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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2006

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



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CHELSEA THERAPEUTICS
INTERNATIONAL, LTD.

(Exact name of Registrant as specified in its charter)



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

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

(Address of principal executive offices, including zip code)

(704) 341-1516

(Registrants telephone number, including area code)



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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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large Accelerated Filer ̈ |  | Accelerated Filer ̈ |  | Non-accelerated Filer  x

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 November 13, 2006, there were 19,707,129 shares of registrants Common Stock outstanding.



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##### Table of Contents

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 |  | 12  
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 16  
|Item 4. |  | Controls and Procedures                                                               |  | 16  
|        |  |                                                                                      
|PART II |  | OTHER INFORMATION                                                                     |  |     
|Item 6. |  | Exhibits                                                                              |  | 17  
|        |  | Signatures                                                                            |  | 18  

Chelsea Therapeutics International, Ltd, Ivory Capital Corporation and Chelsea Therapeutics,
Inc.

Except where the context provides otherwise, references to the Company, we, us,
our and similar terms mean Chelsea Therapeutics International, Ltd., Ivory Capital Corporation and Chelsea Therapeutics, Inc. When we refer to business and financial information relating to periods prior to the merger with Ivory Capital
Corporation dated February 11, 2005, we are referring to the business and financial information of Chelsea Therapeutics, Inc. unless the context requires otherwise.



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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



|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                     |  | September 30,2006 |             |   | December 31,2005 |  
|                                                                                                                                     |  | (unaudited)       |             |   |                  |  
|Assets                                                                                                                               |  |                   |             |   |                  |   |             |  
|Current assets:                                                                                                                      |  |                   |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                            |  | $                 | 17,662,112  |   |                  | $ | 3,173,434   |  
|Prepaid contract research and manufacturing                                                                                          |  |                   | 258,475     |   |                  |   | 106,952     |  
|Other prepaid expenses and other current assets                                                                                      |  |                   | 70,783      |   |                  |   | 89,977      |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Total current assets                                                                                                                 |  |                   | 17,991,370  |   |                  |   | 3,370,363   |  
|Property and equipment, net                                                                                                          |  |                   | 52,541      |   |                  |   | 43,200      |  
|Other assets                                                                                                                         |  |                   | 13,461      |   |                  |   | 13,461      |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|                                                                                                                                     |  | $                 | 18,057,372  |   |                  | $ | 3,427,024   |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Liabilities and Stockholders' Equity                                                                                                 |  |                   |             |   |                  |   |             |  
|Current liabilities:                                                                                                                 |  |                   |             |   |                  |   |             |  
|Accounts payable                                                                                                                     |  | $                 | 232,862     |   |                  | $ | 504,416     |  
|Accrued compensation and related expenses                                                                                            |  |                   | 304,534     |   |                  |   | 245,273     |  
|Accrued contract research and manufacturing                                                                                          |  |                   | 887,994     |   |                  |   | 171,415     |  
|Other accrued expenses                                                                                                               |  |                   | 157,617     |   |                  |   | 121,516     |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Total liabilities                                                                                                                    |  |                   | 1,583,007   |   |                  |   | 1,042,620   |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|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, 19,707,129 and 12,383,188 shares issued and outstanding,
respectively |  |                   | 1,971       |   |                  |   | 1,238       |  
|Additional paid-in capital                                                                                                           |  |                   | 33,655,348  |   |                  |   | 13,315,447  |  
|Deficit accumulated during the development stage                                                                                     |  |                   | (17,182,954 | ) |                  |   | (10,932,281 | )
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|Total stockholders' equity                                                                                                           |  |                   | 16,474,365  |   |                  |   | 2,384,404   |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  
|                                                                                                                                     |  | $                 | 18,057,372  |   |                  | $ | 3,427,024   |  
|                                                                                                                                     |  |                   |             |   |                  |   |             |  

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 endedSeptember 30, |            |   | For the nine months endedSeptember 30, |   |            | Period from April 3, 2002(inception) to September 30, 2006 | 
|                                                                       |  | 2006                                    |            |   | 2005                                   |   |            | 2006                                                       |  |   | 2005       |   | 
|Operating expenses:                                                    |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Research and development                                               |  | $                                       | 1,745,319  |   |                                        | $ | 1,367,538  |                                                            |  | $ | 4,874,971  |   |  | $ | 4,076,493  |   |  | $ | 12,199,217  |  
|Sales and marketing                                                    |  |                                         | 150,137    |   |                                        |   | 119,827    |                                                            |  |   | 460,668    |   |  |   | 391,840    |   |  |   | 1,153,744   |  
|General and administrative                                             |  |                                         | 458,481    |   |                                        |   | 276,964    |                                                            |  |   | 1,551,634  |   |  |   | 1,670,020  |   |  |   | 4,639,312   |  
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Total operating expenses                                               |  |                                         | 2,353,937  |   |                                        |   | 1,764,329  |                                                            |  |   | 6,887,273  |   |  |   | 6,138,353  |   |  |   | 17,992,273  |  
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Operating loss                                                         |  |                                         | (2,353,937 | ) |                                        |   | (1,764,329 | )                                                          |  |   | (6,887,273 | ) |  |   | (6,138,353 | ) |  |   | (17,992,273 | )
|Interest income                                                        |  |                                         | 243,149    |   |                                        |   | 49,254     |                                                            |  |   | 636,600    |   |  |   | 163,069    |   |  |   | 843,339     |  
|Interest expense                                                       |  |                                         |           |   |                                        |   |           |                                                            |  |   |           |   |  |   |           |   |  |   | (34,020     | )
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Net loss                                                               |  | $                                       | (2,110,788 | ) |                                        | $ | (1,715,075 | )                                                          |  | $ | (6,250,673 | ) |  | $ | (5,975,284 | ) |  | $ | (17,182,954 | )
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Net loss per basic and diluted share of common stock                   |  | $                                       | (0.11      | ) |                                        | $ | (0.14      | )                                                          |  | $ | (0.34      | ) |  | $ | (0.49      | ) |  |   |             |  
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  
|Weighted average number of basic and diluted common shares outstanding |  |                                         | 19,707,129 |   |                                        |   | 12,374,263 |                                                            |  |   | 18,468,414 |   |  |   | 12,300,125 |   |  |   |             |  
|                                                                       |  |                                         |            |   |                                        |   |            |                                                            |  |   |            |   |  |   |            |   |  |   |             |  

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-In Capital |       |  | Deficitaccumulatedduring
thedevelopment stage |            |   | Total stock- holders' equity |  
|                                                                                                                                    |  | Shares       |  | Amount                    |       |  |                                              
|Balance at January 1, 2006                                                                                                          |  | 12,383,188   |  | $                         | 1,238 |  | $                                             | 13,315,447 |   |                              | $ | (10,932,281 | ) |  | $ | 2,384,404  |  
|Sale and issuance of common stock with detachable warrants in February 2006 at approximately $2.77 per share, net of issuance
costs |  | 7,166,666    |  |                           | 717   |  |                                               | 19,854,935 |   |                              |   |             |   |  |   | 19,855,652 |  
|Common stock issued in March 2006, at par, pursuant to net-share (cashless) exercise of common stock warrants                       |  | 15,461       |  |                           | 2     |  |                                               | (2         | ) |                              |   |             |   |  |   |           |  
|Common stock issued in May 2006, at approximately $4.35 per share, for license fee                                                  |  | 63,131       |  |                           | 6     |  |                                               | 274,615    |   |                              |   |             |   |  |   | 274,621    |  
|Employee stock options exercised                                                                                                    |  | 78,683       |  |                           | 8     |  |                                               | 5,072      |   |                              |   |             |   |  |   | 5,080      |  
|Stock-based compensation                                                                                                            |  |              |  |                           |       |  |                                               | 201,089    |   |                              |   |             |   |  |   | 201,089    |  
|Variable accounting for stock options granted to third party                                                                        |  |              |  |                           |       |  |                                               | 4,192      |   |                              |   |             |   |  |   | 4,192      |  
|Net loss                                                                                                                            |  |              |  |                           |       |  |                                               |            |   |                              |   | (6,250,673  | ) |  |   | (6,250,673 | )
|                                                                                                                                    |  |              |  |                           |       |  |                                               |            |   |                              |   |             |   |  |   |            |  
|Balance at September 30, 2006                                                                                                       |  | 19,707,129   |  | $                         | 1,971 |  | $                                             | 33,655,348 |   |                              | $ | (17,182,954 | ) |  | $ | 16,474,365 |  
|                                                                                                                                    |  |              |  |                           |       |  |                                               |            |   |                              |   |             |   |  |   |            |  

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 nine months endedSeptember 30, |            |   | Period fromApril 3, 2002(inception) toSeptember 30, 2006 |  
|                                                                                                  |  | 2006                                   |            |   | 2005                                                     |   |           
|Operating activities:                                                                             |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Net loss                                                                                          |  | $                                      | (6,250,673 | ) |                                                          | $ | (5,975,284 | ) |  | $ | (17,182,954 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Non-cash stock-based compensation                                                                 |  |                                        | 201,089    |   |                                                          |   | 73,888     |   |  |   | 301,937     |  
|Non-cash stock-based variable accounting compensation                                             |  |                                        | 4,192      |   |                                                          |   | 99,921     |   |  |   | 62,786      |  
|Depreciation and amortization                                                                     |  |                                        | 25,786     |   |                                                          |   | 18,853     |   |  |   | 62,684      |  
|Stock issued for license agreement                                                                |  |                                        | 274,621    |   |                                                          |   |           |   |  |   | 275,023     |  
|Non-cash interest expense                                                                         |  |                                        |           |   |                                                          |   |           |   |  |   | 34,020      |  
|Changes in operating assets and liabilities:                                                      |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Prepaid expenses and other current assets                                                         |  |                                        | (132,329   | ) |                                                          |   | (152,201   | ) |  |   | (329,258    | )
|Accounts payable, accrued contract research and manufacturing expenses and other accrued expenses |  |                                        | 481,126    |   |                                                          |   | 546,997    |   |  |   | 1,278,474   |  
|Accrued compensation and related expenses                                                         |  |                                        | 59,261     |   |                                                          |   | (69,838    | ) |  |   | 304,534     |  
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Net cash used in operating activities                                                             |  |                                        | (5,336,927 | ) |                                                          |   | (5,457,664 | ) |  |   | (15,192,754 | )
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Investing activities:                                                                             |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Acquisitions of property and equipment                                                            |  |                                        | (35,127    | ) |                                                          |   | (17,564    | ) |  |   | (115,226    | )
|Security deposits                                                                                 |  |                                        |           |   |                                                          |   |           |   |  |   | (13,461     | )
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Net cash used in investing activities                                                             |  |                                        | (35,127    | ) |                                                          |   | (17,564    | ) |  |   | (128,687    | )
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Financing activities:                                                                             |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Proceeds from borrowings from affiliate                                                           |  |                                        |           |   |                                                          |   |           |   |  |   | 1,745,000   |  
|Proceeds from sales of common stock, net of issuance costs                                        |  |                                        | 19,855,652 |   |                                                          |   |           |   |  |   | 19,856,060  |  
|Proceeds from exercise of stock options                                                           |  |                                        | 5,080      |   |                                                          |   | 999        |   |  |   | 6,079       |  
|Proceeds from sales of equity securities, net of issuance costs                                   |  |                                        |           |   |                                                          |   |           |   |  |   | 11,771,789  |  
|Recapitalization of the Company                                                                   |  |                                        |           |   |                                                          |   | (400,000   | ) |  |   | (400,000    | )
|Receipt of cash for stock subscription receivable                                                 |  |                                        |           |   |                                                          |   |           |   |  |   | 4,625       |  
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Net cash provided by (used in) financing activities                                               |  |                                        | 19,860,732 |   |                                                          |   | (399,001   | ) |  |   | 32,983,553  |  
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                                        | 14,488,678 |   |                                                          |   | (5,874,229 | ) |  |   | 17,662,112  |  
|Cash and cash equivalents, beginning of period                                                    |  |                                        | 3,173,434  |   |                                                          |   | 10,977,140 |   |  |   |            |  
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  
|Cash and cash equivalents, end of period                                                          |  | $                                      | 17,662,112 |   |                                                          | $ | 5,102,911  |   |  | $ | 17,662,112  |  
|                                                                                                  |  |                                        |            |   |                                                          |   |            |   |  |   |             |  

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 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.

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

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 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 March 2006, 15,461 shares of the $0.0001 par value common stock of the Company were issued to holders upon exercise of warrants issued in December 2004 per the
net share settlement provisions contained in the terms of the warrants.

In February 2006, in conjunction with and as compensation for
activities related to the 2006 Placement (see Note 4), 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 the licensing agreement with Dainippon Sumitomo Pharma Co.,
Ltd. 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. These warrants were not valued at September 30, 2006 as their
exercise is conditioned on an event, the occurrence of which is undeterminable at September 30, 2006 and accordingly, had no reportable fair value at that date. If and when the event is deemed probable to occur the Company will record a charge
based on the warrants then determined fair value (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 SEPTEMBER 30, 2006

(Unaudited)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

The Company

On
July 27, 2005, the stockholders approved an Agreement and Plan of Merger dated June 17, 2005 (the Delaware reincorporation) pursuant to which the Company merged with and into its newly created, wholly-owned subsidiary, Chelsea
Therapeutics International, Ltd., a Delaware corporation (Chelsea Delaware), with Chelsea Delaware remaining as the surviving corporation.

The Delaware reincorporation also had the effect of the Company changing its corporate name to Chelsea Therapeutics International, Ltd. In addition, the Delaware reincorporation provided that each nine (9) shares
of the no par value common stock of the Company outstanding at the date of the reincorporation was exchanged for one (1) share of the $0.0001 par value common stock of Chelsea Delaware (the Share Exchange). Fractional shares of
Chelsea Delaware common stock were not issued in the Share Exchange and holders of the Companys common stock who would have otherwise been entitled to receive a fractional share of Chelsea Delaware common stock received a cash payment equal to
the fair market value of such fractional share as of the effective date of the reincorporation.

In accordance with the Share Exchange,
Chelsea Delaware issued an aggregate of 12,368,514 shares of its common stock to the stockholders of the Company in exchange for the 111,317,378 shares of the Companys common stock issued and outstanding as of the date of the Share Exchange.
Accordingly, the Company has retroactively restated all share and per share data contained herein as if such exchange had occurred at the beginning of the earliest period presented.

The Chelsea Delaware Certificate of Incorporation authorizes the issuance of up to 45,000,000 shares of common stock, $0.0001 par value per share and
5,000,000 shares of preferred stock, $0.0001 par value per share.

On February 11, 2005, pursuant to an Agreement and Plan of Merger
dated as of January 17, 2005 (the Merger Agreement), Chelsea Therapeutics, Inc. (Chelsea) merged with and into Chelsea Acquisition Corp. (the Merger), a wholly-owned subsidiary of Ivory Capital Corporation
(Ivory), which at that time was a reporting public corporation with no operations. In accordance with the Merger Agreement, each share of the outstanding preferred and common stock of Chelsea automatically converted into approximately
10.563 shares of the no par value common stock of Ivory. Accordingly, and after giving effect for the Delaware reincorporation and in connection with the Merger, Ivory issued an aggregate of 11,911,357 shares of its common stock to the former
stockholders of Chelsea. At the date of the Merger, there were 457,157 shares of Ivorys capital stock issued and outstanding. After giving effect to the issuance of shares in the Merger and the Delaware reincorporation, Ivory had outstanding
12,368,514 shares of common stock. In addition, immediately prior to the Merger, there were outstanding options and warrants to purchase 1,592,876 shares of the common stock of the Company. In conjunction with and immediately prior to the Merger,
Chelsea issued additional warrants for the purchase of 105,516 shares of its common stock as consideration for events that facilitated the Merger.

Immediately after the date of the Merger, the parties who immediately prior thereto held common stock of Ivory continued to own an aggregate of 457,157 shares of the $0.0001 par value common stock of Ivory, equaling 3.25% of the outstanding
common stock of Ivory on a fully diluted basis assuming exercise of all stock options, warrants and any other instruments convertible into equity.

Immediately after the Merger, Chelsea purchased all of the revolving notes outstanding with a face value of $33,292 under the a credit agreement between Ivory and its principal stockholders, together with all related rights (including the
option to convert the amounts due under the revolving notes into up to 444,444 shares of Ivorys common stock), for $400,000 in cash. In connection with such purchase, the holders of such revolving notes released any and all claims against
Ivory and Chelsea, including conversion rights as outlined in the note agreements.



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The terms of the Merger provided that the sole officer and director of Ivory would be replaced by the
officers and directors of Chelsea and having had no significant business activity for a number of years, upon the effective time of the Merger, Ivory adopted the business plan of Chelsea. The transaction was therefore accounted for as a reverse
acquisition with Chelsea as the acquiring party and Ivory as the acquired party, in substance, a reorganization of Chelsea. Accordingly, the results of operations for the periods prior to the Merger are those of Chelsea.

Chelsea was incorporated in the State of Delaware on April 3, 2002 as Aspen Therapeutics, Inc. (Aspen). On July 8, 2004, Aspen
amended its Certificate of Incorporation with the State of Delaware to change its name to Chelsea Therapeutics, Inc. Chelsea Therapeutics International, Ltd. was incorporated in the State of Delaware on June 17, 2005. Chelsea 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 and nuerogenic orthostatic hypotension.

As a result of the Merger of Ivory and
Chelsea in February 2005, and the reincorporation in Delaware in July 2005, Chelsea Therapeutics International, Ltd. is the reporting company and is the 100% owner of Chelsea Therapeutics, Inc. The separate existence of Ivory Capital ceased in
connection with the Delaware reincorporation in July 2005. Except where the context provides otherwise, references to the Company, we, us, our and similar terms mean Ivory, Chelsea Delaware and Chelsea
as applicable.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its 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 nine months ended September 30, 2006 are not necessarily indicative of the results for the year ending December 31, 2006 or future periods. The accompanying condensed
consolidated financial statements should be read in conjunction with the Companys consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K filed on March 8, 2006 and available on the
website of the United States Securities and Exchange Commission (www.sec.gov).

Since inception, the Company has focused primarily on
acquiring and developing pharmaceutical technologies, raising capital, establishing office facilities and recruiting personnel. 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 a combination of equity issuances and debt arrangements. If adequate funds are not available, the Company might be required to delay, reduce the scope of, or eliminate one or more of its research or development
programs, or cease operations.

For presentation purposes, the Company has restated all information contained in this report related to
shares authorized, issued and outstanding and related disclosures of weighted average shares and earnings per share to reflect the results of the Delaware reincorporation in July 2005 as if the Delaware reincorporation had occurred at the beginning
of each of the periods presented.



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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 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.

NOTE 2 STOCK-BASED COMPENSATION

For
periods prior to February 11, 2005, the date of the Merger (see Note 1), the Company followed Statement of Financial Accounting Standard No. 123 (SFAS 123), Accounting for Stock-based Compensation. Effective
February 11, 2005, the Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-based Paymentin accounting for its stock options. The adoption of SFAS 123(R) was applied using
modified prospective application to all grants made after February 11, 2005. The adoption of SFAS 123(R) had no effect on the financial results of the Company from the application of the original provisions of SFAS 123.

Options granted to consultants, advisors or other independent contractors that provide services to the Company are accounted for under the provisions of
SFAS 123(R) and Emerging Issues Task Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

The Company has a stock incentive plan (the Plan) under which incentive stock options may be granted. On April 25, 2006, the Board
approved an amendment to the Plan, increasing the number of shares available for grant to 2,645,000 shares of its $0.0001 par value common stock. In January 2006, the Board approved an amendment to the Plan that increased the number of shares
available for grant to 1,596,432 shares of its $0.0001 par value common stock. These increases were approved by the Companys stockholders at the 2006 Annual Meeting on June 19, 2006. 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 subsidiaries.

During the three months ended September 30, 2006, the Company granted stock options to employees for the purchase of 20,000 shares of its $0.0001 par value common stock. There were no grants during the three months ended
September 30, 2005. The grant made during the three months ended September 30, 2006 had an exercise price of $3.10 per share, a fair value of approximately $1.27 per share and an intrinsic value of $18,000 as of September 30, 2006.
Each option granted to employees during the three months ended September 30, 2006 vests as to 25% of the shares on the first, second, third and fourth anniversary of the vesting commencement date. Once vested, options are exercisable 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.

During the nine months ended September 30, 2006 and 2005, the Company granted stock options to employees and non-employee directors for the purchase
of 638,085 and 756,451 shares of its $0.0001 par value common stock, respectively. The grants made during the nine months ended September 30, 2006 had a weighted average exercise price of $3.58 per share, a weighted average fair value of
approximately $1.46 per share and aggregate intrinsic value as of September 30, 2006 of approximately $0.3 million. The grants made during the nine months ended September 30, 2005 had a weighted average



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exercise price of $2.66 per share, a weighted average fair value of $0.47 per share and an aggregate intrinsic value as of September 30, 2006 of
approximately $1.0 million. Each option granted to employees and non-employee directors during the nine months ended September 30, 2006 and 2005 vests as to 25% of the shares on the first, second, third and fourth anniversary of the vesting
commencement date except that each grant made to non-employee directors during the nine months ended September 30, 2005 vested as to 100% of the shares on the first anniversary of the vesting commencement date. Once vested, options are
exercisable 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.

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 nine months ended September 30, 2006 and 2005:



|                         |  |                            |   |                           |                    |  |                    |   |  |                    |  
|------------------------ |  | -------------------------- | - | ------------------------- | ------------------ |  | ------------------ | - |  | ------------------ | -
|                         |  | For the three months ended |   | For the nine months ended |                   
|                         |  | September 30, 2006         |   |                           | September 30, 2005 |  | September 30, 2006 |   |  | September 30, 2005 |  
|Risk-free interest rate  |  | 4.73                       | % |                           | n/a                |  | 4.31% to 5.12      | % |  | 3.72% to 3.89      | %
|Expected life of options |  | 5 years                    |   |                           | n/a                |  | 5 years            |   |  | 5 years            |  
|Expected dividend yield  |  | 0                          | % |                           | n/a                |  | 0                  | % |  | 0                  | %
|Expected volatility      |  | 37.66                      | % |                           | n/a                |  | 37.66              | % |  | 0% to 41.31        | %
|Forfeitures              |  | 0                          | % |                           | n/a                |  | 0                  | % |  | 0                  | %

All grants made to employees and non-employee directors during the three months ended
March 31, 2005 were made prior to the Companys adoption of SFAS 123(R). As such, the Company utilized the minimum value model, under the provisions of SFAS 123, and assumed no volatility in determining the fair value of options granted.

The Company recorded compensation expense for the three and nine months ended September 30, 2006 of $79,035 and $201,089,
respectively, and compensation expense for the three and nine months ended September 30, 2005 of $25,430 and $73,888, respectively, in conjunction with option grants made to employees and non-employee directors. As of September 30, 2006,
the Company had total unrecognized compensation expense related to options granted to employees and non-employee directors of approximately $1.0 million, which will be recognized over a remaining average period of 3.1 years.

In November 2005, the Company granted a stock option to a third-party contractor to purchase 5,000 shares of its $0.0001 par value common stock at an
exercise price of $3.10 per share. The option vests 25% at each calendar quarter end date from the date of issuance. For the three months ended September 30, 2006, based on the fair value of these options, the Company recorded compensation
expense of $118 and for the nine months ended September 30, 2006 recorded total compensation expense of $4,192. At September 30, 2006, these options had fully vested.

In December 2004, the Company granted a stock option to a third-party contractor to purchase 58,683 shares of its $0.0001 par value common stock at an
exercise price of $2.62 per share. The option was scheduled to vest monthly over a 36-month period. On October 31, 2005, the Company terminated its relationship with this contractor and the vested portion of the options subsequently expired
unexercised after thirty (30) days. For the three months ended September 30, 2005, based on the fair value of these options, the Company recorded a reduction in compensation expense of $204,910 and for the nine months ended
September 30, 2005 recorded total compensation expense of $99,920.

As of September 30, 2006, there were 1,606,342 options
outstanding under the Plan with a weighted average remaining life of 8.69 years, a weighted average fair value of $0.81 per share and an intrinsic value of approximately $2.1 million. Also, options for 417,791 shares had vested and were exercisable
at September 30, 2006 with a weighted average remaining contractual life of 8.1 years, a weighted average fair market value of $0.25 per share and an intrinsic value of approximately $1.1 million. During the nine months September 30, 2006,
options for 78,683 shares were exercised with a weighted average



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exercise price of $0.06 per share and an aggregate intrinsic value as of the dates of exercise of approximately $0.3 million. No options were exercised
during the three months ended September 30, 2006. During the three and nine months ended September 30, 2005, options for 14,663 shares were exercised with a weighted average exercise price of $0.07 per share and an aggregate intrinsic
value as of the date of exercise of approximately $43,000.

NOTE 3 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 September 30, 2006 and 2005 upon exercise or conversion that were not included in the computation of net loss per share totaled 5,286,782 and 1,694,840 shares,
respectively.

NOTE 4 PRIVATE PLACEMENT OF COMMON STOCK

On February 13, 2006, the Company raised gross proceeds of approximately $21.5 million through the sale of 7,166,666 shares of its $0.0001 par value common stock plus warrants for the purchase of 2,149,999 shares
of its $0.0001 par value common stock (the 2006 Placement). The aggregate fair value of these warrants was approximately $1,488,000. The warrants permit the holders to purchase the underlying common shares, for cash only, at $4.20 each
and are exercisable in whole at any time, or in part from time to time, for five years from the date of issuance. The warrants are redeemable at par value at the Companys option in the event that the Companys volume weighted-average
closing bid price of its common stock is greater than $9.00 per share for any twenty (20) consecutive trading days provided that the Company gives thirty (30) business days written notice to the holders and simultaneously calls all
warrants on the same terms. Under the terms of the 2006 Placement, we agreed to and filed a registration statement with the SEC within 30 days of the closing for the shares of common stock sold and the shares of common stock underlying the warrants
and such registration became effective on March 29, 2006.

In connection with this offering, the Company engaged Paramount BioCapital,
Inc., a related party, as placement agent and paid commissions and other offering-related expenses of approximately $1.6 million in cash and issued warrants to purchase 716,666 shares of its common stock with an exercise price equal to 110% of the
price of the shares sold in the offering, or $3.30 per share. The aggregate fair value of these warrants was approximately $705,000.

NOTE 5 EXERCISE OF
COMMON STOCK WARRANTS

On March 6, 2006, a warrant holder exercised the right to purchase 15,221 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 7,507 shares of its $0.0001 par value common stock to the warrant holder based on the excess of the market price of $5.70 per share
over the exercise price of $2.88 per share.

On March 13, 2006, a warrant holder exercised the right to purchase 15,221 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 7,954 shares of its $0.0001 par value common stock to the warrant holder based on the excess of the market price of
$6.05 per share over the exercise price of $2.88 per share.



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NOTE 6 LICENSING AGREEMENT AND ASSET PURCHASE

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. At September 30, 2006, remaining future milestone payments, subject to the Companys right to terminate the license agreement, totaled
$4.0 million, some of which may be payable in equity. Subsequent to execution of the DSP Agreement, the Company and DSP have agreed to initiate, 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 United States Food and Drug Administration. Such activities are currently ongoing and shall continue over a two-year period. Based on work performed by DSP as of
September 30, 2006, the Company had accrued approximately $0.6 million.

In May 2006, 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., a related party. Under the terms of the Finders Agreement, the Company paid Paramount BioCapital,
Inc. an initial payment of $35,000 and issued warrants to Paramount BioCapital, Inc. or its affiliates for the purchase of 250,000 shares of its $0.0001 par value common stock at an exercise price of $4.31 per share. These warrants were not valued
at September 30, 2006 as their exercise is conditioned on an event, the occurrence of which is undeterminable at September 30, 2006, and accordingly, had no reportable fair value at that date. If and when the event is deemed probable to
occur, the Company will record a charge based on the warrants then determined fair value. As additional consideration, the Company agreed to (1) make future milestone payments, upon achievement of milestones as defined in the
Finders Agreement, to Paramount that totaled $185,000 as of September 30, 2006; (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.

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
(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 license and
co-development agreement, an initial payment of $1.0 million was made to AB during the quarter ended June 30, 2006 with such funds to be utilized to cover the initial costs of research and development efforts jointly approved by both parties.
At September 30, 2006, of the initial $1.0 million payment, the company had recorded approximately $0.8 million of expenses related to costs of research and development and approximately $0.2 million as a prepaid expense. Subsequent clinical
development efforts shall be jointly conducted and funded by the Company and AB via a Joint Development Committee with equal representation from both parties. The partnership also establishes a licensing agreement providing Chelsea with the
exclusive North and South American commercial rights to all drugs within this portfolio, while Active Biotech will retain rights for the remaining global markets. In addition to sharing development costs, both Chelsea and Active Biotech will pay the
other partner royalty payments on sales in their respective markets. Active Biotech will also receive certain defined milestone payments related to clinical development and receipt of revenue from commercialization of the compounds. Unless
terminated by either party with six months written notice, the Development Agreement shall remain in effect until the earlier of (1) the expiration of the last to expire patent rights indicated under the Development Agreement or
(2) fifteen (15) years from the date of the first commercial sale of the product. As of September 30, 2006, remaining future milestone payments, subject to the Companys right to terminate the Development Agreement, totaled $15.5
million.



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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

Since inception, we have focused primarily on acquiring and developing pharmaceutical technologies, raising
capital and recruiting personnel. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any revenue unless and until 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 during the course of developing our currently
licensed product candidates, we would not anticipate receiving regulatory approval to market such products until at least 2009. Currently, development expenses are being funded with proceeds from private equity financings completed in December 2004
and February 2006. 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.

On February 11, 2005, we completed a merger with Ivory Capital Corporation, a publicly traded Colorado corporation, in which a wholly-owned
subsidiary of Ivory Capital was merged with and into Chelsea, and Chelsea became a wholly-owned subsidiary of Ivory Capital. As a result of the merger, Ivory Capital, which previously had no material operations, acquired the business of Chelsea.
Each outstanding share of common stock and Series A Preferred Stock of Chelsea was converted into approximately 10.56 shares of common stock of Ivory Capital and outstanding options and warrants to purchase either common stock or Series A Preferred
Stock of Chelsea were assumed by Ivory Capital and converted into options and warrants to purchase shares of common stock at the same ratio. The merger resulted in a change of control of Ivory Capital, with the former stockholders of Chelsea owning
approximately 96.75% assuming the conversion of all outstanding options and warrants.

In addition, the terms of the merger provided that
the sole officer and director of Ivory Capital would be replaced by the officers and directors of Chelsea. Further, having had no significant business activity for a number of years, upon the effective time of the merger, Ivory Capital adopted the
business plan of Chelsea. The transaction was therefore accounted for as a reverse acquisition with Chelsea as the acquiring party and Ivory Capital as the acquired party, in substance, a reorganization of Chelsea. Accordingly, when we refer to our
business and financial information related to periods prior to the merger, we are referring to the business and financial information of Chelsea unless the context indicates otherwise.

On June 17, 2005, Ivory Capital Corporation formed a wholly-owned subsidiary in Delaware named Chelsea Therapeutics International, Ltd. for purposes
of reincorporating in Delaware. On July 28, 2005, Ivory Capital Corporation merged with Chelsea Therapeutics International, Ltd., with Chelsea Therapeutics International, Ltd. as the surviving corporation. As a result, Chelsea Therapeutics
International, Ltd. is the public reporting company and is the 100% owner of Chelsea Therapeutics, Inc., its operating subsidiary.

When we
refer to business and financial information for periods between January 1, 2005 and July 28, 2005, we are referring to the business and financial information of Ivory Capital Corporation. Except as noted, all share numbers included herein
reflect the conversion of every nine shares of Ivory Capital Corporation common stock for one share of Chelsea Therapeutics International, Ltd. common stock that occurred in connection with our Delaware reincorporation on July 28, 2005.



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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.

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 periods. On an ongoing basis, management evaluates their estimates and judgments. Management bases its estimates on historical experience and on various other factors that they believe 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 and record prepaid assets
or accrue expenses on a monthly basis for such activities based on the work performed under the contracts.

These contracts typically call
for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical trial 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 professional fees are incurred throughout the contract period. These professional fees
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.

Accounting for Stock-Based Compensation.We account for our employee stock options and warrants using the fair value method of Statement of
Financial Accounting Standards No. 123(R) (SFAS 123(R)), Share-based Payment.SFAS 123(R) defines a fair value based method of accounting for employee stock options or similar equity instruments. In determining the fair value
of the equity instrument, we considered, among other factors, (i) the risk-free interest rate, (ii) the expected life of the option granted, (iii) the anticipated dividend yield, (iv) the estimated future volatility of the
underlying equity and (v) anticipated future forfeitures. Our results 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.

Results of Operations

Three Months Ended September 30, 2006 and 2005

Research and development expenses. For
the three months ended September 30, 2006, research and development expenses were approximately $1.7 million, or 74% of operating expenses, an increase of approximately $0.4 million when compared to $1.4 million, or 78% of operating expenses,
for the corresponding period ended September 30, 2005. Expenses for each period consisted primarily of expenses incurred for compensation and related expenses and amounts paid to outside contract manufacturing and contract research
organizations relating to our product candidates. During the three months ended September 30, 2006, we carried out significant manufacturing and non-clinical research activities, generating expenses of approximately $1.4 million. For the three
months ended September 30, 2005, our expenditures were focused on outside contract manufacturing and contract research activities generating expenses of approximately $1.1 million.



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Sales and marketing expenses. Although we had no formalized selling activities for the three
months ended September 30, 2006, we did incur expenses of approximately $150,000, an increase of approximately $30,000 when compared to expenses of approximately $120,000 for the three months ended September 30, 2005. Sales and marketing
expenses related to business development activity in both periods and expenses incurred in the development of marketing and branding programs for Droxidopa for the three months ended September 30, 2006. Such expenses include compensation and
related costs, promotional activities and certain legal expenses. The increase during the three months ended September 30, 2006 relates primarily to increased international travel related to our recent agreements in Japan and Sweden and
increased market research and program development expenditures, offset by a reduction in legal expenses mainly associated with intellectual property activities.

General and administrative expenses. For the three months ended September 30, 2006, general and administrative expense were $0.5 million, an increase of $0.2 million, or 66%, when compared to expenses of
approximately $0.3 million for the three months ended September 30, 2005. These costs, focused on support of administrative activities, consisted primarily of compensation and related expenses, consulting and professional fees, travel costs,
insurance and facility expenses. The increase is primarily related to our recording a reversal of previously recorded compensation expense of approximately $0.2 million during the three months ended September 30, 2005, related to the variable
accounting treatment for certain stock options (see Note 2 of the notes to our condensed consolidated financial statements) that reduced the total general and administrative expenses for that period.

Interest income. For the three months ended September 30, 2006, interest income was approximately $243,000, an increase of approximately
$194,000 when compared with interest income for the three months ended September 30, 2005 of $49,000. Our cash and investments position in 2006 reflects the proceeds of approximately $21.5 million received from the 2006 Placement (see Note 4 of
the notes to our condensed consolidated financial statements). Interest income consisted of interest earned on short-term, liquid investments made by us from cash on deposit.

Nine Months Ended September 30, 2006 and 2005

Research and development expenses. For the
nine months ended September 30, 2006, research and development expense were approximately $4.9 million, or 71% of operating expenses, an increase of approximately $0.8 million when compared to $4.1 million, or 66% of operating expenses, for the
corresponding period ended September 30, 2005. The increase during the nine months ended September 30, 2006 consisted of an increase in licensing fees paid of approximately $0.4 million related to our licensing agreement with DSP for
Droxidopa (see Note 6 of the notes the our condensed consolidated financial statements) and increased consulting fees related primarily to our recently announced product candidates. Expenses for each period consisted primarily of expenses incurred
for compensation and related expenses, licensing costs and amounts paid to outside contract manufacturing and contract research organizations relating to our product candidates.

Sales and marketing expenses. Although we had no formalized selling activities for the nine months ended September 30, 2006, we did incur
expenses of approximately $0.5 million, an increase of approximately $69,000 when compared to the nine months ended September 30, 2005. Sales and marketing expenses related primarily to business development activity, including compensation and
related costs, promotional activities and certain legal expenses. The increase reflects higher expenditures for contractor expenses, travel expenses and legal costs during the period offset by a reduction in relocation expenses.

General and administrative expenses. For the nine months ended September 30, 2006, general and administrative expenses were $1.6 million, a
decrease of $0.1 million, or 7%, when compared to expenses of approximately $1.7 million for the nine months ended September 30, 2005. These costs, focused on support of administrative activities, consisted primarily of compensation and related
expenses, consulting and professional fees, travel costs, insurance and facility expenses. The decrease in general and administrative expenses consists of a decrease in compensation expense related to the variable accounting treatment of certain
stock options (see Note 2 of the notes to our condensed consolidated financial statements), along with decreases in legal fees, accounting fees, outside services and relocation expenses, offset by increases in fees related to our registration on
NASDAQ, amortization of employee stock options, compensation expenses for an employee hired in early 2006 and travel expenses.

Interest
income. For the nine months ended September 30, 2006, interest income was approximately $0.6 million, an increase of approximately $0.5 million when compared with interest income for the nine months ended September 30, 2005. Our cash
and investments position in 2006 reflects the proceeds of approximately $21.5 million received from the 2006 Placement (see Note 4). Interest income consisted of interest earned on short-term, liquid investments made by us from cash on deposit.



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Liquidity and Capital Resources

From inception to September 30, 2006, we have incurred an aggregate net loss of approximately $17.2 million, as a result of expenses similar in nature to those described above. As of September 30, 2006, we
had working capital of approximately $16.4 million and cash and cash equivalents of approximately $17.7 million.

We have incurred negative
cash flow 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. We have financed our operations since inception primarily through equity and debt financing. Our continued operations will depend on whether we are able to raise additional funds through
various potential sources, such as equity and debt financing. Such additional funds might not become available on acceptable terms 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. Based on our resources at September 30, 2006, we expect to end the year with cash and cash equivalents of approximately $13.0 million and anticipate that this will cover our operating requirements into the fourth quarter of 2007.
We will need to secure additional financing by that time and thereafter until we can begin generating revenue and achieve profitability, if ever.

However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:



| |  |  | the progress of our research activities;
| | - |  | ----------------------------------------



| |  |  | the number and scope of our research programs;
| | - |  | ----------------------------------------------



| |  |  | the progress of our pre-clinical and clinical development activities;
| | - |  | ---------------------------------------------------------------------



| |  |  | the progress of the development efforts of parties with whom we have entered into research and development agreements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain current research and development programs and to establish new research and development and licensing arrangements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to achieve our milestones under licensing arrangements;
| | - |  | -------------------------------------------------------------------



| |  |  | opportunities to sub-license our existing compounds to others;
| | - |  | --------------------------------------------------------------



| |  |  | potential acquisitions of other compounds or companies;
| | - |  | -------------------------------------------------------



| |  |  | the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the costs and timings of regulatory approvals.
| | - |  | ----------------------------------------------

We have
based our estimate on assumptions that might prove to be incorrect. We might need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private
sales of equity or debt and other sources. We might seek to access the public or private equity markets when and if conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time,
and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional 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 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.



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##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Due to the nature of our short-term
investments and our lack of material debt, we have concluded that we face no material market risk exposure. Therefore, no quantitative tabular disclosures are required.

Item 4. Controls and Procedures

(a) 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. 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 our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

(b) No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As a result of the SECs deferral of the deadline for foreign and non-accelerated filers compliance with the internal control
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as a non-accelerated filer we will not be subject to the requirements until our Annual Report on Form 10-K for fiscal year 2007.



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##### Table of Contents

PART II  OTHER INFORMATION

Item 6. Exhibits



|              |  |                                                                                                     |  |                  |  |       |  |               |  |              
|------------- |  | --------------------------------------------------------------------------------------------------- |  | ---------------- |  | ----- |  | ------------- |  | -------------
|ExhibitNumber |  | 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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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: November 13, 2006 |  | By:                                      |  | /s/ J. Nick Riehle                
|                        |  |                                          |  | J. Nick Riehle                    
|                        |  |                                          |  | Vice President, Administration and
|                        |  |                                          |  | Chief Financial Officer           



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