517
                    )
                    
                    
                    (9,103,345
                    )
                    
                    
                    7,553,609
                    
                    
                    
                    2,637,292Cash
      and cash equivalents, beginning
                    
                    
                    8,442,809
                    
                    
                    
                    17,546,154
                    
                    
                    
                    9,992,545
                    
                    
                    
                    —Cash
      and cash equivalents, end
                    
                    $
                    2,637,292
                    
                    
                    $
                    8,442,809
                    
                    
                    $
                    17,546,154
                    
                    
                    $
                    2,637,292SUPPLEMENTAL
      SCHEDULE OF CASHFLOW INFORMATION:Interest
      paid
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    66,770Taxes
      paid
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    100





The
accompanying notes are an integral part of the financial
statements.




F-9




PROTALEX,
INC.


(A
Company in the Development Stage)





NOTES
TO FINANCIAL STATEMENTS





From
Inception (September 17, 1999) through May 31, 2009





1.
            ORGANIZATION
      AND BUSINESS ACTIVITIES





We are a
development stage company engaged in developing a class of biopharmaceutical
drugs for treating autoimmune and inflammatory diseases. We were incorporated on
September 17, 1999 in Albuquerque, New Mexico and reincorporated in the
State of Delaware on December 1, 2004.  Our headquarters are located
in New Hope, Pennsylvania. We were formed to take all necessary steps to fully
develop and bring to commercial realization certain bioregulatory technology for
the treatment of human diseases. Our lead product, PRTX-100, has demonstrated
effectiveness in pre-clinical studies in regulating the immune system with
persisting effects.  However, the effectiveness of PRTX-100 shown in
pre-clinical studies using animal models may not be predictive of the results
that we will see in our clinical trials.  We currently have no product on
the market and we have no operating revenue.  We are targeting the
autoimmune diseases rheumatoid arthritis, or RA and idiopathic thrombocytopenic
purpura, or ITP.





As of the
date of this Report, the Company has no employees and it has insufficient funds
to cover future clinical trials and Chemistry, Manufacturing and Control or CMC
related expenses beyond the third calendar quarter of 2009.  If the
Company is unable to raise to sufficient additional funds, it  will
likely be required to cease further operations. These matters raise substantial
doubt about the ability of the Company to continue as a going
concern.





The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. The Company is a
development stage enterprise and does not anticipate generating operating
revenue for the foreseeable future. The ability of the Company to continue as a
going concern is dependent upon developing products that are regulatory approved
and market accepted. There is no assurance that these plans will be realized in
whole or in part. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.





2.
            LIQUIDITY





Since
inception, the Company has incurred an accumulated deficit of $44,584,511
through May 31, 2009. For the years ended May 31, 2009, 2008 and 2007, the
Company had losses from operations of $7,230,206, $10,490,758, and $8,451,942
respectively.  The Company has used $5,805,517, $9,103,345, and
$6,979,686 of cash in operating and investing activities for the years ended May
31, 2009, 2008, and 2007, respectively. As of May 31, 2009, the Company had cash
and cash equivalents of $2,637,292 and net working capital of $1,237,428. The
Company has incurred negative cash flow from operating activities since its
inception. The Company has spent, and with adequate additional financing,
expects to continue to spend, substantial amounts in connection with executing
its business strategy, including the continued development efforts relating to
PRTX-100. As of the date of this Report, the Company has no employees and
it has insufficient funds to cover future clinical trials and CMC related
expenses beyond the third calendar quarter of 2009.  If the Company is
unable to raise sufficient additional funds, it will likely be required to
suspend or cease further operations of any nature beyond the third calendar
quarter of 2009 until such financing is obtained, if ever.. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern.





Management
anticipates that the Company’s capital resources will be adequate to fund its
operations into the third calendar quarter of 2009. Additional financing or
potential sublicensing of PRTX-100 will be required during the third calendar
quarter of 2009, if not sooner in order to continue to fund operations. The most
likely sources of additional financing include the private sale of the Company’s
equity or debt securities, including bridge loans to the Company from third
party lenders.. Additional capital that is required by the Company may not be
available on reasonable terms, or at all





..





3.
            BASIS
      OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES





Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
and expense, and the disclosure of contingent assets and liabilities. Estimated
amounts could differ from actual results.





Loss
per Common Share





The
Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128 “Earnings Per Share” (SFAS
No. 128) that provides for the calculation of “Basic” and “Diluted”
earnings per share. Basic earnings per share include no dilution and is computed
by dividing loss to common shareholders by the weighted average number of common
shares outstanding for the period. All potentially dilutive securities have been
excluded from the computations since they would be antidilutive. However, these
dilutive securities could potentially dilute earnings per share in the future.
As of May 31, 2009, the Company had a total of 7,225,708 potentially
dilutive securities comprised of 3,928,896 warrants and 3,296,812 stock
options.




F-10




Share-Based
Compensation





Effective
June 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123 (revised), Accounting for
Share-Based Payment  (“SFAS No. 123R”) using the modified prospective
method.  This standard requires the Company to measure the cost of
employee services received in exchange for equity share options granted based on
the grant-date fair value of the options.  The cost is recognized as
compensation expense over the vesting period of the options.  Under
the modified prospective method, compensation cost included in operating
expenses was $753,268, $1,011,025 and $1,826,850 for the years ended May 31,
2009, 2008 and 2007, respectively and included both the compensation cost of
stock options granted prior to but not yet vested as of June 1, 2006 and
compensation cost for all options granted subsequent to May 31,
2006.  In accordance with the modified prospective application
transition method of SFAS No. 123R, prior period results are not restated. 
Incremental compensation cost for a modification of the terms or conditions of
an award is measured by comparing the fair value of the modified award with the
fair value of the award immediately before the modification.  No tax
benefit was recorded as of May 31, 2009 in connection with these compensation
costs due to the uncertainty regarding ultimate realization of certain net
operating loss carryforwards.  The Company has also implemented the
SEC interpretations in Staff Accounting Bulletin (“SAB”) No. 107 and No. 110,
Share-Based Payments, in connection with the adoption of SFAS No.
123R.





Prior to
the adoption of SFAS No. 123R, the Company accounted for stock options granted
to employees using the intrinsic value method under the guidance of APB No. 25,
and provided pro forma disclosure as required by SFAS No. 123.  Stock
options issued to non-employees were accounted for as required by SFAS No.
123.  Options to non-employees were accounted for using the fair value
method, which recognizes the value of the option as an expense over the related
service period with a corresponding increase to additional paid-in
capital.





The Board
of Directors adopted and the stockholders approved the 2003 Stock Option Plan on
October 2003 and it was amended in October 2005. The plan was adopted to
recognize the contributions made by the Company’s employees, officers,
consultants, and directors, to provide those individuals with additional
incentive to devote themselves to the Company’s future success, and to improve
the Company’s ability to attract, retain and motivate individuals upon whom the
Company’s growth and financial success depends. Under the plan, stock
options may be granted as approved by the Board of Directors or the Compensation
Committee. There are 4,500,000 shares reserved for grants of options under
the plan, of which 1,943,890 have been issued and 4,000 were exercised. The
Company has issued 1,358,922 stock options as stand alone grants, of which 2,000
were exercised. Stock options vest pursuant to individual stock option
agreements. No options granted under the plan are exercisable after the
expiration of ten years (or less in the discretion of the Board of Directors or
the Compensation Committee) from the date of the grant. The plan will
continue in effect until terminated or amended by the Board of
Directors.





SFAS
123(R) requires the use of a valuation model to calculate the fair value of each
stock-based award. The Company uses the Black-Scholes model to estimate the fair
value of stock options granted based on the following assumptions:





Expected Term or Life. The
expected term or life of stock options granted issued represents the expected
weighted average period of time from the date of grant to the estimated date
that the stock option would be fully exercised. The weighted average expected
option term was determined using a combination of the “simplified method” for
plain vanilla options as allowed by Staff Accounting Bulletin No. 107,Share-Based
Payments (“SAB No. 107”) and as further permitted by Staff
Accounting Bulletin No. 110, Share-Based Payments (“SAB
No. 110”). The “simplified method” calculates the expected term as the average
of the vesting term and original contractual term of the options.





Expected Volatility. Expected
volatility is a measure of the amount by which the Company’s stock price is
expected to fluctuate. Expected volatility is based on the historical daily
volatility of the price of our common shares. The Company estimated the expected
volatility of the stock options at grant date.





Risk-Free Interest Rate. The
risk-free interest rate is based on the implied yield on U.S. Treasury
zero-coupon issues with remaining terms equivalent to the expected term of our
stock-based awards.





As of May
31, 2009, there were 3,296,812 stock options outstanding.  At May 31, 2009,
the aggregate unrecognized compensation cost of unvested options, as determined
using a Black-Scholes option valuation model was approximately $1,178,000 (net
of estimated forfeitures) will be recognized over a weighted average period of
1.54 years.  For the year ended May 31, 2009, the Company
granted 1,685,000 stock options, with a fair value of $661,531 (net of
estimated forfeitures), and 2,730,606 options were forfeited or
expired.





The fair
value of the options is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:





Year Ended
                    May, 31, 2009
                  
                  
                  Year Ended
                    May, 31, 2008
                  
                  
                  Year Ended
                    May, 31, 2007
                  
                  
                  From Inception
                    Through
                    May 31, 2009Dividends
      per year
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Volatility
      percentage
                  
                  
                  96%-112
                  %
                  
                  
                  94.4%-96.3
                  %
                  
                  
                  107
                  %
                  
                  
                  90%-112
                  %Risk
      free interest rate
                  
                  
                  3.11%-3.51
                  %
                  
                  
                  4.67%-4.87
                  %
                  
                  
                  3.85%-4.42
                  %
                  
                  
                  2.07%-5.11
                  %Expected
      life (years)
                  
                  
                  6.25-10
                  
                  
                  
                  6.25
                  
                  
                  
                  4
                  
                  
                  
                  3-10Weighted
      Average Fair Value
                  
                  $
                  .39
                  
                  
                  
                  2.00
                  
                  
                  
                  1.98
                  
                  
                  
                  1.36




Cash
and Cash Equivalents





For the
purposes of reporting cash flows, the Company considers all cash accounts which
are not subject to withdrawal restrictions or penalties, and highly liquid
investments with original maturities of 60 days or less to be cash and cash
equivalents. The cash and cash equivalent deposits are not insured by The
Federal Deposit Insurance Corporation (“FDIC”).





Property,
Equipment, Intellectual Technology Property, Depreciation and
Amortization





Property,
equipment and leasehold improvements are carried at cost. Depreciation and
amortization has been provided by the Company in order to amortize the cost of
property and equipment over their estimated useful lives, which are estimated to
be over three to five years. The Company uses the straight-line method for all
classes of assets for book purposes and accelerated methods for tax purposes.
Depreciation expense was $48,779, $176,019, $168,845, and $873,449 for the years
ended May 31, 2009, 2008, 2007 and from inception through May 31, 2009,
respectively. Depreciation included in research and development expense totaled
$31,900, $172,893, $163,724, and $696,900 for the years ended May 31, 2009, 2008
and 2007 and from inception to May 31, 2009, respectively.




F-11




The
Company’s intellectual technology property was originally licensed from a former
related party. This intellectual technology property was then assigned to the
Company upon the dissolution of the related party. The cost of the intellectual
technology property is being amortized over a 20-year period. Amortization
expense is $1,020, $1,020, $1,020 and $9,753 for the years ended May 31,
2009, 2008, 2007 and from inception through May 31, 2009, respectively. The
Company reviews the intellectual property for impairment on at least an annual
basis in accordance with SFAS No. 142 “Goodwill and Other Intangible
Assets”; no impairment charge was recorded as of May 31,
2009.  Amortization expense for the intellectual property will be
$1,020 for each of the next five years.





Income
Taxes





Income
taxes are recognized using enacted tax rates, and are composed of taxes on
financial accounting income that is adjusted for the requirement of current tax
law and deferred taxes. Deferred taxes are accounted for using the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on the difference between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The Company does
not expect to have current income taxes payable or deferred tax asset balances
for the foreseeable future.





In July
2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes: an interpretation of FASB Statement No. 109. (“FIN 48”), which
clarifies Statement 109, Accounting for Income Taxes
and establishes the criterion that an individual tax position has to meet for
some or all of the benefits of that position to be recognized in the Company’s
financial statements. On initial application, FIN 48 must be applied to all tax
positions for which the statute of limitations remains open. Only tax positions
that meet the more-likely-than-not recognition threshold at the adoption date
will be recognized or continue to be recognized. The cumulative effect of
applying FIN 48 is to be reported as an adjustment to retained earnings at the
beginning of the period in which it is adopted. We adopted FIN 48 effective as
of June 1, 2007 and it did not have any impact on our results of operations and
financial position.





Other
Comprehensive Income





From
September 17, 1999 (inception) through May 31, 2009, the Company had no changes
in equity which constitute components of other comprehensive
income.





Research
and Development





Research
and development costs are expensed as incurred and also include depreciation as
reported above.





Fair
Value of Financial Instruments





The fair
value of the Company’s financial instruments, principally cash, approximates
their carrying value.





Recent
Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles-a replacement of FASB Statement No.162 (“SFAS 168”). SFAS 168
establishes the FASB Accounting Standards Codification as the single source of
authoritative US generally accepted accounting principles recognized by the FASB
to be applied to nongovernmental entities. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of SFAS 168 will not have an impact on the Company’s
financial position, results of operations or cash flow. The Company will update
the disclosures for the appropriate FASB codification reference after adoption
in the second quarter of fiscal 2010.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS
165"). SFAS 165 is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. SFAS
165 is effective for interim or annual financial periods ending after June 15,
2009. The Company has evaluated subsequent events after the balance sheet date
of May 31,2009 through the date this annual report is filed on August 28,
2009.





In
December 2007, the FASB issued SFAS No. 141R (revised 2007) Business Combinations (“SFAS
141R”). SFAS 141R states that all business combinations (whether full, partial
or step acquisitions) will result in all assets and liabilities of an acquired
business being recorded at their fair values. Certain forms of contingent
considerations and certain acquired contingencies will be recorded at fair value
at the acquisition date. SFAS 141R also states acquisition costs will generally
be expensed as incurred and restructuring costs will be expensed in periods
after the acquisition date. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008. Earlier adoption
is prohibited.  We are currently evaluating the impact, if any, of
SFAS 141R upon adoption on our financial statements.





In
December 2007, the FASB ratified the Emerging Issue Task Force (“EITF”) Issue
07-01, Accounting for
Collaborative Arrangements(“EITF 07-01”). EITF 07-01 clarifies the
accounting for contractual arrangements wherein two or more parties come
together to participate in a joint operating activity which is conducted based
on provisions of a contract. EITF 07-01 provides guidance on income statement
classification of revenues and expenses related to such activities, and
specifies disclosures that should be made with respect to such activities. EITF
07-01 is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the potential impact, if any, of the adoption of
EITF 07-01 on its financial statements.




4.
            REVERSE
      MERGER





On
November 15, 1999, Enerdyne Corporation or Enerdyne acquired all of the
outstanding common stock of Protalex, Inc. in exchange for the issuance of
additional shares of Enerdyne stock. The ratio of exchange was 822 shares of
Enerdyne stock issued for each share of Protalex stock received. For accounting
purposes, the acquisition has been treated as an acquisition of Enerdyne by
Protalex and as a recapitalization of Protalex or Reverse Merger. The historical
statement of operations presented herein include only those of the accounting
acquirer and the retained earnings or deficit of only the accounting
acquirer carries over consistent with the requirements of reverse merger
accounting. Concurrently with the share exchange, Enerdyne changed its name to
Protalex, Inc.




F-12




The
details of the reverse merger transaction are as follows:





Account Description
                  
                  Protalex, Inc.
                  
                  
                  Enderdyne
                    Corporation
                  
                  
                  Transaction
                    Adjustments
                  
                  
                  Balance Sheet at
                    November 16, 1999Cash
                  
                  $
                  23,531
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  23,531Note
      receivable shareholder
                  
                  
                  —
                  
                  
                  
                  118,547
                  
                  
                  
                  —
                  
                  
                  
                  118,547License
                  
                  
                  20,300
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,300Investment
      in Enerdyne
                  
                  
                  368,547
                  
                  
                  
                  —
                  
                  
                  
                  (368,547
                  )
                  
                  
                  —Other
      current assets
                  
                  
                  8,212
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  8,212Other
      current liabilities
                  
                  
                  (17,555
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (17,555
                  )Accounts
      payable Alex
                  
                  
                  (40,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (40,000
                  )Note
      payable
                  
                  
                  (368,546
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (368,546
                  )Common
      stock
                  
                  
                  (25,300
                  )
                  
                  
                  (833,459
                  )
                  
                  
                  714,912
                  
                  
                  
                  (143,847
                  )Additional
      paid in capital
                  
                  
                  —
                  
                  
                  
                  (1,105,014
                  )
                  
                  
                  1,105,014
                  
                  
                  
                  —Treasury
      stock
                  
                  
                  —
                  
                  
                  
                  430,424
                  
                  
                  
                  (430,424
                  )
                  
                  
                  —Accumulated
      deficit
                  
                  
                  30,811
                  
                  
                  
                  1,389,502
                  
                  
                  
                  (1,389,502
                  )
                  
                  
                  30,811Common
      stock – contra
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  368,547
                  
                  
                  
                  368,547$
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —





5.
            INCOME
      TAXES





For the
years ended May 31, 2009, 2008 and 2007, the components of income tax
benefit (expense) consist of the following:





Current:
                  
                  Year Ended
                    May 31, 2009
                  
                  
                  Year Ended
                    May 31, 2008
                  
                  
                  Year Ended
                    May 31, 2007Federal
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —State
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Deferred:Federal
                  
                  
                  2,584,000
                  
                  
                  
                  3,797,800
                  
                  
                  
                  3,354,205State
                  
                  
                  456,000
                  
                  
                  
                  670,200
                  
                  
                  
                  591,795Increase
      in valuation allowance
                  
                  
                  (3,040,000
                  )
                  
                  
                  (4,468,000
                  )
                  
                  
                  (3,946,000
                  )Income
      tax benefit
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —





Income
tax as a percentage of income for the year ended May 31, 2009, 2008 and 2007
differ from statutory federal income tax rates due to the
following:





Year Ended
                    May 31, 2009
                  
                  
                  Year Ended
                    May 31, 2008
                  
                  
                  Year Ended
                    May 31, 2007Statutory
      federal income tax rate
                  
                  
                  (34
                  )%
                  
                  
                  (34
                  )%
                  
                  
                  (34
                  )%State
      income taxes, net of federal income tax impact
                  
                  
                  (6
                  )%
                  
                  
                  (6
                  )%
                  
                  
                  (6
                  )%Change
      in valuation allowance
                  
                  
                  42
                  %
                  
                  
                  43
                  %
                  
                  
                  46
                  %General
      business credit/other
                  
                  
                  (2
                  )%
                  
                  
                  (3
                  )%
                  
                  
                  (6
                  )%0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %





The
components of the net deferred tax asset as of May 31, 2009, 2008 and 2007
are as follows:





Assets:
                  
                  May 31, 2009
                  
                  
                  May 31, 2008
                  
                  
                  May 31, 2007Net
      operating losses
                  
                  $
                  14,296,000
                  
                  
                  $
                  12,190,000
                  
                  
                  $
                  8,616,000Vacation
      accrual
                  
                  
                  401,000
                  
                  
                  
                  14,000
                  
                  
                  
                  8,000Stock
      based compensation
                  
                  
                  2,263,000
                  
                  
                  
                  1,961,000
                  
                  
                  
                  1,560,000Equipment
                  
                  
                  30,000
                  
                  
                  
                  38,000
                  
                  
                  
                  20,000General
      business credit
                  
                  
                  1,852,000
                  
                  
                  
                  1,599,000
                  
                  
                  
                  1,130,000Deferred
      tax assets
                  
                  
                  18,842,000
                  
                  
                  
                  15,802,000
                  
                  
                  
                  11,334,000Liability:Equipment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Gross
      deferred tax asset
                  
                  
                  18,842,000
                  
                  
                  
                  15,802,000
                  
                  
                  
                  11,334,000Less
      valuation allowance
                  
                  
                  (18,842,000
                  )
                  
                  
                  (15,802,000
                  )
                  
                  
                  (11,334,000
                  )Deferred
      tax asset, net of valuation allowance
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —





The gross
deferred tax assets have been fully offset by a valuation allowance since the
Company cannot currently conclude that it is more likely than not that the
benefits will be realized. The net operating loss carryforward for income tax
purposes of approximately $35,800,000 as of May 31, 2009 expires beginning in
2020 through 2029. Internal Revenue Code Section 382 places a limitation on the
amount of taxable income that can be offset by carryforwards after a change in
control. As a result of these provisions, utilization of the NOL and tax credit
carryforwards may be limited.  As of May 31, 2009, a portion of the
gross deferred tax asset and related valuation allowance is attributable to
stock based compensation.  To the extent that such assets are realized
in the future, the benefit will be applied to equity.




F-13




The
Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes.  Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for
Contingencies. As required by Interpretation 48, which clarifies
Statement 109, Accounting for
Income Taxes, the Company recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-notthreshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company applied Interpretation
48 to all tax positions for which the statute of limitations remained open. The
impact of adopting FIN 48 was not material as of the date of adoption or in
subsequent periods. As a result of the implementation of Interpretation 48, the
Company did not recognize any change in the liability for unrecognized tax
benefits and there was no change to the June 1, 2007 balance of retained
earnings.





The
Company is subject to US federal income tax as well as income taxes of state
jurisdiction. The Company is not currently under examination by any Federal or
state jurisdiction. The federal statute of limitations and state are opened from
inceptionforward. Management believes
that the accrual for tax liabilities is adequate for all open years. This
assessment relies on estimates and assumptions and may involve a series of
complex judgments about future events. On the basis of present information, it
is the opinion of the Company’s management that there are no pending assessments
that will result in a material adverse effect on the Company’s financial
statements over the next twelve months. The Company recognizes any interest
accrued related to unrecognized tax benefits in interest expense and penalties
in operating expenses for all periods presented. The Company has not recorded
any material interest or penalties during any of the years
presented.





6.
            RELATED
      PARTIES





During
the years ended May 31, 2009, May 31, 2008 and May 31, 2007, the Company
incurred $7,677, $48,633, and $81,352 respectively, of expenses related to air
travel to a partnership principally owned by the Chief Executive Officer of the
Company.





The
Company has an agreement with its Chairman to pay $12,500 per month as a
director fee.  During the years ended May 31, 2009 the Company
incurred $125,000 for this director’s fee and during the years ended May 31,
2008 and May 31, 2007, the Company incurred $150,000 in each year for this
director’s fee.





The
Company has an agreement with Carleton A. Holstrom, Eugene A. Bauer, MD, Peter
G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro to pay each $1,667 per
month payable on a quarterly basis in arrears as a director fee. During the
years ended May 31, 2009, May 31, 2008 and May 31, 2007, the Company incurred
$56,678, $60,000, and $60,000 respectively for these directors’
fees.





Pursuant
to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each
of the outside Directors of the Company, G. Kirk Raab, Carleton A. Holstrom,
Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro
who are currently entitled to a Director's cash fee agreed to waive all such
accrued and unpaid Director cash fees and terminate any rights for further cash
fees. For Mr. Raab, those cash fees ceased as of April 1, 2009. For the other
Directors, those cash fees ceased as of February 1, 2009. In addition, each of
these Directors has agreed to terminate immediately all of their existing stock
options in the Company (vested and unvested).





As
previously disclosed in our Form 10-Q filed on April 14, 2009, Messers. Kane and
Rose voluntarily terminated their employment. Messers. Kane and Rose remain the
CEO and CFO, respectively, of the Company. As of the date of this report, while
Mr. Rose has not accepted full time employment elsewhere, Mr. Kane is now
currently also the Chairman and CEO of Patient Safety Technologies, Inc. At May
31, 2009, the Company accrued $845,406 for the Company’s severance obligations
to Messers. Kane and Rose covering salary, payroll taxes and health
benefits.  As also disclosed on our Form 8-K dated July 2, 2009, the
Company subsequently entered into a consulting agreement with Mr. Rose providing
for consulting fees.





7.
            STOCK
      OPTIONS





Prior to
January 22, 2004, all options were issued as “stand alone” options. On January
22, 2004, the board of directors of the Company approved the Protalex, Inc. 2003
Stock Option Plan., and on October 25, 2005, the shareholders approved an
amendment to the Protalex, Inc. 2003 Stock Option Plan to increase the
authorized number of shares under the Plan from 1,500,000 to 4,500,000 which
provides for incentive and non-qualified stock options to purchase a total of
4,500,000 shares of the Company’s Common Stock. Under the terms of the plan,
incentive options may not be granted at exercise prices less than the fair
market value of the Common Stock at the date of the grant and non-qualified
options shall not be granted at exercise prices equal to less than 85% of the
fair market value of the Common Stock at the date of the grant. Beginning
January 1, 2005, all stock options are granted at fair market value. Vesting
generally occurs ratably over forty eight months and is exercisable over a
period no longer than ten years after the grant date. As of May 31, 2009,
options to purchase 3,296,812 shares of the Company’s Common Stock were
outstanding, of which 1,943,890 were issued and 4,000 were exercised under the
Company’s 2003 Stock Option Plan and the remaining 1,358,922 were issued and
2,000 were exercised as stand alone options.  As of May 31, 2009,
2,505,294 are exercisable.





A summary
of the common stock option activity for employees, directors, officers and
consultants as of May 31, 2009 and for the three years then ended is as
follows:




F-14




Shares
                  
                  
                  Weighted
                    Average Exercise
                    Price
                  
                  
                  Weighted
                    Average Remaining
                    Contractual Term
                    (Years)Outstanding
      at May 31, 2006
                  
                  
                  3,834,625
                  
                  
                  $
                  1.98
                  
                  
                  
                  7.7Granted
                  
                  
                  458,000
                  
                  
                  $
                  2.56
                  
                  
                  
                  —Exercised
                  
                  
                  (6,000
                  )
                  
                  $
                  2.53
                  
                  
                  
                  —Forfeited
                  
                  
                  (112,217
                  )
                  
                  $
                  2.58
                  
                  
                  
                  —Expired
                  
                  
                  (210,546
                  )
                  
                  $
                  2.54
                  
                  
                  
                  —Outstanding
      at May 31, 2007
                  
                  
                  3,963,862
                  
                  
                  $
                  2.00
                  
                  
                  
                  6.9Granted
                  
                  
                  457,500
                  
                  
                  $
                  1.27
                  
                  
                  
                  —Exercised
                  
                  
                  0
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  (48,428
                  )
                  
                  $
                  2.75
                  
                  
                  
                  —Expired
                  
                  
                  (30,516
                  )
                  
                  $
                  2.70
                  
                  
                  
                  —Outstanding
      at May 31, 2008
                  
                  
                  4,342,418
                  
                  
                  $
                  1.91
                  
                  
                  
                  6.2Granted
                  
                  
                  1,685,000
                  
                  
                  $
                  0.49
                  
                  
                  
                  —Exercised
                  
                  
                  0
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  (545,793
                  )
                  
                  $
                  0.53
                  
                  
                  
                  —Expired
                  
                  
                  (2,184,813
                  )
                  
                  $
                  1.67
                  
                  
                  
                  —Outstanding
      at May 31, 2009
                  
                  
                  3,296,812
                  
                  
                  $
                  1.57
                  
                  
                  
                  6.0Exercisable
      at May 31, 2009
                  
                  
                  2,505,294
                  
                  
                  $
                  1.79
                  
                  
                  
                  —





The
outstanding and exercisable stock options as of May 31, 2009 had an intrinsic
value of $0 and $0, respectively.





The
following summarizes certain information regarding stock options at May 31,
2009:





Total
                  
                  
                  ExercisableExercise Price
                    Range
                  
                  Number
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Life
                    (years)
                  
                  
                  Number
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Life
                    (years)$0.00
      – 0.45
                  
                  
                  576,876
                  
                  
                  $
                  0.45
                  
                  
                  
                  9.1
                  
                  
                  
                  121,676
                  
                  
                  $
                  0.45
                  
                  
                  
                  9.1$0.46
      – 0.90
                  
                  
                  150,000
                  
                  
                  $
                  0.85
                  
                  
                  
                  9.3
                  
                  
                  
                  37,500
                  
                  
                  $
                  0.85
                  
                  
                  
                  9.3$0.91
      – 1.35
                  
                  
                  351,563
                  
                  
                  $
                  1.26
                  
                  
                  
                  6.7
                  
                  
                  
                  225,526
                  
                  
                  $
                  1.26
                  
                  
                  
                  6.7$1.36
      – 1.80
                  
                  
                  1,256,922
                  
                  
                  $
                  1.50
                  
                  
                  
                  3.6
                  
                  
                  
                  1,256,922
                  
                  
                  $
                  1.50
                  
                  
                  
                  3.6$1.81
      – 2.25
                  
                  
                  119,166
                  
                  
                  $
                  2.14
                  
                  
                  
                  5.7
                  
                  
                  
                  116,103
                  
                  
                  $
                  2.14
                  
                  
                  
                  5.7$2.26
      – 2.70
                  
                  
                  560,714
                  
                  
                  $
                  2.49
                  
                  
                  
                  6.1
                  
                  
                  
                  495,607
                  
                  
                  $
                  2.52
                  
                  
                  
                  6.1$2.70
      – 3.15
                  
                  
                  281,571
                  
                  
                  $
                  2.88
                  
                  
                  
                  6.9
                  
                  
                  
                  251,960
                  
                  
                  $
                  2.87
                  
                  
                  
                  6.93,296,812
                  
                  
                  $
                  1.57
                  
                  
                  
                  6.0
                  
                  
                  
                  2,505,294
                  
                  
                  $
                  1.79
                  
                  
                  
                  6.0





8.
            COMMITMENTS





The
Company leases its office space under a non-cancelable operating lease. The
lease term, revised on April 30, 2007 extends through January 31, 2010. Rent
expense for the years ended May 31, 2009, May 31, 2008 and May 31, 2007 was
$175,997, $170,801, and $166,189, respectively.





In
December 2004, the Company entered into a non-cancelable operating lease for a
multi-function copier.  The lease term is for sixty three months. Rent
expense for the years ended May 31, 2009, May 31, 2008 and May 31, 2007 was
$6,052, $7,502, and $5,130, respectively.





Future
minimum lease payments are as follows:





Year
      ending May 31,2010
                  
                  $
                  122,212





9.
            SALE
      AND REPURCHASE OF COMMON STOCK





On
September 18, 2003, we raised $12,657,599 through the sale of 7,445,646 shares
of our common stock at $1.70 per share, with warrants to purchase an additional
3,164,395 shares of our common stock, at an exercise price of $2.40 per share.
The warrants expire on September 19, 2008. Net of transaction costs of
$1,301,536, our proceeds were $11,356,063.





On May
25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our
common stock at $1.95 per share, with warrants to purchase an additional 920,121
shares of our common stock, at an exercise price of $2.25 per share. The
warrants expire on May 25, 2010.  As part of this transaction, the
exercise price for the warrants from the September 2003 transaction were lowered
from $2.40 per share to $2.25 per share.  Net of transaction costs of
$206,717, our proceeds were $4,851,168.





On
December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares of
our common stock at $2.25 per share, with warrants to purchase an additional
648,784 shares of our common stock, at an exercise price of $2.99 per share. We
also issued warrants to purchase 227,074 shares of our common stock, at an
exercise price of $2.99 per share, to the placement agent.  All the
warrants expire on December 30, 2010.  Net of transaction costs of
approximately $328,118, our proceeds were $5,510,941.




F-15




In the
fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
which resulted in $786,538 in cash proceeds.




On July
7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through
the sale of 6,071,013 shares of our common stock at $2.50 per share, with
warrants to purchase an additional 1,517,753 shares of our common stock, at an
exercise price of $3.85 per share. We also issued warrants to purchase 531,214
shares of our common stock, at an exercise price of $3.85 per share, to the
placement agent.  All the warrants expire on July 7,
2011.





In the
first fiscal quarter of 2007, existing investors and option holders exercised
133,500 warrants and 6,000 options which resulted in $315,574 in cash
proceeds.





In
December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-02
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-02") which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with SFAS No. 5, "Accounting
for  Contingencies." Adoption of FSP EITF 00-19-02 is required for
fiscal years beginning after December 15, 2006. For our private placement
transactions in September 2003, May 2005, December 2005 and July 2006, the
Company granted registration rights which included payment arrangements of
liquidated damages under certain circumstances, as noted in each respective
registration rights agreement, including in the event an effective registration
statement registering the resale of shares of common stock issuable upon
exercise of the warrants does not remain effective. The Company generally uses
its best efforts or all commercially reasonable efforts to maintain effective
registration statements.  The Company completed its evaluation, and
believes that an obligation to transfer consideration under its registration
payment arrangement for all registrations since inception is not probable. 
Accordingly, we adopted FSP EITF 00-19-02 as of June 1, 2007 and as of the
adoption date, it did not have any impact on the financial
statements.





10.
            EMPLOYEE
      BENEFITS





Effective
July 1, 2005 until January 31, 2009, we had defined contribution 401(k)
retirement plan, pursuant to which employees, with no service requirement, could
elect to contribute up to 15% of their compensation on a tax deferred basis up
to the maximum amount permitted by the Internal Revenue Code of 1986, as
amended.  We did not match the participants’ deferral at
anytime.





11.
            UNAUDITED
      QUARTERLY INFORMATION





This
table summarizes the unaudited results of operations for each quarter of 2009,
2008 and 2007:





Quarter
      EndedAugust 31
                              
                              
                              November 30
                              
                              
                              February 28
                              
                              
                              May 31Fiscal
      2009Revenue
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —Net
      loss
                              
                              
                              (2,398,932
                              )
                              
                              
                              (1,520,570
                              )
                              
                              
                              (1,603,928
                              )
                              
                              
                              (2,155,932
                              )Basic
      and diluted loss per share
                              
                              
                              (.08
                              )
                              
                              
                              (.05
                              )
                              
                              
                              (.06
                              )
                              
                              
                              (.08
                              )August 31
                              
                              
                              November 30
                              
                              
                              February 29
                              
                              
                              May 31Fiscal
      2008Revenue
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —Net
      loss
                              
                              
                              (2,371,680
                              )
                              
                              
                              (2,814,598
                              )
                              
                              
                              (2,742,684
                              )
                              
                              
                              (2,561,795
                              )Basic
      and diluted loss per share
                              
                              
                              (.08
                              )
                              
                              
                              (.10
                              )
                              
                              
                              (.10
                              )
                              
                              
                              (.09
                              )August 31
                              
                              
                              November 30
                              
                              
                              February 28
                              
                              
                              May 31Fiscal
      2007Revenue
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —Net
      loss
                              
                              
                              (1,504,529
                              )
                              
                              
                              (2,430,673
                              )
                              
                              
                              (2,512,995
                              )
                              
                              
                              (2,003,745
                              )Basic
      and diluted loss per share
                              
                              
                              (.06
                              )
                              
                              
                              (.08
                              )
                              
                              
                              (.09
                              )
                              
                              
                              (.07
                              )


* Totals
may not sum to annual amounts due to rounding at quarterly measurements
dates.




F-16




EXHIBIT
INDEX




2.1
              
              Stock
      Purchase Agreement among the Company, Don Hanosh and Enerdyne Corporation,
      dated December 6, 1999
              
              Incorporated
      by reference, to Exhibit 2.1 to the Company’s 10-SB filing on December 6,
      19992.2
              
              Merger
      Agreement and Plan of Re-organization between the Company and Enerdyne
      Corporation
              
              Incorporated
      by reference, to Exhibit 2.2 to the Company’s 10-SB filing on December 6,
      19992.3
              
              Plan
      of Merger and Agreement between Protalex, Inc., a New Mexico corporation
      and Protalex, Inc. a Delaware Corporation
              
              Incorporated
      by reference, to Exhibit 2.1 to the Company’s 8-K filing on December 6,
      20043.1
              
              Certificate
      of Incorporation of the Company
              
              Incorporated
      by reference, to Exhibit 3.1 to the Company’s 8-K filing on December 6,
      20043.2
              
              Bylaws
      of the Company
              
              Incorporated
      by reference, to Exhibit 3.2 to the Company’s 8-K filing on December 6,
      20043.3
              
              State
      of Delaware, Certificate of Amendment of Certificate of
      Incorporation
              
              Incorporated
      by reference, to Exhibit 3.3 to the Company 10-QSB filed on January 13,
      20064.1
              
              Letter
      Agreement with Pembroke Financial Ltd. Dated July 9, 2001
              
              Incorporated
      by reference, to Exhibit 10.9 to the Company’s 10-KSB/A filed on September
      24, 20034.2
              
              Securities
      Purchase Agreement dated September 18, 2003 between the Company and
      certain of the Selling Stockholders
              
              Incorporated
      by reference, to Exhibit 4.3 to the Company’s SB-2 filed on October 20,
      2003.4.3
              
              Investor
      Rights Agreement dated September 18, 2003 between the Company and certain
      of the Selling Stockholders
              
              Incorporated
      by reference, to Exhibit 4.3 to the Company’s SB-2 filed on October 20,
      2003.4.4
              
              Form
      of Common Stock Purchase Warrant issued by the Company to the Selling
      Stockholders
              
              Incorporated
      by reference, to Exhibit 4.4 to Company’s SB-2 filed on October 20,
      2003.4.5
              
              Warrant
      and Common Stock Purchase Agreement dated May 25, 2005 among the Company
      and the several purchasers thereunder
              
              Incorporated
      by reference to Exhibit 4.5 to the Company’s Form SB-2 filed on June 16,
      20054.6
              
              Registration
      Rights Agreement dated May 25, 2005 among the purchasers under the Warrant
      and Common Stock Purchase Agreement of even date therewith
              
              Incorporated
      by reference to Exhibit 4.6 to the Company’s Form SB-2 filed on June 16,
      20054.7
              
              Addendum
      1 to Subscription Agreement and Questionnaire of vSpring SBIC, LP dated
      May 25, 2005
              
              Incorporated
      by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-KSB
      filed on August 26, 20054.8
              
              Warrant
      and Common Stock Purchase Agreement dated December 22, 2005 among the
      Company and the several purchasers thereunder
              
              Incorporated
      by reference, to Exhibit 4.5 to the Company’s SB-2 filed on January 27,
      20064.9
              
              Registration
      Rights Agreement dated December 22, 2005 among the purchasers under the
      Warrant and Common Stock Purchase Agreement of even date
      therewith
              
              Incorporated
      by reference, to Exhibit 4.6 to the Company’s SB-2 filed on January 27,
      20064.10
              
              Form
      of Warrant issued by the Company to the Selling Stockholders dated
      December 22, 2005 of even date therewith
              
              Incorporated
      by reference, to Exhibit 4.7 to the Company’s SB-2 filed on January 27,
      20064.11
              
              Warrant
      and Common Stock Purchase Agreement dated June 30, 2006 among the Company
      and the several purchasers thereunder
              
              Incorporated
      by reference, to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed on July 10, 2006.4.12
              
              Registration
      Rights Agreement dated June 30, 2006 among the purchasers under the
      Warrant and Common Stock Purchase Agreement of even date
      therewith
              
              Incorporated
      by reference, to Exhibit 10.2 to the Company’s Current Report on Form 8-K
      filed on July 10, 20064.13
              
              Form
      of Warrant issued by the Company to the Selling Stockholders dated June
      30, 2006 of even date therewith
              
              Incorporated
      by reference, to Exhibit 10.3 to the Company’s Current Report on Form 8-K
      filed on July 10, 200610.1
              
              Employment
      offer letter executed by Steven H. Kane
              
              Incorporated
      by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
      10-QSB filed on January 13, 2006.10.2
              
              Board
      appointment executed by G. Kirk Raab
              
              Incorporated
      by reference, to Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.3
              
              Form
      of Option Agreement
              
              Incorporated
      by reference, to Exhibit 10.6 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 200310.4
              
              Frame
      Contract between the Company and Eurogentec S.A.
              
              Incorporated
      by reference, to Exhibit 10.5 to the Company’s 10-KSB/A filed on September
      24, 200310.5
              
              Assignment
      of Intellectual Property from Alex LLC to the Company
              
              Incorporated
      by reference, to Exhibit 10.8 to the Company’s 10-KSB/A filed on September
      24, 2003.10.6
              
              Assignment
      of Intellectual Property from Dr. Paul Mann to the Company
              
              Incorporated
      by reference, to Exhibit 10.8 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.7
              
              Stock
      Redemption Agreement dated August 15, 2003, by and between the Company,
      Paul L. Mann, Leslie A. McCament-Mann, Gail Stewe and Elizabeth Sarah Anne
      Wiley
              
              Incorporated
      by reference, to Exhibit 10.10 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.8
              
              Letter
      dated August 21, 2003 from Paul L. Mann to the Company
              
              Incorporated
      by reference, to Exhibit 10.11 to the Company’s Annual Report on Form
      10-KSB/A filed on September 24, 2003.10.9
              
              Technology
      License Agreement dated November 17, 1999, between the Company and Alex,
      LLC
              
              Incorporated
      by reference, to Exhibit 10.4 to the Company’s Registration of Securities
      on Form 10-SB filed on December 6, 1999.10.10
              
              Letter
      Agreement, dated March 16, 2005, effective October 26, 2004, between the
      Company and Carleton A. Holstrom
              
              Incorporated
      by reference, to Exhibit 10.3 to the Company’s Quarterly Report on Form
      10-QSB/A filed on April 14,
2005.









10.11
              
              Description
      of the verbal agreement between the Company and Eugene A. Bauer,
      M.D.
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on February
      22, 2005.10.12
              
              Protalex,
      Inc. 2003 Stock Option Plan Amended and Restated as of July 29,
      2005
              
              Incorporated
      by reference to Appendix B to the Company’s Proxy Statement filed on
      September 23, 2005.10.13
              
              Description
      of the verbal agreement between the Company and Peter G.
      Tombros
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on November
      14, 2005.10.14
              
              Modified
      lease agreement with Union Square LP, dated November 18,
    2005
              
              Incorporate
      by reference to Exhibit 99.1 to the Company’s Current Report Form 8-K
      filed on November 22, 2005.10.15
              
              Employment
      offer letter executed by Marc L. Rose, CPA, Vice President, Chief
      Financial Officer, Treasurer and Corporate Secretary
              
              Incorporated
      by reference, to Exhibit 10.2 to the Company’s Quarterly Report on Form
      10-QSB filed on January 14, 2005.10.16†
              
              Service
      Contract with AAIPharma Inc., dated January 29, 2007
              
              Incorporated
      by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form
      10-QSB filed on April 13, 2007.10.17
              
              Modified
      lease agreement with Union Square LP, dated April 30, 2007
              
              Incorporate
      by reference to Exhibit 99.1 to the Company’s Current Report Form 8-K
      filed on May 3, 2007.10.18
              
              Settlement
      Agreement with Steven H. Kane, President, Chief Executive Officer and
      Director dated April 14, 2009
              
              Filed
      herewith10.19
              
              Settlement
      Agreement with Marc L. Rose, Vice President, Finance, Chief Financial
      Officer, Secretary and Treasurer dated April 14, 2009
              
              Filed
      herewith10.20
              
              Cash
      Waiver & Option Termination Agreement dated April 10, 2009 with G.
      Kirk Raab, Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G. Tombros,
      Frank M. Dougherty and Thomas P. Stagnaro
              
              Filed
      herewith10.21
              
              Indemnification
      Agreement with Directors and  Executive Officers dated August
      28, 2009
              
              Filed
      herewith23.1
              
              Consent
      of Grant Thornton LLP
              
              Filed
      herewith31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act
              
              Filed
      herewith31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act
              
              Filed
      herewith32.1
              
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act
              
              Filed
      herewith32.2
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act
              
              Filed
      herewith





†Portions
of the exhibit have been omitted pursuant to a request for confidential
treatment.  The confidential portions have been filed with the
SEC.