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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2008

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 number: 000-51462





CHELSEA THERAPEUTICS INTERNATIONAL, LTD.

(Exact name of Registrant as
specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-3174202                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

3530 Toringdon Way, Suite 200, Charlotte, North Carolina 28277

(Address of principal executive offices, including zip code)

13950 Ballantyne Corporate Place, Suite 325, Charlotte, North Carolina 28277

(Former address)

(704) 341-1516

(Registrants telephone number, including area code)





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.    YES  x    NO   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                |  |                           |  |  
|----------------------- |  | ---------------------------------------------- |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈                                              |  | Accelerated Filer         |  | x
|                        |  |                                                | 
|Non-accelerated Filer   |  |  ̈  (Do not check if smaller reporting company) |  | Smaller Reporting Company |  |  ̈

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

As of August 4, 2008, there were 30,042,459 shares of registrants Common Stock outstanding.









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Index



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                 |  |     
|Item 1. |  | Condensed Consolidated Financial Statements                                           |  | 1   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 20  
|Item 4. |  | Controls and Procedures                                                               |  | 21  
|        |  |                                                                                      
|PART II |  | OTHER INFORMATION                                                                     |  |     
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 22  
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 22  
|Item 6. |  | Exhibits                                                                              |  | 22  
|        |  | Signatures                                                                            |  | 23  



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

CHELSEA THERAPEUTICS
INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                     |  |              |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                     |  | June 30,2008 |             |   | December 31,2007 |  
|                                                                                                                                     |  | (unaudited)  |             |   | (Note 1)         |  
|Assets                                                                                                                               |  |              |             |   |                  |   |             |  
|Current assets:                                                                                                                      |  |              |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                            |  | $            | 25,551,239  |   |                  | $ | 34,076,217  |  
|Short-term investments                                                                                                               |  |              | 24,712,597  |   |                  |   | 28,638,336  |  
|Prepaid contract research and manufacturing                                                                                          |  |              | 569,859     |   |                  |   | 299,319     |  
|Other prepaid expenses and other current assets                                                                                      |  |              | 188,034     |   |                  |   | 93,243      |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|Total current assets                                                                                                                 |  |              | 51,021,729  |   |                  |   | 63,107,115  |  
|Property and equipment, net                                                                                                          |  |              | 176,573     |   |                  |   | 42,793      |  
|Other assets                                                                                                                         |  |              | 89,625      |   |                  |   | 13,461      |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|                                                                                                                                     |  | $            | 51,287,927  |   |                  | $ | 63,163,369  |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                                 |  |              |             |   |                  |   |             |  
|Current liabilities:                                                                                                                 |  |              |             |   |                  |   |             |  
|Accounts payable                                                                                                                     |  | $            | 2,004,851   |   |                  | $ | 888,560     |  
|Accrued compensation and related expenses                                                                                            |  |              | 373,994     |   |                  |   | 567,268     |  
|Accrued contract research and manufacturing                                                                                          |  |              | 5,765,184   |   |                  |   | 3,540,629   |  
|Other accrued expenses                                                                                                               |  |              | 356,396     |   |                  |   | 200,333     |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|Total current liabilities                                                                                                            |  |              | 8,500,425   |   |                  |   | 5,196,790   |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|Commitments                                                                                                                          |  |              |             |   |                  |   |             |  
|Stockholders equity:                                                                                                                |  |              |             |   |                  |   |             |  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding                                    |  |              |            |   |                  |   |            |  
|Common stock, $0.0001 par value, 45,000,000 shares authorized, 30,007,249 and 29,917,454 shares issued and outstanding,
respectively |  |              | 3,001       |   |                  |   | 2,992       |  
|Additional paid-in capital                                                                                                           |  |              | 93,462,232  |   |                  |   | 92,648,789  |  
|Deficit accumulated during the development stage                                                                                     |  |              | (50,677,731 | ) |                  |   | (34,685,202 | )
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|Total stockholders equity                                                                                                           |  |              | 42,787,502  |   |                  |   | 57,966,579  |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  
|                                                                                                                                     |  | $            | 51,287,927  |   |                  | $ | 63,163,369  |  
|                                                                                                                                     |  |              |             |   |                  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|---------------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ------------------------------------------------------- |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                       |  | For the three months ended June 30, |            |   | For the six months ended June 30, |   |            | Period fromApril 3, 2002(inception)throughJune 30, 2008 | 
|                                                                       |  | 2008                                |            |   | 2007                              |   |            | 2008                                                    |  |   | 2007        |   | 
|Operating expenses:                                                    |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Research and development                                               |  | $                                   | 6,369,029  |   |                                   | $ | 2,155,547  |                                                         |  | $ | 12,873,861  |   |  | $ | 5,322,836  |   |  | $ | 39,398,730  |  
|Sales and marketing                                                    |  |                                     | 404,648    |   |                                   |   | 602,805    |                                                         |  |   | 882,212     |   |  |   | 819,420    |   |  |   | 3,511,910   |  
|General and administrative                                             |  |                                     | 1,000,924  |   |                                   |   | 722,694    |                                                         |  |   | 1,857,256   |   |  |   | 1,372,106  |   |  |   | 9,847,260   |  
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Total operating expenses                                               |  |                                     | 7,774,601  |   |                                   |   | 3,481,046  |                                                         |  |   | 15,613,329  |   |  |   | 7,514,362  |   |  |   | 52,757,900  |  
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Operating loss                                                         |  |                                     | (7,774,601 | ) |                                   |   | (3,481,046 | )                                                       |  |   | (15,613,329 | ) |  |   | (7,514,362 | ) |  |   | (52,757,900 | )
|Interest income                                                        |  |                                     | 457,598    |   |                                   |   | 317,619    |                                                         |  |   | 1,187,046   |   |  |   | 515,055    |   |  |   | 3,680,435   |  
|Interest expense                                                       |  |                                     |           |   |                                   |   |           |                                                         |  |   |            |   |  |   |           |   |  |   | (34,020     | )
|Other expense                                                          |  |                                     |           |   |                                   |   |           |                                                         |  |   | (1,566,246  | ) |  |   |           |   |  |   | (1,566,246  | )
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Net loss                                                               |  | $                                   | (7,317,003 | ) |                                   | $ | (3,163,427 | )                                                       |  | $ | (15,992,529 | ) |  | $ | (6,999,307 | ) |  | $ | (50,677,731 | )
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Net loss per basic and diluted share of common stock                   |  | $                                   | (0.24      | ) |                                   | $ | (0.14      | )                                                       |  | $ | (0.53       | ) |  | $ | (0.33      | ) |  |   |             |  
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  
|Weighted average number of basic and diluted common shares outstanding |  |                                     | 29,988,944 |   |                                   |   | 22,404,328 |                                                         |  |   | 29,973,319  |   |  |   | 21,196,442 |   |  |   |             |  
|                                                                       |  |                                     |            |   |                                   |   |            |                                                         |  |   |             |   |  |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED
CONSOLIDATED STATEMENT OF

STOCKHOLDERS EQUITY

(unaudited)



|                                                                                                                                                       |  |              |  |                          |       |  |                                              |            |   |                          |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ |  | ------------------------ | ----- |  | -------------------------------------------- | ---------- | - | ------------------------ | - | ----------- | - |  | - | ----------- | -
|                                                                                                                                                       |  | Common
stock |  | Additionalpaid-incapital |       |  | Deficitaccumulatedduring thedevelopmentstage |            |   | Totalstockholdersequity |  
|                                                                                                                                                       |  | Shares       |  | Amount                   |       |  |                                             
|Balance at January 1, 2008                                                                                                                             |  | 29,917,454   |  | $                        | 2,992 |  | $                                            | 92,648,789 |   |                          | $ | (34,685,202 | ) |  | $ | 57,966,579  |  
|                                                                                                                                                       |  |              |  |                          |      
|Common stock issued in 2008, at par, pursuant to net-share (cashless) exercises of common stock warrants                                               |  | 57,983       |  |                          | 6     |  |                                              | (6         | ) |                          |   |            |   |  |   |            |  
|                                                                                                                                                       |  |              |  |                          |      
|Common stock issued in January 2008, at $4.20 per share, pursuant to exercise of common stock warrants                                                 |  | 1,200        |  |                          |      |  |                                              | 5,040      |   |                          |   |            |   |  |   | 5,040       |  
|                                                                                                                                                       |  |              |  |                          |      
|Final adjustment to issuance costs accrued in conjunction with the sale and issuance of common stock in November 2007 at approximately $6.19
per share |  |             |  |                          |      |  |                                              | 5,733      |   |                          |   |            |   |  |   | 5,733       |  
|                                                                                                                                                       |  |              |  |                          |      
|Common stock issued in April 2008, at approximately $4.90 per share, for license fee                                                                   |  | 30,612       |  |                          | 3     |  |                                              | 149,997    |   |                          |   |             |   |  |   | 150,000     |  
|                                                                                                                                                       |  |              |  |                          |      
|Stock-based compensation                                                                                                                               |  |             |  |                          |      |  |                                              | 652,679    |   |                          |   |            |   |  |   | 652,679     |  
|                                                                                                                                                       |  |              |  |                          |      
|Net loss                                                                                                                                               |  |             |  |                          |      |  |                                              |           |   |                          |   | (15,992,529 | ) |  |   | (15,992,529 | )
|                                                                                                                                                       |  |              |  |                          |       |  |                                              |            |   |                          |   |             |   |  |   |             |  
|Balance at June 30, 2008                                                                                                                               |  | 30,007,249   |  | $                        | 3,001 |  | $                                            | 93,462,232 |   |                          | $ | (50,677,731 | ) |  | $ | 42,787,502  |  
|                                                                                                                                                       |  |              |  |                          |       |  |                                              |            |   |                          |   |             |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|------------------------------------------------------------------------------------------------- |  | --------------------------------- | ----------- | - | ------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                                                                  |  | For the six months ended June 30, |             |   | Period fromApril 3, 2002(inception)throughJune 30, 2008 |  
|                                                                                                  |  | 2008                              |             |   | 2007                                                    |   |           
|Operating activities:                                                                             |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Net loss                                                                                          |  | $                                 | (15,992,529 | ) |                                                         | $ | (6,999,307 | ) |  | $ | (50,677,731 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Non-cash stock-based compensation                                                                 |  |                                   | 652,679     |   |                                                         |   | 385,705    |   |  |   | 1,866,136   |  
|Non-cash stock-based variable accounting compensation                                             |  |                                   |             |   |                                                         |   |            |   |  |   | 62,786      |  
|Depreciation and amortization                                                                     |  |                                   | 20,185      |   |                                                         |   | 18,088     |   |  |   | 123,494     |  
|Stock issued for license agreement                                                                |  |                                   | 150,000     |   |                                                         |   | 150,000    |   |  |   | 575,023     |  
|Non-cash interest expense                                                                         |  |                                   |            |   |                                                         |   |           |   |  |   | 34,020      |  
|Other-than-temporary impairment of short-term investments                                         |  |                                   | 1,566,246   |   |                                                         |   |           |   |  |   | 1,566,246   |  
|Fair value of warrants for finders agreement                                                     |  |                                   |            |   |                                                         |   | 433,750    |   |  |   | 433,750     |  
|Changes in operating assets and liabilities:                                                      |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Prepaid contract research and manufacturing expenses, other prepaid expenses and other assets     |  |                                   | (441,495    | ) |                                                         |   | (24,899    | ) |  |   | (847,518    | )
|Accounts payable, accrued contract research and manufacturing expenses and other accrued expenses |  |                                   | 3,496,909   |   |                                                         |   | 1,525,815  |   |  |   | 8,126,433   |  
|Accrued compensation and related expenses                                                         |  |                                   | (193,274    | ) |                                                         |   | (102,912   | ) |  |   | 373,994     |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Net cash used in operating activities                                                             |  |                                   | (10,741,279 | ) |                                                         |   | (4,613,760 | ) |  |   | (38,363,367 | )
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Investing activities:                                                                             |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Acquisitions of property and equipment                                                            |  |                                   | (153,965    | ) |                                                         |   | (7,224     | ) |  |   | (300,069    | )
|Purchases of short-term investments                                                               |  |                                   |            |   |                                                         |   | (9,390,415 | ) |  |   | (49,538,336 | )
|Redemptions and sales of short-term investments                                                   |  |                                   | 2,359,493   |   |                                                         |   | 8,262,031  |   |  |   | 23,259,493  |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Net cash provided by (used in) investing activities                                               |  |                                   | 2,205,528   |   |                                                         |   | (1,135,608 | ) |  |   | (26,578,912 | )
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Financing activities:                                                                             |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Proceeds from borrowings from affiliate                                                           |  |                                   |            |   |                                                         |   |           |   |  |   | 1,745,000   |  
|Proceeds from exercise of stock options                                                           |  |                                   |            |   |                                                         |   | 307        |   |  |   | 21,785      |  
|Proceeds from exercise of common stock warrants                                                   |  |                                   | 5,040       |   |                                                         |   | 252,000    |   |  |   | 257,080     |  
|Recapitalization of the Company                                                                   |  |                                   |            |   |                                                         |   |           |   |  |   | (400,000    | )
|Proceeds from sales of equity securities, net of issuance costs                                   |  |                                   | 5,733       |   |                                                         |   | 11,476,677 |   |  |   | 88,865,028  |  
|Receipt of cash for stock subscription receivable                                                 |  |                                   |            |   |                                                         |   |           |   |  |   | 4,625       |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Net cash provided by financing activities                                                         |  |                                   | 10,773      |   |                                                         |   | 11,728,984 |   |  |   | 90,493,518  |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                                              |  |                                   | (8,524,978  | ) |                                                         |   | 5,979,616  |   |  |   | 25,551,239  |  
|Cash and cash equivalents, beginning of period                                                    |  |                                   | 34,076,217  |   |                                                         |   | 3,111,502  |   |  |   |            |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  
|Cash and cash equivalents, end of period                                                          |  | $                                 | 25,551,239  |   |                                                         | $ | 9,091,118  |   |  | $ | 25,551,239  |  
|                                                                                                  |  |                                   |             |   |                                                         |   |            |   |  |   |             |  

See accompanying notes to condensed consolidated financial statements.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Supplemental disclosure of non-cash investing and financing activities:

During 2002, the Company
issued 5,428,217 shares of its $0.0001 par value common stock for a subscription receivable of $4,625.

During 2004, the Company converted
a loan with an affiliate for aggregate principal of $1,745,000 and accrued interest of $34,020 into shares of the Companys $0.0001 par value common stock, issuing 677,919 shares, at approximately $2.62 per share in lieu of repayment of this
obligation.

In December 2004, in conjunction with and as compensation for activities related to the December 2004 sale of equity
securities, the Company issued warrants to purchase 483,701 shares of its $0.0001 par value common stock, with a purchase price of approximately $2.88 per share and an aggregate fair value of $14,400.

In conjunction with the merger and recapitalization of the Company dated February 11, 2005, the Company issued 11,911,357 shares of its $0.0001 par
value common stock in exchange for all of the issued and outstanding shares of Chelsea Therapeutics, Inc. In addition, in conjunction with and as compensation for facilitating the merger, the Company issued warrants for the purchase of 105,516
shares of its $0.0001 par value common stock at an exercise price of $2.62 per share and an aggregate fair value of $26,700.

In February
2006, in conjunction with and as compensation for activities related to the February 2006 sale of equity securities, the Company issued warrants to purchase 716,666 shares of its $0.0001 par value common stock, with a purchase price of $3.30 per
share and an aggregate fair value of approximately $705,000.

In May 2006, in conjunction with and as compensation for activities related
to a licensing agreement and under a Finders Agreement, the Company issued warrants to purchase 250,000 shares of its $0.0001 par value common stock, with an exercise price of $4.31 per share. The exercise of these warrants was conditioned on
an event that occurred in January 2007 and, accordingly, the Company recorded a charge based on the warrants fair value determined at January 2007 of $433,750 (see Note 6).

See accompanying notes to condensed consolidated financial statements.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

The Company

Chelsea
Therapeutics International, Ltd. (Chelsea Ltd. or the Company) is a specialty pharmaceutical company focused on the acquisition, development and commercialization of innovative pharmaceutical products. The Companys
currently licensed compounds target a variety of prevalent medical conditions, particularly rheumatoid arthritis, psoriasis, cancer, other immunological disorders, neurogenic orthostatic hypotension and other autonomic disorders. The Companys
operating subsidiary, Chelsea Therapeutics, Inc. (Chelsea Inc.), was incorporated in the State of Delaware on April 3, 2002 as Aspen Therapeutics, Inc., with the name changed in July 2004. In February 2005, Chelsea Inc. merged with
a wholly-owned subsidiary of our predecessor company, Ivory Capital Corporation (Ivory), a Colorado public company with no operations (the Merger). The Company reincorporated into the State of Delaware in July 2005, changing
its name to Chelsea Therapeutics International, Ltd.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its operating subsidiary, which shall collectively be
referred to as the Company. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and do not
include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Companys management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the
results for the year ending December 31, 2008 or future periods. The accompanying condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and related notes
included in the Companys Annual Report on Form 10-K filed on March 11, 2008 and available on the website of the United States Securities and Exchange Commission (www.sec.gov). The accompanying condensed consolidated balance sheet
as of December 31, 2007 has been derived from the audited balance sheet as of that date included in the Form 10-K.

Since inception,
the Company has focused primarily on organizing and staffing, negotiating in-licensing agreements with its partners, acquiring, developing and securing its proprietary technology, participating in regulatory discussions with the United States Food
and Drug Administration (FDA), the European Medicines Agency (EMEA) and other regulatory agencies and undertaking pre-clinical trials and clinical trials of its product candidates. The Company is a development stage company
and has generated no revenue since inception.

The Company has sustained operating losses since its inception and expects such losses to
continue over the next several years. Management plans to continue financing the operations with equity issuances, debt arrangements, strategic alliances or other arrangements of a collaborative nature. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs, or cease operations.

Basis
of Consolidation

All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. Management



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



bases estimates on its historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Short-term Investments

Short-term investments
consist of investments in certain auction rate securities (ARS). ARS are generally long-term debt instruments for which interest rates are reset through a dutch auction process that occurs at pre-determined calendar intervals, generally
each 28 or 35 days. The Company accounts for such investments utilizing Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities.SFAS 115 requires that
the Company evaluate whether an event or change in circumstances has occurred during the period that may have a significant adverse effect on the fair value of the investment (an impairment indicator) at the balance sheet date. If an
impairment indicator is present, the Company would perform an analysis based on factors as prescribed by Statement of Financial Accounting Standards No. 157 (SFAS 157), Fair Value Measurements, to determine the fair value of
such investments at the balance sheet date. If a decline in value had occurred, further analyses would be performed to determine whether such decline is temporary or other-than-temporary. If it is determined that the decline in value is
other-than-temporary, then an impairment loss would be recognized in operations.

Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities and any other assets and liabilities carried at fair
value. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Companys adoption of SFAS 157 did not have a material effect on the Companys
consolidated financial position or results of operations.

As defined in SFAS 157, fair value is based on the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:



| |  |  | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 2 SHORT-TERM INVESTMENTS

At June 30, 2008, the Company held investments, classified as available-for-sale, in student-loan backed auction rate securities with a fair value of approximately $24.7 million and a par value of approximately
$26.3 million. The Company has historically invested in these securities for short periods of time as part of its cash management program. These investments are accounted for in accordance with SFAS 115. All of the Companys investments are
currently classified as available-for-sale as the Company does not intend, nor has the ability, to hold the securities to maturity and does not purchase them for the purpose of selling them in the short-term to realize profit on short-term
differences in price. Available-for-sale securities are carried at estimated fair value, based on available information.

The
Companys ARS investments represent interests in collateralized debt obligations supported by pools of student loans and none are collateralized by mortgage, credit card or insurance securitizations. All but approximately $4.4 million of



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



the par value of the Companys investments in ARS were AAA/Aaa rated, fully backed by the Federal Family Education Loan Program (FFELP)
and/or over-collateralized. Of the remaining $4.4 million of investments at par value, all were collateralized at 100% or greater and, consistent with our investment policy, $0.75 million carried an A rating, $1.15 million carried an Aa3/AAA rating
and the remainder carried AAA/Aaa ratings. As of June 30, 2008, the Company reviewed information related to the credit downgrade, as announced by Moodys, of an insurer on one of its investments with a par value of $1.15 million and the
resulting downgrade of that investment from AAA to Aa3. However, the Company had already taken into account the publicized weaknesses of that insurer before such announcement was made. The Company has not been notified of any modification to the
credit ratings of the underlying issuing agencies for any of its investments.

In early 2008, with the liquidity issues in the global
credit and capital markets, the Company was informed that there was insufficient demand at auction for its ARS investments. As a result, auctions for these securities began to fail and by March 2008, all normal market activity had essentially
ceased. The securities are currently not liquid and the interest rates have been reset to predetermined rates per the terms of the investments. Based on discussions with its investment advisors and other information available to management, the
Company anticipates that liquidity for its ARS investments might be realized through the redemption by the issuing agencies or the emergence of public secondary markets within a twelve-month timeframe.

On December 31, 2007, the Company held investments in ARS of approximately $28.6 million. During the six months ended June 30, 2008, the
Company received proceeds of approximately $2.4 million from redemptions at par. The estimated fair value of the Companys ARS investments as of June 30, 2008 was approximately $24.7 million, which reflects an adjustment of approximately
$1.6 million to the par value of $26.3 million. Although the ARS continue to pay interest according to their stated terms, based on a grouping of the assets into similar categories and the application of a discounted cash flow valuation model and
other factors, the Company has determined that the value of these investments was impaired on an other-than-temporary basis and recorded a charge of approximately $1.6 million during the three months ended March 31, 2008. At June 30, 2008,
the Company determined that the value of these investments was not additionally impaired and no charge was recorded in the three months ended June 30, 2008.

As stated in Note 1. Summary of Significant Account Policies and Nature of Operations, on January 1, 2008, the Company adopted the methods of determining fair value as described in SFAS 157 to value
its financial assets and liabilities. In determining fair value, the Company utilizes techniques that optimize the use of observable inputs, when available, and minimize the use of unobservable inputs to the extent possible. As normal trading
activity within public markets ceased during the quarter ended March 31, 2008 and did not resume with any regularity in the quarter ended June 30, 2008, there is an absence of observable market quotes (level 1 inputs) or market quotes on
similar or identical assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means (level 2 inputs) on the Companys ARS investments. As such, the Company utilized
valuation models that rely exclusively on unobservable inputs (level 3 inputs) including those that are based on percentage of collateralization, counterparty credit quality, risk of default underlying the security, government guarantees or
insurance characteristics and overall capital market liquidity.



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CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



The following fair value hierarchy table categorizes information regarding assets measured at fair
value on a recurring basis that include only the Companys investments in ARS:

Assets Measured at Fair Value on a Recurring
Basis

(in thousands)



|                              |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|----------------------------- |  | ---------------------------------------------------------- | ------ | ----------------------------------------- | - | -------------------------------------- |  | ----- | ------ |  | - | ------
|                              |  | Quoted prices inactive marketsfor identicalassets(Level 1) |        | Significantotherobservableinputs(Level 2) |   | Significantunobservableinputs(Level 3) |  | Total
|As of June 30, 2008           |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|Available-for-sale securities |  | $                                                          |       |                                           | $ |                                       |  | $     | 24,713 |  | $ | 24,713
|                              |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|As of December 31, 2007       |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       
|Available-for-sale securities |  | $                                                          | 28,638 |                                           | $ |                                       |  | $     |       |  | $ | 28,638
|                              |  |                                                            |        |                                           |   |                                        |  |       |        |  |   |       

The Companys assets that were measured at fair value on a recurring basis using significant
Level 3 inputs as of June 30, 2008 consisted of its investments in ARS. The following table summarizes the Companys fair value measurements using significant Level 3 inputs, and changes therein, for the six month period ended
June 30, 2008 (in thousands):



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Balance as of December 31, 2007    |  | $ |       |  
|Redemptions at par                 |  |   | (2,359 | )
|Purchases                          |  |   |       |  
|Realized losses                    |  |   | (1,566 | )
|Transfers in and/or out of Level 3 |  |   | 28,638 |  
|                                   |  |   |        |  
|Balance as of June 30, 2008        |  | $ | 24,713 |  
|                                   |  |   |        |  

While the Companys valuation was based on both Level 2 (credit quality and interest rates)
and Level 3 inputs, management determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk, ranges of expected periods of illiquidity and anticipated potential market
recovery. Although measured in the aggregate, the Company grouped its investments in ARS into four distinct categories for the purpose of determining value. Such groupings were based on factors including credit ratings, percent collateralization,
FFELP guarantees, and insurance characteristics. The Company assigned specific discount factors to each rating component within that group and, utilizing an anticipated five-year life, determined the current fair value by applying the discount rate
in a discounted cash flow analysis. The estimated fair value and classification as a current asset takes into consideration the Companys intent of holding its investments in ARS until they can be liquidated in a market that facilitates orderly
transactions or are redeemed by the issuing agencies, provided that such redemptions occur or market activity returns within the expected timeframe. The Company anticipates that, should liquidity begin to return to the market during the next three
to nine months, it might be able to liquidate most, if not all, of its investments in ARS at amounts reasonably close to the estimated fair value at June 30, 2008.

The valuation of the Companys ARS investment portfolio is sensitive to market conditions and is based on managements best estimate given the facts available at the time of the estimate. The assumptions
utilized in the estimate of fair value are difficult to predict and can change significantly. Factors that may impact the Companys valuation include changes to credit ratings of the securities as well as to the underlying assets supporting
those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company performed a sensitivity analysis to assess the
risk associated with the methods and factors considered in determining the fair value of its ARS investments. The results of this analysis indicate that a 1%, or 100 basis point, increase or decrease in the aggregate estimated fair value, as applied
to the par value of such investments, would have increased or decreased the other-than-temporary impairment charge by approximately $0.3 million.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



NOTE 3 STOCK-BASED COMPENSATION

The Company has a stock incentive plan (the Plan) under which incentive stock options for 4,145,000 shares of the Companys $0.0001 par value common stock may be granted. Grants under the Plan may be
made to employees (including officers), directors, consultants, advisors or other independent contractors who provide services to the Company or its subsidiary.

During the three months ended June 30, 2008, the Company granted stock options to employees and non-employee directors for the purchase of 180,000 shares of its $0.0001 par value common stock with a weighted
average exercise price of approximately $5.20 per share, a weighted average grant date fair value of approximately $2.92 per share and an exercise price greater than the market value at June 30, 2008, resulting in no intrinsic value as of that
date. There were no stock options granted to employees and non-employee directors during the three months ended June 30, 2007.

During
the six months ended June 30, 2008 and 2007, the Company granted stock options to employees and non-employee directors for the purchase of 805,000 and 630,500 shares of its $0.0001 par value common stock, respectively. The grants made during
the six months ended June 30, 2008 had a weighted average exercise price of approximately $6.16 per share, a weighted average grant date fair value of approximately $3.44 per share and an exercise price greater than the market value at
June 30, 2008, resulting in no intrinsic value as of that date. The grants made during the six months ended June 30, 2007 had a weighted average exercise price of approximately $5.65 per share, a weighted average grant date fair value of
approximately $3.35 per share and aggregate intrinsic value as of June 30, 2008 of approximately $3.0 million.

Each option granted to
employees and non-employee directors during the three and six months ended June 30, 2008 and 2007 vests as to 25% of the shares on each of the first, second, third and fourth anniversary of the vesting commencement date. Following the vesting
periods, options are exercisable by employees until the earlier of 90 days after the employees termination with the Company or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions. Following the vesting
periods, options are exercisable by non-employee directors until the earlier of 180 days after they cease to be a member of the Board of Directors or the ten-year anniversary of the initial grant, subject to adjustment under certain conditions.

In January 2008, the Board of Directors approved a modification for all grants previously made to Dr. Jason Stein, a former
non-employee director who resigned from the Board on February 8, 2008. This modification extended the option exercise term until December 31, 2008. As a result of the modification, the Company recorded additional compensation expense
during the three months ended March 31, 2008 of approximately $11,000.

The Company utilizes the Black-Scholes-Merton valuation model
for estimating the fair value of the stock options granted. The table below summarizes the assumptions utilized in estimating the fair value of the stock options granted for the three and six months ended June 30, 2008 and 2007:



|                         |  |                                     |   |                                   |      |  |               |   |  |               |  
|------------------------ |  | ----------------------------------- | - | --------------------------------- | ---- |  | ------------- | - |  | ------------- | -
|                         |  | For the three months ended June 30, |   | For the six months ended June 30, |     
|                         |  | 2008                                |   |                                   | 2007 |  | 2008          |   |  | 2007          |  
|Risk-free interest rate  |  | 2.66% to 3.73                       | % |                                   | n/a  |  | 2.66% to 3.73 | % |  | 4.76% to 4.82 | %
|Expected life of options |  | 5 years                             |   |                                   | n/a  |  | 5 years       |   |  | 5 years       |  
|Expected dividend yield  |  | 0                                   | % |                                   | n/a  |  | 0             | % |  | 0             | %
|Expected volatility      |  | 63.55                               | % |                                   | n/a  |  | 63.55         | % |  | 66.01         | %
|Estimated forfeitures    |  | 0                                   | % |                                   | n/a  |  | 0             | % |  | 0             | %



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



The Company recorded compensation expense for the three and six months ended June 30, 2008 of
$369,742 and $652,679, respectively and compensation expense for the three and six months ended June 30, 2007 of $214,886 and $385,705, respectively, in conjunction with option grants made to employees and non-employee directors. As of
June 30, 2008, the Company had total unrecognized compensation expense related to options granted to employees and non-employee directors of approximately $4.2 million, which it expects to recognize over a remaining average period of 2.8 years.

As of June 30, 2008, there were 2,975,797 options outstanding under the Plan with a weighted average remaining contractual life of
8.0 years, a weighted average exercise price of approximately $4.25 per share and an aggregate intrinsic value of approximately $1.9 million. Of these, options for 1,243,243 shares had vested and were exercisable at June 30, 2008 with a
weighted average remaining contractual life of 7.0 years, a weighted average exercise price of approximately $2.89 per share and an aggregate intrinsic value of approximately $2.5 million. During the three and six months ended June 30, 2008, no
options were exercised. During the three and six months ended June 30, 2007, options for 12,000 shares were exercised with a weighed average exercise price of approximately $0.03 per share and an aggregate intrinsic value as of the date of
exercise of approximately $63,000. During the three months ended March 31, 2008, unvested options for 109,375 shares were forfeited by board members that resigned during that period.

NOTE 4 LOSS PER SHARE

Basic net loss per common
share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. For the periods presented, basic and diluted net loss per common share
are identical. Potentially dilutive securities from stock options and stock warrants would be antidilutive as the Company incurred a net loss. The number of shares of common stock potentially issuable at June 30, 2008 and 2007 upon exercise or
conversion that were not included in the computation of net loss per share totaled 7,166,246 and 6,651,541 shares, respectively.

NOTE 5 EXERCISE OF
COMMON STOCK WARRANTS

During the three months ended June 30, 2008, various warrant holders exercised rights to purchase 31,794
shares of the $0.0001 par value common stock of the Company, with an average exercise price of approximately $3.04 per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued 14,469 shares of its $0.0001 par value
common stock to the warrant holders based on the excess of the market price over the exercise price on the respective dates of exercise. During the six months ended June 30, 2008, various warrant holders exercised rights to purchase 100,487
shares of the $0.0001 par value common stock of the Company, with an average exercise price of approximately $2.91 per share, pursuant to cashless exercises whereby the Company, in net share settlements, issued 57,983 shares of its $0.0001 par value
common stock to the warrant holders based on the excess of the market price over the exercise price on the respective dates of exercise.



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



In January 2008, a warrant holder exercised the right to purchase 1,200 shares of the $0.0001 par
value common stock of the Company at an exercise price of $4.20 per share pursuant to a cash exercise whereby the Company recorded proceeds of $5,040.

During the three months ended June 30, 2007, a warrant holder exercised the right to purchase 60,000 shares of the $0.0001 par value common stock of the Company on a cash basis at an exercise price of $4.20 per
share. The Company recorded aggregate cash proceeds of $252,000 in conjunction with this transaction. During the six months ended June 30, 2007, a warrant holder exercised the right to purchase 9,431 shares of the $0.0001 par value common stock
of the Company pursuant to a cashless exercise whereby the Company, in a net share settlement, issued 4,928 shares of its $0.0001 par value common stock to the warrant holder based on the excess of the market price over the exercise price of $2.88
per share.

NOTE 6 LICENSING AGREEMENTS

In March 2004, the Company entered into a license agreement with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for the rights to use, produce, distribute and market products derived from an invention
by Dr. Nair, claimed in US Patent # 5,912,251, entitled metabolically inert anti-inflammatory and antitumor antifolates, designated by Chelsea as CH-1504 and related compounds. The license provides the Company exclusive, worldwide
(excluding India) rights for CH-1504. The Company made an upfront payment in May 2004 of $150,000 and milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, the Company issued 26,643 shares of its
$0.0001 par value common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the $150,000 annual milestone payment liability recorded at March 31, 2007. During the three months ended
March 31, 2008, the Company made a milestone payment of $100,000 related to patient dosing in a Phase 2 study as required by the agreement. In April 2008, the Company issued 30,612 shares of its common stock, subject to trading restrictions, at
a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment of $150,000 that had been accrued at March 31, 2008. The Company is required to make additional payments upon the achievement of specific
development and regulatory approval milestones. The Company is also obligated to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of market exclusivity after the first
commercial sale, on a country-by-country basis. Future potential milestone and anniversary payments total approximately $1,500,000 and there are no minimum royalties required under the agreement.

In May 2006, the Company entered into an agreement with Dainippon Sumitomo Pharma Co., Ltd. (DSP) for a worldwide, exclusive, sub-licensable
license and rights to certain intellectual property and proprietary information (the DSP Agreement) relating to L-threo-3,4-dihydroxyphenylserine (L-DOPS or droxidopa) including, but not limited to all
information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation. As consideration for these rights, the Company paid DSP $100,000 and issued 63,131 shares of its $0.0001 par
value common stock, with a value of approximately $4.35 per share, or $274,621. As additional consideration, the Company agreed to pay DSP and/or its designees (1) royalties on the sales should any compound be approved for commercial sale, and
(2) milestone payments, payable upon achievement of milestones as defined in the DSP Agreement. In February 2008, the Company made a milestone payment under the agreement of $500,000 related to patient dosing in a Phase 3 study and has
remaining potential future milestone payments, subject to the Companys right to terminate the license agreement, totaling $3.25 million. The Company and DSP have also initiated, and the Company has agreed to fund, activities focused on
modifying the manufacturing capabilities of DSP in order to expand capacity and comply with regulations and requirements of the FDA. Such activities are currently ongoing and based on work performed by DSP as of June 30, 2008, the Company had
accrued a liability of $2.3 million.

In conjunction with and as consideration for activities related to the execution of the DSP
Agreement, the Company entered into a Finders Agreement with Paramount BioCapital, Inc. (Paramount). In May 2006, pursuant to the Finders Agreement, the Company issued warrants for the purchase of 250,000 shares of its
$0.0001 par value common stock at an exercise price of $4.31 per share. The exercise of these warrants is conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge for the fair value of the warrants at
January 2007 of $433,750. The



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##### Table of Contents

CHELSEA THERAPEUTICS INTERNATIONAL, LTD. AND SUBSIDIARY

(A Development Stage Company)

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2008

(Unaudited)



Company utilized the Black-Scholes-Merton valuation model for estimating the fair value of the warrants at the date the condition lapsed, based on a
risk-free interest rate of 4.79%, an expected life of three years, an expected dividend yield of 0%, an expected volatility of 66.01% and no estimated forfeitures. As additional consideration, the Company agreed to (1) make future milestone
payments to Paramount, upon achievement of milestones as defined in the Finders Agreement, (2) pay royalties on sales should any licensed compound become available for commercial sale, and (3) compensate a stated third-party
consultant for services rendered in the evaluation of the transaction with DSP. The Company has remaining potential future milestone payments under the Finders Agreement of $150,000.

NOTE 7 DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

Effective May 2006, the Company entered into a development and commercialization agreement (the Development Agreement) with Active Biotech AB to co-develop and commercialize the I-3D portfolio of orally active, Dihydroorotate
dehydrogenase (DHODH) inhibiting compounds for the treatment of autoimmune diseases and transplant rejection. Under the terms of the development agreement, an initial payment of $1.0 million was made to Active Biotech during the quarter ended
June 30, 2006 with such funds utilized to cover the initial costs of research and development efforts jointly approved by both parties. During the three and six months ended June 30, 2007, the Company expensed approximately $0.3 and $0.5
million pursuant to the development agreement. During 2008, the Company and Active Biotech ceased joint discovery efforts on this portfolio and, accordingly, the Company has recorded no costs related to this program during 2008.

In April 2008, the Company and Active Biotech entered into a termination and assignment agreement (the Termination Agreement), whereby Active
Biotech discontinued its participation in the I-3D co-development program and assigned its entire right, title and interest in the portfolio to the Company in exchange for royalties on future sales. The Termination Agreement also eliminated the
Companys obligation related to payment of potential future development milestones under the Development Agreement.

NOTE 8 LEASE AGREEMENT

On March 7, 2008, the Company entered into a lease for office space in Charlotte, North Carolina near its then existing office
location to serve as its new corporate headquarters. The Company occupied the new facility on May 23, 2008 and monthly payments of approximately $19,000 will begin in October 2008. The lease expires on October 15, 2013 and calls for
annual rent increases of 3%. In addition, the lease provides an option to rent additional adjacent space. The option remains in effect until November 2009 at a cost of $1,750 per month, but may be terminated sooner at the Companys discretion.
The Company paid a security deposit equal to four months rent, or approximately $76,000, upon signing.

NOTE 9 SUBSEQUENT EVENTS

In July 2008, the Company granted options for the purchase of a total of 25,000 shares of its $0.0001 par value common stock to two newly hired employees.
The options have a weighted average exercise price of approximately $5.28 per share, a weighted average grant date fair value of approximately $3.05 and were granted at an exercise price equal to the closing market value of the Companys stock
on the dates of grant.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The statements contained in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. We intend
that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, this Managements Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as we expect, anticipate, believe, and
intend and similar expressions to identify forward-looking statements. A number of important factors could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any
forward-looking statement.

Overview

We are a development stage pharmaceutical company that seeks to acquire and develop innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet medical needs or
offer improved, cost-effective alternatives to current methods of treatment. Specifically, we are developing prescription products for multiple autoimmune disorders including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer
along with our development of a novel therapeutic agent for the treatment of neurogenic orthostatic hypotension and related conditions and diseases.

We are currently focusing the majority of our drug development resources on two major research and development projects: droxidopa for symptomatic neurogenic orthostatic hypotension and other potential indications;
and our antifolate compounds, including CH-1504, for rheumatoid arthritis. Droxidopa, our most advanced investigational product candidate, is currently being studied in double-blind pivotal Phase III trials under a Special Protocol Assessment, or
SPA, with the FDA, designed to compare droxidopa to placebo at multiple sites in North America, Europe and Australia. Droxidopa is also being studied in a double-blind, placebo controlled Phase II clinical study for the treatment of intradialytic
hypotension. In addition, we recently received approval from the United Kingdoms Medicines and Healthcare Products Regulatory Agency to begin a Phase II trial of droxidopa, alone and in combination with carbidopa, for the treatment of
fibromyalgia. Our lead antifolate candidate, CH-1504, is being investigated for the treatment of rheumatoid arthritis in a Phase II head-to-head clinical trial to compare its efficacy and tolerability against methotrexate, currently the leading
antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. We also continue to review the potential development opportunities in our I-3D portfolio of therapeutics targeting immune-mediated inflammatory
disorders and transplantation that is complimentary to our antifolates program.

Since inception we have focused primarily on organizing
and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and
undertaking pre-clinical trials and clinical trials of our product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any revenue until and unless we successfully obtain
approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. However, developing pharmaceutical products is a lengthy and expensive process. Even if we do not encounter unforeseen safety issues or
timing or other delays during the course of developing our currently licensed product candidates, we would not anticipate receiving regulatory approval to market such products until, at the earliest, 2010. Currently, development expenses are being
funded with proceeds from equity financings completed in December 2004, February 2006, March 2007 and November 2007. To the extent we are successful in acquiring additional product candidates for our development pipeline and as we move our
products into more extensive clinical trials, our need to finance research and development costs will continue to increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to
finance the development of the products.

Critical Accounting Policies

Our managements discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the financial statements. The following accounting policies are critical in fully understanding and evaluating our reported financial
results.



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Use of Estimates.The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements
as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under
different assumptions or conditions.

Research and Development Expense.Research and development expenditures are expensed as
incurred. We often contract with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work
performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and
the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon
the achievement of certain milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted
research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass-through fees. Pass-through fees include, but are not limited to, regulatory expenses, investigator fees,
travel costs, and other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation
to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.

Accounting for Stock-Based Compensation.We account for our stock options and warrants using the fair value method as prescribed in Statement of
Financial Accounting Standards No. 123R (SFAS 123R), Share-based Payment. SFAS 123R defines a fair value based method of accounting for stock options or similar equity instruments. In determining the fair value of the equity
instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the underlying shares and
(v) anticipated future forfeitures. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our awards. We estimate the expected life of
the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future policy for dividends on our common stock. To
determine the expected stock price volatility for our stock options, we examine historical volatilities for industry peers closely related to the current status of our business, but with sufficient trading history to be able to determine volatility.
Utilizing a weighted average calculation to account for the limited price history of our stock, we analyze the historical volatility of our stock price in combination with the historical volatility of the industry peers selected to determine an
appropriate volatility factor. We plan to continue to analyze the expected stock price volatility and expected term assumption at each grant date as more historical data for our common stock becomes available. Given the limited service period for
our current employees and the senior nature of the roles for those employees, we had estimated that we would experience no forfeitures or that our rate of forfeiture would be immaterial to the recognition of compensation expense for those options
currently outstanding. Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants utilizing this method. We expect to record additional non-cash compensation expense in the future, which might
be significant. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.



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Results of Operations

Three Months Ended June 30, 2008 and 2007

The table below sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations and other pertinent financial and operating data.

(in thousands, except percentages)



|                                   |  |                                       |       |                                       |   |           |  |   |         |   |  |     |  
|---------------------------------- |  | ------------------------------------- | ----- | ------------------------------------- | - | --------- |  | - | ------- | - |  | --- | -
|                                   |  | For the threemonths endedJune 30,2008 |       | For the threemonths endedJune 30,2007 |   | $Increase |  |   | %Change |  
|Research and development expense   |  | $                                     | 6,369 |                                       | $ | 2,156     |  | $ | 4,213   |   |  | 195 | %
|Sales and marketing expense        |  |                                       | 405   |                                       |   | 603       |  |   | (198    | ) |  | -33 | %
|General and administrative expense |  |                                       | 1,001 |                                       |   | 723       |  |   | 278     |   |  | 38  | %
|Interest income                    |  |                                       | 458   |                                       |   | 318       |  |   | 140     |   |  | 44  | %

Research and development expenses increased in 2008 primarily related to the advancement of
our drug candidates into more extensive clinical testing programs and compensation costs related to the addition of new personnel during the latter part of 2007. As a percentage of operating expenses, research and development costs increased to 82%
for the period ended June 30, 2008 from 62% for the second quarter of 2007. During 2008, we continued our development activities, including manufacturing, pre-clinical, Phase I and Phase II activities, for our portfolio of antifolates
compounds. A component of our costs in 2008 is related to the ongoing clinical trial for CH-1504 in rheumatoid arthritis and investigational activities for follow-on molecules in our portfolio of antifolates. We also incurred significant costs
during 2008 for our manufacturing, formulation, pre-clinical, Phase II and, particularly, Phase III activities for droxidopa. Related to these activities, we incurred a $0.2 million increase in compensation and related expenses and a $0.1 million
increase in general contractor costs.

From inception through June 30, 2008, cumulative research and development expenses related to
our major research and development projects were approximately $39.4 million and are detailed as follows:

(in thousands)



|            |  |                      |       
|----------- |  | -------------------- | ------
|            |  | Through June 30,2008
|Antifolates |  | $                    | 19,800
|Droxidopa   |  |                      | 17,100
|I-3D        |  |                      | 2,500 
|            |  |                      |       
|            |  | $                    | 39,400
|            |  |                      |       

Droxidopa.From inception through June 30, 2008, we had spent
approximately $17.1 million in research and development expenses on droxidopa. Assuming we do not enter into an out-license, development or other collaborative agreement with respect to this compound, we estimate that subsequent to that date we will
need to incur approximately $18.0 million more to complete our Phase III clinical trials and submit an NDA to the FDA in order to complete development of droxidopa in NOH through to commercialization. Assuming its approval for marketing, we
currently estimate launch of this product and initial sales or royalty revenue from it no sooner than 2010. In addition to the spending requirements above, we plan spending of approximately $4.0 million in 2008 for clinical proof of concept studies
in other indications, our once-daily formulation and other droxidopa related programs.

Antifolates.From inception
through June 30, 2008, we had spent approximately $19.8 million in research and development expenses on CH-1504 and other antifolates. We currently intend to seek a partner to assist us in the development of this compound before or soon after
the completion of Phase II proof-of-concept studies for rheumatoid arthritis. We estimate that, extending into early 2009, we will need to incur approximately $6.5 million more for the trials related to proof-of-concept and the development of other
antifolate compounds. Assuming CH-1504 is approved for marketing, we currently estimate launch of this product and initial royalty revenue from it no sooner than 2012.



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I-3D Portfolio.From inception through June 30, 2008, we had spent
approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have been conducting compound discovery work on the portfolio to try and indentify one or more lead compounds, and have yet to estimate the amount
of expenses it would take to move beyond this development stage to potential revenue generation. For 2008, our additional discovery costs are not expected to exceed $0.3 million.

Sales and marketing expenses. Although we had no formalized selling activities, in 2008 we incurred sales and marketing expenses primarily related
to compensation and related costs, the costs of a pricing study for droxidopa and legal expenses related to our intellectual property. Similar expenses were incurred in 2007, except for the costs of the pricing study, and also included significant
costs for market research, including a review of possible trademarks for droxidopa.

General and administrative expenses. The $0.3
million increase in general and administrative expenses primarily consists of a $0.1 million increase in compensation and related expenses. The remainder of the increase related to moderate increases in other categories of spending during the period
including office rent and professional fees. Franchise tax expense also increased during 2008 because of our 2007 issuances of stock for financing purposes and the related increase in our stockholders equity.

Interest income. During 2007, we raised approximately $57.2 million, net of expenses, through the sale of our common stock in two financing
transactions. As such, our cash of approximately $25.6 million and short-term investments of approximately $26.3 million at par value at June 30, 2008 reflect our cash and short term investments at December 31, 2007 offset by approximately
$10.7 million used to fund operating activities during the year. Accordingly, interest earned on cash and short-term investments increased by approximately $0.1 million to $0.5 million for the second quarter of 2008.

Six Months Ended June 30, 2008 and 2007

The
table below sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations and other pertinent financial and operating data.

(in thousands, except percentages)



|                                   |  |                                     |        |                                     |   |           |  |         |       |  |     |  
|---------------------------------- |  | ----------------------------------- | ------ | ----------------------------------- | - | --------- |  | ------- | ----- |  | --- | -
|                                   |  | For the sixmonths endedJune 30,2008 |        | For the sixmonths endedJune 30,2007 |   | $Increase |  | %Change |      
|Research and development expense   |  | $                                   | 12,874 |                                     | $ | 5,323     |  | $       | 7,551 |  | 142 | %
|Sales and marketing expense        |  |                                     | 882    |                                     |   | 819       |  |         | 63    |  | 8   | %
|General and administrative expense |  |                                     | 1,857  |                                     |   | 1,372     |  |         | 485   |  | 35  | %
|Interest income                    |  |                                     | 1,187  |                                     |   | 515       |  |         | 672   |  | 130 | %
|Other expense                      |  |                                     | 1,566  |                                     |   |          |  |         | 1,566 |  | n/a |  

Research and development expensesincreased in 2008 primarily related to the advancement of
our drug candidates into more extensive clinical testing programs and compensation costs related to the addition of new personnel during the latter part of 2007. As a percentage of operating expenses, research and development costs increased to 82%
for the six months ended June 30, 2008 from 71% for the same period of 2007. During 2008, we continued our development activities, including manufacturing, pre-clinical, Phase I and Phase II activities, for our portfolio of antifolates
compounds. A component of our costs in 2008 is related to the ongoing clinical trial for CH-1504 in rheumatoid arthritis and investigational activities for follow-on molecules in our portfolio of antifolates. We also incurred significant costs
during 2008 for our manufacturing, formulation, pre-clinical, Phase II and, particularly, Phase III activities for droxidopa. Related to these activities, during the six months ended June 30, 2008, we incurred a $0.3 million increase in
compensation and related expenses.

Sales and marketing expenses. Although we had no formalized selling activities, in 2008 we
incurred sales and marketing expenses primarily related to compensation and related expenses, the printing of promotional materials, the costs



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of a pricing study for droxidopa and legal expenses related to our intellectual property. During 2007, we incurred expenses of a similar nature that included
compensation and related costs, costs for market research, including a review of possible trademarks for droxidopa, legal costs and travel expenses.

General and administrative expenses. The $0.5 million increase in general and administrative expenses primarily consists of a $0.2 million increase in compensation and related expenses. The remainder of the
increase is related to moderate increases in other categories of spending during the period including professional fees for accounting and legal services. Franchise tax expense also increased during 2008 because of our 2007 issuances of stock for
financing purposes and the related increase in our stockholders equity.

Interest income. During 2007, we raised approximately
$57.2 million, net of expenses, through the sale of our common stock in two financing transactions. As such, our cash of approximately $25.6 million and short-term investments of approximately $26.3 million at par value at June 30, 2008 reflect
our cash and short term investments at December 31, 2007 offset by approximately $10.7 million used to fund operating activities during the year. Accordingly, interest earned on cash and short-term investments increased by approximately $0.7
million to $1.2 million for the six months ended June 30, 2008.

Other expense. During the six months ended June 30, 2008,
we recorded an other-than-temporary impairment charge related to our investment in auction rate securities, or ARS, of approximately $1.6 million.

Liquidity and Capital Resources

From inception to June 30, 2008, we have incurred an aggregate net loss of
approximately $50.7 million as a result of expenses similar in nature to those described above.

As of June 30, 2008, we had working
capital of approximately $42.5 million, cash and cash equivalents of approximately $25.6 million and short-term investments with a fair value of approximately $24.7 million. We have financed our operations primarily through sales of our stock and,
to a much lesser extent, through the issuance of our common stock pursuant to option or warrant exercises. Cash on hand results primarily from previous financing activities offset by funds utilized for operating and investing activities.

At June 30, 2008, the estimated fair value of our short-term investments of $24.7 million consisted of principal invested in certain ARS. The ARS
held by us have long-term nominal maturities for which the interest rates are reset through a dutch auction on 28 or 35 day cycles. Although the monthly auctions had historically provided a liquid market for these securities, in early 2008, with the
liquidity issues in the global credit and capital markets, auctions for these, and similar, securities began to fail and by March 2008, market activity had essentially ceased. Our investments in these securities represent interests in collateralized
debt obligations supported by pools of structured credit instruments consisting of student loans. None of the collateral for the ARS held by us includes mortgage, credit card, preferred stock or insurance securitizations. Of the par value of these
investments of $26.3 million, all but approximately $4.4 million were AAA/Aaa rated and fully backed by the FFELP and/or over-collateralized by more than 10%. Of the remaining $4.4 million, all were collateralized at 100% or greater and, consistent
with our investment policy, $0.75 million carried an A rating, $1.15 million carried an Aa3/AAA rating and the remainder carried AAA/Aaa ratings.

Since early February 2008 we have experienced difficulty in liquidating our ARS as the amount of securities submitted for auction has exceeded the market demand and auctions began to fail. When the auctions for these securities fail, the
investments are not readily convertible into cash until a future auction is successful, secondary markets emerge, the securities are redeemed by the issuer or they mature. Although we are experiencing a lack of liquidity for these securities at the
present time, we anticipate, based on discussions with our investment advisors, that liquidity for these securities might be realized through the emergence of secondary markets, particularly considering the relatively high default interest rates,
high credit ratings, the backing of the FFELP and/or the collateralization related to the underlying securities. While taking into consideration valuation factors as set forth in the guidelines of SFAS 157, management has established estimated fair
values for the ARS held at June 30, 2008 based on the potential cash realization that is likely to be available from these assets by holders of these securities. We have noted, although we have yet been unable to confirm, that sporadic
trades supposedly have taken place recently in private secondary markets for ARS holdings similar to our own and appear to be between opportunistic buyers and distressed sellers. While such trades are potentially important to understanding a
relevant range of valuation, they are not indicative of fair value. Similarly, recent news has highlighted increasing levels of redemptions by issuing agencies of ARS similar to those we hold at 100% of face value and support for the
refinancing of such securities as expressed by the United States government. Recent redemptions are based on an opportunity by the issuers to reduce their



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cost of capital through redemption and refinancing and we, along with others, believe that such redemptions make good economic sense and might accelerate
over time. Again however, while redemption at 100% of face value is important for understanding the range of our opportunity, it would not be appropriate to ignore the pervasive lack of liquidity for the securities we currently hold.

Further, we are led to believe that more fluid secondary markets might develop and that if this occurs and as redemptions accelerate, the valuations
at which Aaa rated student loan-backed ARS trade could improve. While we acknowledge that specific observable inputs are not available to support our estimates, we anticipate that if a functioning public secondary market emerged today with
continuing orderly transactions, the pricing in such a market would approximate our estimates. However, over time and as more ARS issuers are able to organize alternative financing, the accelerating rate of redemptions might gradually move the
market value closer to 100%, though without ever entirely reaching that level. Accordingly, we continue to believe that 90% to 100% of the face value of these assets reflects a range of realistic valuations. Based on these considerations, we
estimated that an aggregate impairment of approximately 6% of par value of our ARS holdings continued to be appropriate as of June 30, 2008 and have made no additional adjustment to the fair value and impairment charge that we had previously
recorded during the first quarter of 2008. We consider such impairment to be other-than temporary and have recorded a charge to operations during the six months ended June 30, 2008 of approximately $1.6 million.

We continue to explore other potential methods for leveraging these assets to provide the cash necessary to sustain operations within our required
timeframes. If partial or complete liquidity does not to return to these markets within the near term through public secondary trading opportunities, government intervention or issuer redemptions, we may be required to leverage the value of these
assets through other financing alternatives or liquidate them at discounted values that might be less than our currently estimated fair value. Although we currently have no reliable evidence with which to accurately estimate a future transaction in
the volatile private secondary markets, we believe that, if a partial liquidation of our ARS holdings were to become necessary in the current market environment, the resulting realized discounts could easily exceed our recorded impairment of 6% of
par value, perhaps by as much as five to ten additional percentage points, or potentially even more.

We currently have sufficient cash to
sustain operating activities in the near term and we plan to continue closely monitoring the redemptions by the issuing agencies at par value and the progress of activity in the private secondary markets on an ongoing basis. In addition, considering
our relative inability to hold these securities to maturity, we do anticipate leveraging or liquidating the majority, if not all, of our ARS investments in order to maintain our financing strategies over the next twelve months. Despite the fact that
our estimate of fair value considers a five-year time horizon, we do not have the ability to hold the majority of these securities beyond the next nine to twelve months if we are to effectively fund planned operational needs and, accordingly, may
determine that it is in our best interest to seek liquidity for these assets at discounts greater than current fair value might imply. Despite this, we continue to believe that the temporary liquidity issues in the market for ARS is unlikely to have
a material impact on our future liquidity or financial flexibility.

We have incurred negative cash flows from operations since inception.
We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and our continuing efforts to secure in-licensing
opportunities. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing or strategic alliances. Such additional funds might not become available on
acceptable terms, or at all, and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. We expect to record a loss from operations, net of interest earned on investments, in the
range of $32 to $60 million during the 12 to 18 months commencing July 2008.

Actual losses will depend on a number of considerations
including:



| |  |  | the pace and success of pre-clinical development and clinical trials for droxidopa, antifolates and other product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | seeking regulatory approval for our various product candidates;
| | - |  | ---------------------------------------------------------------



| |  |  | discussions with regulatory agencies concerning the design of our clinical trials;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our ability to identify and recruit patients into our clinical trials at costs consistent with our current estimates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the pace of development of new intellectual property for our existing product candidates;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | possible out-licensing of our product candidates;
| | - |  | -------------------------------------------------



| |  |  | in-licensing and development of additional product candidates;
| | - |  | --------------------------------------------------------------



| |  |  | effectively leveraging or liquidating our holdings in ARS;
| | - |  | ----------------------------------------------------------



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| |  |  | implementing additional internal systems and infrastructure; and
| | - |  | ----------------------------------------------------------------



| |  |  | hiring additional personnel.
| | - |  | ----------------------------

We
have based our estimate of projected expenses during the next 12 to 18 months on assumptions that might prove to be incorrect. Potential sources of future financing include strategic relationships, public or private sales of equity or debt and other
sources. Additional financing might be needed for future activities and we might again seek to access the public or private equity markets when and if conditions are favorable to meet additional long term capital requirements. Should we raise
additional funds by selling shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we might be unable to
carry out our long term business plan. As a result, we might have to significantly delay certain activities or limit our operations and our business, financial condition and results of operations would be materially harmed.

Off-Balance Sheet Arrangements

We do not have any
unconsolidated entities, and accordingly, we have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that
expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Contractual Obligations

As of June 30, 2008, we
had contractual obligations and commitments of approximately $18.1 million, primarily related to the recently executed lease agreement for our new office space and contracted research and development activities. To facilitate an understanding of our
contractual obligations and commercial commitments, the following data is provided as of June 30, 2008:



|                            |  |                        |            |          |   |            |  |           |           |                  |   |         |  |   |  
|--------------------------- |  | ---------------------- | ---------- | -------- | - | ---------- |  | --------- | --------- | ---------------- | - | ------- |  | - | -
|                            |  | Payments due by period
|Category                    |  | Total                  |            | < 1 Year |   | 1-3 Years  |  | 3-5 Years |           | More than5 Years
|Operating lease obligations |  | $                      | 1,446,833  |          | $ | 178,102    |  | $         | 746,681   |                  | $ | 522,050 |  | $ | 
|Purchase obligations        |  |                        | 16,683,043 |          |   | 14,328,498 |  |           | 2,261,546 |                  |   | 93,000  |  |   | 
|                            |  |                        |            |          |   |            |  |           |           |                  |   |         |  |   |  
|Total                       |  | $                      | 18,129,877 |          | $ | 14,506,600 |  | $         | 3,008,227 |                  | $ | 615,050 |  | $ | 
|                            |  |                        |            |          |   |            |  |           |           |                  |   |         |  |   |  

In addition, we have entered into certain licensing and related agreements that, as of
June 30, 2008, might require we make contingent milestone payments of up to approximately $4.9 million over the life of the agreements upon the achievement of certain clinical or commercial milestones. Such future payments are subject to our
right to terminate the agreements. In the event that the milestones are not achieved, we elect not to pursue further testing of the drug candidate or we terminate such agreements, we will have no further obligations under the agreements. The
uncertainty relating to the timing and occurrence of the commitments described prevents us from including them in the table above.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We invest our cash in a variety of financial instruments in order to preserve principal and liquidity while maximizing returns and we do not invest in financial instruments or their derivatives for trading or speculative purposes. To
minimize the exposure due to adverse shifts in interest rates, we maintain investments of shorter maturities. Our investment guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting our
investments to high quality debt instruments with relatively short maturities. At June 30, 2008, our investments primarily consisted of money market funds, corporate debt securities and commercial paper with an average maturity under 90 days
and ARS with long-term nominal maturities for which the interest rates are reset through a dutch auction each month or, should those auctions fail, as determined by contractual obligation. All investments to date have been made in U. S. dollars and
accordingly, we do not have any exposure to foreign currency rate fluctuations.

Our interest income is sensitive to changes in the general
level of interest rates in the United States, particularly since our investments are and will be in short-term investments. To assess our interest rate risk, we performed a sensitivity



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analysis projecting potential future interest earnings on investments in which we estimated the impact of a 1%, or 100 basis point, increase or decrease in
our average interest rate over a 12 month time horizon. This analysis resulted in a potential effect of approximately $300,000 on the interest earned on investments.

At June 30, 2008, we had investments in ARS with an estimated fair value of $24.7 million. Historically, ARS were priced at par, as per industry convention, based on observed or reported verifiable trades and
provided a liquid market for these ARS investments. However, the recent liquidity issues have virtually shut down most active market transactions. Our investments in ARS represent interests in collateralized debt obligations supported by pools of
student loans, typically over-collateralized and/or insured by the Federal Family Education Loan Program (FFELP). None of the ARS investments in our portfolio were backed by sub-prime mortgage loans or other collateral with exposure to certain
current market conditions. However, liquidity issues experienced recently in global credit and capital markets have prevented us from liquidating our ARS investments as the amount of securities submitted for sale at recent ARS auctions has exceeded
the market demand, though they continue to pay interest according to their stated terms. Although insufficient demand for certain ARS may continue, we anticipate, based on discussions with our investment advisors, that liquidity for our securities
might possibly be realized through redemptions by the issuing agencies, government intervention in the market or the emergence of secondary markets in the near term, particularly considering the relatively high default interest rates, high credit
ratings, the backing of the FFELP and/or the underlying assets collateralizing these investments. In the event that we are unable to sell the investments at or above our carrying value, these securities may not provide us a liquid source of cash or
might require us to record additional impairment to the asset value.

Notwithstanding the above, if uncertainties in the credit and capital
markets continue and secondary markets for ARS do not emerge, we might not be able to convert these investments into cash during our required timeframe. Even if secondary markets do emerge, we might experience temporary losses of principal if such
securities continue to be marketed at a discount or additional realized losses if it becomes necessary to sell these investments at such a discount. In addition, should the credit ratings of our ARS be downgraded, we might incur further value
impairment and additional problems in liquidating our investments.



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that they will meet their objectives that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation and subject to the
foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2008.

Changes in internal control over financial reporting.

Management has determined that, as of
June 30, 2008, there were no changes in our internal control over financial reporting that occurred during our fiscal quarter then ended that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.



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PART II  OTHER INFORMATION



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

In April 2008, we issued 30,612 shares of our common stock, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment of $150,000 that had been accrued at March 31, 2008 under our license
agreement with Dr. Gopal Nair. The issuance of shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.



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



| | (a) | On June 26, 2008, we held our Annual Meeting of Stockholders.
| | --- | -------------------------------------------------------------



| | (b) | At that Annual Meeting, Simon Pedder, Kevan Clemens, Norman Hardman, Johnson Y.N. Lau, Roger Stoll and Michael Weiser were re-elected for one-year terms as members of the Board of
Directors.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | In total, two matters were voted on at the Annual Meeting: (1) the re-election of the six directors as described in item (b) above; and (2) the ratification of
Ernst & Young LLP as the Companys independent registered public accounting firm for 2008. A tabulation for each matter is as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1) | The stockholders elected the following directors to serve for the ensuing year and until their successors are elected by the following votes:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |            |  |         
|----------------- |  | ---------- |  | --------
|                  |  | FOR        |  | WITHHELD
|Simon Pedder      |  | 19,205,526 |  | 18,840  
|Kevan Clemens     |  | 19,205,526 |  | 18,840  
|Norman Hardman    |  | 19,205,526 |  | 18,840  
|Johnson Y. N. Lau |  | 19,205,526 |  | 18,840  
|Roger Stoll       |  | 19,205,526 |  | 18,840  
|Michael Weiser    |  | 19,099,639 |  | 124,727 



| | 2) | The stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 as
follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|FOR        |  | AGAINST |  | ABSTAIN
|19,216,211 |  | 7,965   |  | 190    



|Item 6. | Exhibits
|------- | --------



|               |  |                                                                                                     |  |                  |  |       |  |               |  |              
|-------------- |  | --------------------------------------------------------------------------------------------------- |  | ---------------- |  | ----- |  | ------------- |  | -------------
|Exhibit Number |  | Description of Document                                                                             |  | RegistrantsForm |  | Dated |  | ExhibitNumber |  | FiledHerewith
|31.1           |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                  |  |       |  |               |  | X            
|               |  |                                                                                                     |  |                  | 
|31.2           |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  |                  |  |       |  |               |  | X            
|               |  |                                                                                                     |  |                  | 
|32.1           |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                  |  |       |  |               |  | X            
|               |  |                                                                                                     |  |                  | 
|32.2           |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |                  |  |       |  |               |  | X            



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##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



|                     |  |                                          |  |                                                           
|-------------------- |  | ---------------------------------------- |  | ----------------------------------------------------------
|                     |  | Chelsea Therapeutics International, Ltd.
|                     |  |                                         
|Date: August 6, 2008 |  | By:                                      |  | /s/ J. Nick Riehle                                        
|                     |  |                                          |  | J. Nick Riehle                                            
|                     |  |                                          |  | Vice President, Administration and Chief Financial Officer



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