SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





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





**For
      the quarterly period ended** **June
      30, 2006**





OR





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




**For
      the transition period
      fromto**





Commission
      file number 001-16043




**ALTEON
                INC.**(Exact
                name of registrant as specified in its
                charter)


**Delaware**
                  
                  **13-3304550**(State
                      or other jurisdiction of incorporation
                      or organization)
                  
                  (I.R.S.
                      Employer Identification No.)
   **6
                      Campus Drive, Parsippany, New Jersey
                      07054**(Address
                      of principal executive
                      offices)(Zip
                      Code)(201)
                      934-5000(Registrant's
                      telephone number, including area
                      code)Not
                      Applicable(Former
                      name, former address and formerfiscal year,if
                      changed since last report.)
  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 o





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 oAccelerated filer
oNon-accelerated filer x




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


Yes
o No **** x





On
      August
      1, 2006, 119,848,525 shares of the registrant’s Common Stock were
      outstanding.




1




**ALTEON
      INC.**





**INDEX**







PagePART
                  I - FINANCIAL INFORMATIONItem
                  1.
              Condensed
                  Financial Statements (Unaudited)
              3Condensed
                  Balance Sheets as of June 30, 2006and December 31, 2005
              3Condensed
                  Statements of Operations for the three and six monthsended June 30, 2006 and 2005
              4Condensed
                  Statement of Changes in Stockholders’ Equityfor the three
                  and six months ended June 30, 2006
              5Condensed
                  Statements of Cash Flows for the six monthsended June 30, 2006 and 2005
              6Notes
                  to Condensed Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis ofFinancial
                  Condition and Results of Operations
              12Item
                  3.
              Qualitative
                  and Quantitative Disclosures about Market Risk
              16Item
                  4.
              Controls
                  and Procedures
              16PART
                  II - OTHER INFORMATIONItem
                  1A.
              Risk
                  Factors
              18Item
                  4.
              Submission
                  of Matters to a Vote of Security-holders
              33Item
                  6.
              Exhibits
              34SIGNATURES
              35INDEX
                  TO EXHIBITS
              36




2




**PART
      I - FINANCIAL INFORMATION**





**ITEM
      l.**   **Condensed
      Financial Statements (Unaudited).**





**ALTEON
      INC.**


**CONDENSED
      BALANCE SHEETS**


**(Unaudited)**





**ASSETS**




June
                    30,2006
              
              
              December
                    31,2005Current
                  Assets:Cash and cash equivalents
              
              $
              4,984,928
              
              $
              6,582,958Other current assets
              
              
              354,379
              
              
              216,290Total current assets
              
              
              5,339,307
              
              
              6,799,248Property
                  and equipment, net
              
              
              28,982
              
              
              55,154Restricted
                  cash
              
              
              150,000
              
              
              150,000Receivable
                  from HaptoGuard
              
              
              336,000
              
              
              --Other
                  assets
              
              
              1,259,056
              
              
              129,195Total
                  assets
              
              $
              7,113,345
              
              $
              7,133,597


**LIABILITIES
      AND STOCKHOLDERS' EQUITY**




Current
              Liabilities:Accounts
                payable
            
            $
            630,396
            
            $
            351,232Accrued
                expenses
            
            
            679,793
            
            
            790,705Total
                liabilities
            
            
            1,310,189
            
            
            1,141,937Stockholders'
              Equity:


Preferred Stock, $0.01 par value,1,993,329 shares authorized, and 1,448 and 1,389 sharesof Series G and 4,351 and 4,172 shares of Series Hissued and outstanding, as of June 30, 2006 andDecember 31, 2005, respectively. The liquidation valueat June 30, 2006 and December 31, 2005 was $57,992,692and $55,613,905 respectively
              
              
              58
              
              
              56Common Stock, $0.01 par value,300,000,000 shares authorized, and 68,957,111 shares
                  issuedand outstanding, as of  June
                  30, 2006 and 57,996,711 sharesissued and outstanding as of December 31, 2005
              
              
              689,571
              
              
              579,967Additional paid-in capital
              
              
              232,960,553
              
              
              228,225,082Accumulated deficit
              
              
              (227,847,026
              )
              
              (222,813,445
              )Total stockholders’ equity
              
              
              5,803,156
              
              
              5,991,660Total
                  liabilities and stockholders' equity
              
              $
              7,113,345
              
              $
              7,133,597




The
      accompanying notes are an integral part of these unaudited financial
      statements.




3




**ALTEON
      INC.**


**CONDENSED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**




Three
                  Months
              
              Six
                  MonthsEnded
                  June 30,
              
              Ended June 30,2006
              
              2005
              
              2006
              
              2005Income:Investment income
              
              $
              66,197
              
              $
              100,405
              
              $
              126,561
              
              $
              199,554Other income
              
              
              50,000
              
              
              100,000
              
              
              50,000
              
              
              100,000Total income
              
              
              116,197
              
              
              200,405
              
              
              176,561
              
              
              299,554Expenses:Research and development
              
              
              494,936
              
              
              2,493,379
              
              
              944,776
              
              
              6,134,479General and administrative
              
              
              664,443
              
              
              1,083,095
              
              
              1,896,295
              
              
              2,183,443Total expenses
              
              
              1,159,379
              
              
              3,576,474
              
              
              2,841,071
              
              
              8,317,922Net
                  loss
              
              
              (1,043,182
              )
              
              (3,376,069
              )
              
              (2,664,510
              )
              
              (8,018,368
              )Preferred stock dividends
              
              
              1,193,749
              
              
              1,106,193
              
              
              2,369,071
              
              
              2,177,771Net
                  loss applicable to common stockholders
              
              $
              (2,236,931
              )
              $
              (4,482,262
              )
              $
              (5,033,581
              )
              $
              (10,196,139
              )Basic/diluted
                  net loss per shareapplicable to common stockholders
              
              $
              (0.03
              )
              $
              (0.08
              )
              $
              (0.08
              )
              $
              (0.18
              )Weighted
                  average common shares usedin computing basic/diluted net loss per share
              
              
              66,789,120
              
              
              57,996,711
              
              
              62,417,204
              
              
              57,275,874




The
      accompanying notes are an integral part of these unaudited financial
      statements.




4




**ALTEON
      INC.**


**CONDENSED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


**(Unaudited)**




Preferred
                Stock
            
            Common
                Stock
            
            AdditionalPaid-in
            
            Accumulated
            
            TotalStockholders'Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            EquityBalance,
                December 31, 2005
            
            
            5,561
            
            $
            56
            
            
            57,996,711
            
            $
            579,967
            
            $
            228,225,082
            
            $
            (222,813,445
            )
            $
            5,991,660Net
                loss
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (2,664,510
            )
            
            (2,664,510
            )Private
                placement of common stock
            
            
            ---
            
            
            ---
            
            
            10,960,400
            
            
            109,604
            
            
            2,366,402
            
            
            ---
            
            
            2,476,006Issuance
                of Series G and H
              preferred
                stock dividends
            
            
            238
            
            
            2
            
            
            ---
            
            
            ---
            
            
            2,369,069
            
            
            (2,369,071
            )
            
            ---Balance,
                June 30, 2006
            
            
            5,799
            
            $
            58
            
            
            68,957,111
            
            $
            689,571
            
            $
            232,960,553
            
            $
            (227,847,026
            )
            $
            5,803,156




The
      accompanying notes are an integral part of these unaudited financial
      statements.




5




**ALTEON
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**




Six
                  Months Ended June 30,2006
              
              2005Cash
                  flows from operating activities:Net loss
              
              $
              (2,664,510
              )
              $
              (8,018,368
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation and amortization
              
              
              26,172
              
              
              33,434Stock compensation expense
              
              
              ---
              
              
              19,573Changes
                  in operating assets and liabilities:Other current assets
              
              
              (138,089
              )
              
              (558,073
              )Accounts payable and accrued expenses
              
              
              (274,748
              )
              
              (588,055
              )Net cash used in operating activities
              
              
              (3,051,175
              )
              
              (9,111,489
              )Cash
                  flows from investing activities:Capital expenditures
              
              
              ---
              
              
              (760
              )Other assets
              
              
              (1,022,861
              )
              
              ---Net cash used in investing activities
              
              
              (1,022,861
              )
              
              (760
              )Cash
                  flows from financing activities:Net proceeds from issuance of common stock
              
              
              2,476,006
              
              
              9,532,295Net cash provided by financing activities
              
              
              2,476,006
              
              
              9,532,295Net
                  (decrease)/increase in cash and cash equivalents
              
              
              (1,598,030
              )
              
              420,046Cash
                  and cash equivalents, beginning of period
              
              
              6,582,958
              
              
              11,175,762Cash
                  and cash equivalents, end of period
              
              $
              4,984,928
              
              $
              11,595,808Supplemental
                  disclosure of cash flow information:Accrual of deferred merger costs
              
              $
              443,000
              
              $
              ---




The
      accompanying notes are an integral part of these unaudited financial
      statements.




6




**ALTEON
      INC.**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**(Unaudited)**





**Note
      1 - Basis of Presentation**





The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with generally accepted accounting principles for interim financial
      information and the instructions to Form 10-Q and Rule 10-01 of Regulation
      S-X.
      Accordingly, they 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 management, all adjustments
      (consisting of only normal recurring adjustments) considered necessary for
      a
      fair presentation have been included. Operating results for the six months
      ended
      June 30, 2006, are not necessarily indicative of the results that may be
      expected for the year ending December 31, 2006. For further information, refer
      to the financial statements and footnotes thereto included in the Company's
      Annual Report on Form 10-K for the year ended December 31, 2005, as filed with
      the Securities and Exchange Commission.





**Note
      2 - Liquidity**





The
      Company has devoted substantially all of its resources to research, drug
      discovery and development programs. To date, it has not generated any revenues
      from the sale of products and does not expect to generate any such revenues
      for
      a number of years, if at all. As a result, Alteon has incurred net losses since
      inception, has an accumulated deficit of $227,847,026 as of June 30, 2006,
      and
      expects to incur net losses, potentially greater than losses in prior years,
      for
      a number of years, assuming the Company is able to continue as a going concern,
      of which there can be no assurance.





The
      Company has financed its operations through proceeds from the sale of common
      and
      preferred equity securities, revenue from former collaborative relationships,
      reimbursement of certain of its research and development expenses by
      collaborative partners, investment income earned on cash and cash equivalent
      balances and short-term investments and the sale of a portion of the Company’s
      New Jersey state net operating loss carryforwards and research and development
      tax credit carryforwards.





As
      of
      June 30, 2006, the Company had working capital of $4,029,118, including
      $4,984,928 of cash and cash equivalents. The Company’s net cash used in
      operating activities for the six months ended June 30, 2006 was $3,051,175
      and
      for the year ended December 31, 2005 was $14,032,796.





On
      July
      19, 2006, the Company’s shareholders approved a merger with HaptoGuard, Inc.,
      formerly a privately-held development-stage biotechnology company. The two
      companies have combined operations and intend to pursue clinical development
      of
      their complementary product platforms. The merger transaction, which was
      completed on July 21, 2006, included the granting of certain royalty and
      negotiation rights to Genentech, Inc., as part of the restructuring of
      Genentech’s former preferred stock position in Alteon. The merger will be
      accounted for in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 141, “Business Combinations”. (See Note 6 - Subsequent
      Events).





As
      a
      result of the merger with HaptoGuard, which closed on July 21, 2006, the Company
      is required to make payments of severance and insurance costs in the amount
      of
      approximately $2.0 million. In addition, the Company has incurred transaction
      fees and expenses of approximately $1,259,000 through June 30, 2006, in
      connection with the merger, which fees and expenses are currently due and
      payable.





The
      Company is urgently continuing to pursue fund-raising possibilities through
      the
      sale of its equity securities. If the Company is unsuccessful in its efforts
      to
      raise additional funds through the sale of additional equity securities or
      if
      the level of cash and cash equivalents falls below anticipated levels, Alteon
      will not have the ability to continue as a going concern after the third quarter
      of 2006.





The
      amount and timing of the Company’s future capital requirements will depend on
      numerous factors, including the timing of resuming its research and development
      programs, if at all, the number and characteristics of product candidates that
      it pursues, the conduct of pre-clinical tests and clinical studies, the status
      and timelines of regulatory submissions, the costs associated with protecting
      patents and other proprietary rights, the ability to complete strategic
      collaborations and the availability of third-party funding, if any.





Selling
      securities to satisfy the Company’s capital requirements may have the effect of
      materially diluting the current holders of its outstanding stock. Alteon may
      also seek additional funding through corporate collaborations and other
      financing vehicles. There can be no assurance that such funding will be
      available at all or on terms acceptable to the Company. The Company is in the
      process of significantly curtailing its research and development programs,
      until
      additional financing is obtained. If funds are obtained through arrangements
      with collaborative partners or others, the Company may be required to relinquish
      rights to certain of its technologies or product candidates and alter its plans
      for the development of its product candidates. If Alteon is unable to obtain
      the
      necessary funding, it will likely need to cease operations. There can be no
      assurance that the products or technologies acquired in the merger will result
      in revenues to the combined company or any meaningful return on investment
      to
      its stockholders.




7




**Note
      3 - Stock-Based Compensation**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces “Accounting for Stock-Based
      Compensation,” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
      all share-based payments to employees, including grants of employee stock
      options, to be recognized in the financial statements based on their fair values
      effective for the Company on January 1, 2006. Under SFAS 123R, the pro forma
      disclosures previously permitted under SFAS 123 are no longer an alternative
      to
      financial statement recognition.





The
      Company accounts for employee stock-based compensation, awards issued to
      non-employee directors, and stock options issued to consultants and contractors
      in accordance with SFAS 123R and Emerging Issues Task Force Issue No. 96-18,
      “Accounting for Equity Instruments that are Issued to Other Than Employees for
      Acquiring or in Conjunction with Selling Goods or Services.”





The
      Company has adopted the new standard, SFAS 123R, effective January 1, 2006
      and
      has selected the Black-Scholes method of valuation for share-based compensation.
      The Company has adopted the modified prospective transition method which
      requires that compensation cost be recorded, as earned, for all unvested stock
      options and restricted stock outstanding at the beginning of the first quarter
      of adoption of SFAS 123R, and that such costs be recognized over the remaining
      service period after the adoption date based on the options’ original estimate
      of fair value.





On
      December 15, 2005, the Compensation Committee of the Board of Directors of
      the
      Company approved the acceleration of the vesting date of all previously issued,
      outstanding and unvested options, effective December 31, 2005. The acceleration
      and the fact that no options were issued in the six months ended June 30, 2006,
      resulted in the Company not being required to recognize aggregate compensation
      expense under SFAS 123R for the three and six months ended June 30,
      2006.





Prior
      to
      adoption of SFAS 123R, the Company applied the intrinsic-value method under
      APB
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations, under which no compensation cost (excluding those options
      granted below fair market value) had been recognized. SFAS 123 established
      accounting and disclosure requirements using a fair-value based method of
      accounting for stock-based employee compensation plans. As permitted by SFAS
      123, the Company elected to continue to apply the intrinsic-value based method
      of accounting described above, and adopted only the disclosure requirements
      of
      SFAS 123, as amended.





The
      following table illustrates the effect on net loss and net loss per share as
      if
      the Company had applied the fair value recognition provisions of SFAS 123 to
      its
      stock-based employee compensation for the three and six months ended June 30,
      2005.





Three
                Months EndedJune
                30,
            
            Six
                Months EndedJune
                30,2005
            
            2005Net
                loss, as reported
            
            $
            (3,376,069
            )
            $
            (8,018,368
            )Less:Total
                stock-based employee
              and
                director
                compensation
              expense
                determined under
                fair
              value
                method
            
            
            (269,437
            )
            
            (711,579
            )Pro
                forma net loss
            
            
            (3,645,506
            )
            
            (8,729,947
            )Preferred
                stock dividends
            
            
            1,106,193
            
            
            2,177,771Pro
                forma net loss applicable tocommon
                stockholders
            
            $
            (4,751,699
            )
            $
            (10,907,718
            )Earnings
                per share applicable tocommon
                stockholders:Basic/diluted,
                as reported
            
            $
            (0.08
            )
            $
            (0.18
            )Basic/diluted,
                pro forma
            
            $
            (0.08
            )
            $
            (0.19
            )




8


The
        following table shows the weighted average assumptions the
        Company used to develop the fair value estimates for the determination of
        the compensation in 2005:


**Six
                Months Ended**
              **June
                30, 2005**Expected
                volatility
            
            
            135.26
            %Dividend
                yield
            
            
            —Expected
                term (in years)
            
            
            5Risk-free
                interest rate
            
            
            3.4
            %




A
      summary
      of the status of the Company’s stock options as of June 30, 2006 and changes
      during the six months then ended is presented below:




Outstanding
                at
            
            **Shares**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Weighted
                Average Remaining Contractual**
              **Term
                (years)**December
                31, 2005
            
            
            6,486,665
            
            $
            2.12Granted
            
            
            ---
            
            
            ---Exercised
            
            
            ---
            
            
            ---Cancelled
            
            
            (193,387
            )
            
            4.20Outstanding
                atJune
                30, 2006
            
            
            6,293,278
            
            $
            2.06
            
            
            5.23





As
      of
      June 30, 2006 there were no options outstanding that were “in the money”,
      therefore there was no aggregate intrinsic value.





9





**Note
      4 - Net Loss Per Share Applicable to Common Stockholders**





Basic
      net
      loss per share is computed by dividing net loss applicable to common
      stockholders by the weighted average number of shares outstanding during the
      period. Diluted net loss per share is the same as basic net loss per share
      applicable to common stockholders, since the assumed exercise of stock options
      and warrants and the conversion of preferred stock would be antidilutive. The
      amount of potentially dilutive shares excluded from the calculation as of June
      30, 2006 and 2005, was 329,837,548 and 158,194,608 shares, respectively. (See
      Note 6 - Subsequent Events).





**Note
      5 - Stockholders’ Equity**




On
      April 21, 2006, the Company closed a private placement of Units, consisting
      of common stock and warrants, for gross proceeds of approximately
      $2.6 million. Each Unit consisted of one share of Company common stock and
      one warrant to purchase one share of Company common stock, comprising a total
      of
      10,340,000 shares of Company common stock and warrants to purchase 10,340,000
      shares of Company common stock.





The
      offering was made to accredited investors, as defined in and pursuant to an
      exemption from registration under Regulation D promulgated under the
      Securities Act of 1933, as amended (the “Securities Act”).





The
      Units
      were sold at a price of $0.25 per Unit, and the warrants will be exercisable
      for
      a period of five years commencing six months from the date of issue at a price
      of $0.30 per share. Investors in the private placement have a right to
      participate in any closing of a subsequent financing by the Company of its
      common stock or common stock equivalents up to an aggregate amount equal to
      50%
      of such subsequent financing until June 14, 2008, the second anniversary of
      the
      declaration of effectiveness by the Securities and Exchange Commission (“SEC”),
      of the registration statement for the resale of the shares of common stock
      and
      the shares of common stock underlying the warrants sold in the private
      placement. Rodman & Renshaw, LLC served as placement agent in the
      transaction and received a 6% placement fee which was paid in
      Units.





Series
      G
      Preferred Stock and Series H Preferred Stock dividends were payable quarterly
      in
      shares of preferred stock at a rate of 8.5% of the accumulated balance. Each
      share of Series G Preferred Stock and Series H Preferred Stock was convertible,
      upon 70 days’ prior written notice, into the number of shares of common stock
      determined by dividing $10,000 by the average of the closing sales price of
      the
      common stock, as reported on the American Stock Exchange, for the 20 business
      days immediately preceding the date of conversion. For the three months ended
      June 30, 2006 and 2005, preferred stock dividends of $1,193,749 and $1,106,193,
      respectively, were recorded. On June 30, 2006, the Series G and Series H
      Preferred Stock would have been convertible into 77,665,416 common stock shares
      and 233,287,399 common stock shares, respectively, and had a total liquidation
      value of $57,992,692. The Series G and Series H Preferred Stock had no voting
      rights. (See
      Note 6 - Subsequent Events).





**Note
      6 - Subsequent Events**





**Merger
      with HaptoGuard**




On
      July
      19, 2006, the Company’s shareholders approved the merger with HaptoGuard, Inc.,
      and on July 21, 2006, the companies’ combined operations in a stock transaction
      valued at approximately $8.8 million at the signing of the merger agreement
      on
      April 19, 2006. Alteon and HaptoGuard have complementary product platforms
      in
      cardiovascular diseases, diabetes and other inflammatory diseases, including
      two
      Phase 2 clinical-stage compounds focused on cardiovascular diseases in diabetic
      patients.





As
      part
      of the merger, a portion of existing shares of Alteon preferred stock held
      by
      Genentech, Inc. were converted into Alteon common stock. Genentech transferred
      a
      portion of the Alteon preferred stock that they held to HaptoGuard and canceled
      its remaining preferred stock position in Alteon. Genentech acquired the right
      of first negotiation for HaptoGuard’s cardiovascular compound, ALT-2074
      (formerly BXT-51072), and future royalties on Alteon’s alagebrium. Also as a
      result of the merger, the potentially dilutive shares reflected in Note 4 -
      Net
      Loss per Share Applicable to Common Stockholders will no longer be applicable
      as
      of the transaction closing date. Additionally, upon completion of the merger,
      the receivable from HaptoGuard will be eliminated and not
      collected.





The
      merger of the two companies was structured as an acquisition by Alteon. Under
      the terms of the merger agreement, HaptoGuard shareholders received a total
      of
      37.4 million shares of Alteon common stock (from Alteon and Genentech, equal
      to
      approximately 31 percent of the shares of Alteon company stock outstanding
      after
      completion of the merger).




10




Key components of the transactions among Alteon, HaptoGuard and stockholder
      Genentech are as follows:





·
            Alteon
                acquired all outstanding equity of HaptoGuard. In exchange, HaptoGuard
                shareholders received from Alteon approximately 22.5 million shares
                of
                Alteon common stock.·
            Genentech
                converted a portion of its existing Alteon preferred stock to Alteon
                common stock. A portion of Alteon preferred stock held by Genentech,
                which
                as of April 19, 2006 equaled approximately $3.5 million in Alteon
                common
                stock, was transferred to HaptoGuard shareholders.·
            The
                remaining Alteon preferred stock held by Genentech was cancelled.·
            Genentech
                will receive milestone payments and royalties on net sales of alagebrium,
                if any, and will receive a right of first negotiation on ALT-2074,
                HaptoGuard’s lead compound.





Following the merger, the new Alteon management team is as follows:





·
            Noah
                Berkowitz, M.D., Ph.D. - President and Chief Executive
                Officer;·
            Malcolm
                MacNab, M.D., Ph.D. - Vice President, Clinical Development; and·
            Howard
                B. Haimes, Ph.D. - Executive Director, Preclinical
                Sciences.




Additionally, the Board of Directors of the combined company is composed of
      seven members as follows:





·
            Kenneth
                I. Moch, Chairman - Director of Alteon since December
                1998·
            Noah
                Berkowitz, M.D., Ph.D. - Director of HaptoGuard since November
                2003·
            Marilyn
                G. Breslow - Director of Alteon since June 1988·
            Thomas
                A. Moore - Director of Alteon since October 2001·
            George
                M. Naimark - Director of Alteon since June 1999·
            Mary
                Tanner - Director of HaptoGuard since January 2004·
            Wayne
                P. Yetter - Director of HaptoGuard since August
                2004





***Unaudited
      Proforma Financial Information***





The
      following unaudited proforma financial information presents the results of
      operations of the Company and HaptoGuard, as if the acquisition had occurred
      on
      January 1, 2005 instead of July 21, 2006, after giving effect to certain
      adjustments including the issuance of the Company’s common stock as part of the
      purchase price. The pro forma information does not necessarily reflect the
      results of operations that would have occurred had the entities been a single
      company during the periods presented.





3
                Months Ended
              June
                30
            
            6
                Months Ended
              June
                302006
            
            2005
            
            2006
            
            2005Net
                Loss
            
            $
            (1,428,948
            )
            $
            (3,667,166
            )
            $
            (3,720,303
            )
            $
            (8,986,787
            )Weighted
                average number of common shares outstanding
            
            
            117,680,534
            
            
            108,888,125
            
            
            113,308,618
            
            
            108,167,288Loss
                per common share - Basic and fully diluted
            
            
            (0.01
            )
            
            (0.03
            )
            
            (0.03
            )
            
            (0.08
            )





11




**ITEM
        2.**  **Management's
        Discussion and Analysis of Financial Condition**  **and
        Results of Operations.**
  **Overview**





We
      are a
      product-based biopharmaceutical company engaged in the development of small
      molecule drugs to treat and prevent cardiovascular disease in diabetic patients.
      We have identified several promising product candidates that we believe
      represent novel approaches to some of the largest pharmaceutical markets. We
      have advanced one of these products into Phase 2 clinical trials.





Our
      lead
      drug candidate, alagebrium chloride or alagebrium (formerly ALT-711), is a
      product of our drug discovery and development program. Alagebrium has
      demonstrated potential efficacy in two clinical trials in heart failure, as
      well
      as in animal models of heart failure and nephropathy, among others. It has
      been
      tested in approximately 1,000 patients in a number of Phase 1 and Phase 2
      clinical trials. Our goal is to develop alagebrium in diastolic heart failure
      (“DHF”). This disease represents a rapidly growing market of unmet need,
      particularly common among diabetic patients, and alagebrium has demonstrated
      relevant clinical activity in two Phase 2 clinical trials.





In
      July
      2006, we completed a merger with HaptoGuard, Inc., whereby the two companies’
combined operations, including their complementary product platforms in
      cardiovascular diseases, diabetes and other inflammatory diseases. The
      newly-combined company has two products in Phase 2 clinical
      development:




·
            ALT-2074,
                formerly HaptoGuard’s licensed lead compound BXT-51072, is a glutathione
                peroxidase mimetic in clinical development for reduction of mortality
                in
                post-myocardial infarction patients with diabetes. The compound has
                demonstrated the ability to reduce infarct size by approximately
                85
                percent in a mouse model of heart attack called ischemia reperfusion
                injury. A Phase 2 clinical study for this compound was opened for
                enrollment in May, but progress has been slow by virtue of limited
                financial resources and the eruption of the conflict in the Middle
                East,
                as many of the sites open for patient enrollment are in northern
                Israel.
                The Company also owns a license to a proprietary genetic biomarker
                that
                has shown the potential to identify patients who are most responsive
                to
                ALT-2074.




·
            Alagebrium
                chloride (formerly ALT-711), Alteon's lead compound, is an Advanced
                Glycation End-product Crosslink Breaker being developed for heart
                failure.
                The most recent data on alagebrium, presented from two Phase 2 clinical
                studies at the American Heart Association meeting in November 2005,
                demonstrated the ability of alagebrium to improve overall cardiac
                function, including measures of diastolic and endothelial function.
                In
                these studies, alagebrium also demonstrated the ability to significantly
                reduce left ventricular mass. The compound has been tested in
                approximately 1000 patients, which represents a sizeable human safety
                database, in a number of Phase 2 clinical studies.




o
            The
                Company recently announced that the Juvenile Diabetes Research Foundation
                (JDRF) awarded a grant to one of our independent researchers, Mark
                Cooper,
                M.D., Ph.D., Professor at the Baker Heart Research Institute, Melbourne,
                Australia. This grant will fund a multinational Phase 2 clinical
                study of
                alagebrium on renal function in patients with type 1 diabetes and
                microalbuminuria. Alagebrium will be tested for its ability to reverse
                kidney damage caused by diabetes, and to reverse the protein excretion
                which is characteristic of diabetic nephropathy. Dr. Cooper has
                demonstrated promising preclinical results with alagebrium in diabetic
                kidney disease. The trial is expected to be initiated in the fourth
                quarter of this year.




o
            Additionally,
                the Company announced that it has filed an Investigational New Drug
                Application (IND) with the U.S. Food & Drug Administration's (FDA)
                Division of Cardio-Renal Drug Products for a Phase 2b clinical study
                of
                the Company’s lead A.G.E. Crosslink Breaker compound, alagebrium, in
                diastolic heart failure (DHF). The IND has passed the 30-day review
                period
                for the proposed study’s clinical protocol, and the Company is allowed to
                initiate the study at its discretion.




The
      merger of the two companies was structured as an acquisition by Alteon. Under
      the terms of the merger agreement, HaptoGuard shareholders received 37.4 million
      shares of Alteon common stock (approximately 31 percent of the shares after
      completion of the merger). As an additional part of the merger, a portion of
      existing shares of Alteon preferred stock held by Genentech, Inc. was converted
      into Alteon common stock.





Key
      components of the transactions completed in July 2006 between Alteon, HaptoGuard
      and Genentech were as follows:





Ø
            Alteon
                acquired all outstanding equity of HaptoGuard. In exchange, HaptoGuard
                shareholders received from Alteon $5.3 million in Alteon common stock,
                or
                approximately 22.5 million shares.


Ø
            Genentech
                converted a portion of its existing Alteon preferred stock to Alteon
                common stock. A portion of Alteon preferred stock held by Genentech,
                which, when converted to Alteon common stock is equal to $3.5 million
                in
                Alteon common stock, was transferred to HaptoGuard shareholders.


Ø
            The
                remaining Alteon preferred stock held by Genentech was cancelled.


Ø
            Genentech
                will receive milestone payments and royalties on any future net sales
                of
                alagebrium, and received a right of first negotiation on
                ALT-2074.




12




**ITEM
        2.**  **Management's
        Discussion and Analysis of Financial Condition and Results of Operations—Continued.**


We
      had
      been evaluating potential pre-clinical and clinical studies in other therapeutic
      indications in which alagebrium may address significant unmet needs, during
      the
      period ended June 30, 2006, but subsequent to the completion of the merger,
      we
      have curtailed such studies to conserve cash. In addition to our anticipated
      clinical studies in renal disease, ischemia reperfusion injury and heart
      failure, we have conducted early research studies focusing on atherosclerosis;
      Alzheimer's disease; photoaging of the skin; eye diseases, including age-related
      macular degeneration (“AMD”), and glaucoma; and other diabetic complications,
      including renal diseases.





Since
      our
      inception in October 1986, we have devoted substantially all of our resources
      to
      research, drug discovery and development programs. To date, we have not
      generated any revenues from the sale of products and do not expect to generate
      any such revenues for a number of years, if at all. We have incurred an
      accumulated deficit of $227,847,026 as of June 30, 2006, and expect to incur
      net
      losses, potentially greater than losses in prior years, for a number of
      years.





We
      have
      financed our operations through proceeds from public offerings of common stock,
      private placements of common and preferred equity securities, revenue from
      former collaborative relationships, reimbursement of certain of our research
      and
      development expenses by our collaborative partners, investment income earned
      on
      cash and cash equivalent balances and short-term investments and the sale of
      a
      portion of our New Jersey State net operating loss carryforwards and research
      and development tax credit carryforwards.





Our
      business is subject to significant risks including, but not limited to, (1)
      our
      ability to obtain sufficient additional funding to resume the development of
      alagebrium in heart failure, enroll patients in the study opened for ALT-2074,
      and continue operations, (2) our ability to complete enrollment in our clinical
      studies of alagebrium and ALT-2074 should we have adequate financial and other
      resources to do so, (3) the risks inherent in our research and development
      efforts, including clinical trials and the length, expense and uncertainty
      of
      the process of seeking regulatory approvals for our product candidates, (4)
      our
      reliance on alagebrium and ALT-2074, which are our only significant drug
      candidates, (5) uncertainties associated with obtaining and enforcing our
      patents and with the patent rights of others, (6) uncertainties regarding
      government healthcare reforms and product pricing and reimbursement levels,
      (7)
      technological change and competition, (8) manufacturing uncertainties, and
      (9)
      dependence on collaborative partners and other third parties. Even if our
      product candidates appear promising at an early stage of development, they
      may
      not reach the market for numerous reasons. These reasons include the
      possibilities that the products will prove ineffective or unsafe during
      pre-clinical or clinical studies, will fail to receive necessary regulatory
      approvals, will be difficult to manufacture on a large scale, will be
      uneconomical to market or will be precluded from commercialization by
      proprietary rights of third parties. These risks and others are discussed under
      the heading Part II, Item 1A - Risk Factors.




13
 
  **ITEM
        2.** **Management's Discussion and Analysis of Financial
        Condition and Results of Operations—Continued.**


**Results
      of Operations**





**Three
      Months ended June 30, 2006 and 2005**





Total
      revenues for the three months ended June 30, 2006 and 2005, were $116,197 and
      $200,405, respectively. Revenues were derived from interest earned on cash
      and
      cash equivalents and other income. The decrease from 2005 to 2006 was attributed
      to lower investment balances and partially offset by higher interest rates.
      In
      2006 and 2005 other income included $50,000 and $100,000, respectively, received
      from a licensing agreement with Avon Products, Inc.





Our
      total
      expenses were $1,159,379 for the three months ended June 30, 2006, compared
      to $
      3,576,474 for the three months ended June 30, 2005, and in each period consisted
      primarily of research and development expenses. Research and development
      expenses normally include third-party expenses associated with pre-clinical
      and
      clinical studies, manufacturing costs, including the development and preparation
      of clinical supplies, personnel and personnel-related expenses and facility
      expenses.





Research
      and development expenses were $494,936 for the three months ended June 30,
      2006,
      as compared to $2,493,379 for the same period in 2005, a decrease of $1,998,443,
      or 80.1%. This decrease was attributed to decreased clinical trial costs and
      manufacturing expenses as a result of the discontinuation in June 2005 of our
      Systolic Pressure Efficacy and Safety Trial of Alagebrium (“SPECTRA”). In 2006,
      of the total amount spent on research and development expenses, we incurred
      $115,880 in personnel and personnel-related expenses, $62,518 in product
      liability insurance and $144,931 in third party consulting. In 2005, we incurred
      $941,891 in personnel and personnel-related expenses, $729,861 in clinical
      trial
      expenses primarily related to SPECTRA, $393,930 in pre-clinical expenses and
      $169,811 related to manufacturing (packaging and distribution).





General
      and administrative expenses were $664,443 for the three months ended June 30,
      2006, as compared to $1,083,095 for the same period in 2005. The decrease for
      2006 includes reduced corporate expenses offset by increased severance costs
      and
      retention bonuses.





Our
      net
      loss applicable to common stockholders was $2,236,931 for the three months
      ended
      June 30, 2006, compared to $4,482,262 in the same period in 2005, a decrease
      of
      50.0%. This decrease was a result primarily of our significantly reduced
      research and development expenses. Included in the net loss applicable to common
      stockholders are preferred stock dividends of $1,193,749 and $1,106,193 for
      the
      three months ended June 30, 2006 and 2005 respectively.





**Six
      Months ended June 30, 2006 and 2005**





Total
      revenues for the six months ended June 30, 2006 and 2005, were $176,561 and
      $299,554, respectively. Revenues were derived from interest earned on cash
      and
      cash equivalents and other income. The decrease from 2005 to 2006 was attributed
      to lower investment balances and partially offset by higher interest rates.
      In
      2006 and 2005, other income included $50,000 and $100,000, respectively,
      received from a licensing agreement with Avon Products, Inc.





Our
      total
      expenses were $2,841,071 for the six months ended June 30, 2006, compared to
      $8,317,922 for the six months ended June 30, 2005, and in each period consisted
      primarily of research and development expenses. Research and development
      expenses normally include third-party expenses associated with pre-clinical
      and
      clinical studies, manufacturing costs, including the development and preparation
      of clinical supplies, personnel and personnel-related expenses and facility
      expenses.





Research
      and development expenses were $944,776 for the six months ended June 30, 2006,
      as compared to $6,134,479 for the same period in 2005, a decrease of $5,189,703,
      or 84.6%. This decrease was attributed to decreased clinical trial costs and
      manufacturing expenses as a result of the discontinuation in June 2005 of our
      Systolic Pressure Efficacy and Safety Trial of Alagebrium (“SPECTRA”). In 2006,
      of the total amount spent on research and development expenses, we incurred
      $348,401 in personnel and personnel-related expenses, $164,430 in product
      liability insurance and $230,432 in third party consulting. In 2005, we incurred
      $ 2,079,819  in
      personnel and personnel-related expenses, $729,861 in clinical trial expenses
      primarily related to SPECTRA, $393,930 in pre-clinical expenses and $169,811
      related to manufacturing (packaging and distribution).





General
      and administrative expenses were $1,896,295 for the six months ended June 30,
      2006, as compared to $2,183,443 for the same period in 2005. The decrease for
      2006 includes reduced corporate expenses offset by increased severance costs
      and
      retention bonuses.





Our
      net
      loss applicable to common stockholders was $5,034,000 for the six months ended
      June 30, 2006, compared to $10,196,000 in the same period in 2005, a decrease
      of
      50.6%. This decrease was a result primarily of our significantly reduced
      research and development expenses. Included in the net loss applicable to common
      stockholders are preferred stock dividends of $2,369,071 and $2,177,771 for
      the
      six months ended June 30, 2006 and 2005 respectively.




14




**ITEM
        2. Management's Discussion and Analysis of Financial Condition and 
Results of Operations—Continued.**


**Liquidity
      and Capital Resources** ****




We
      had
      cash and cash equivalents at June 30, 2006, of $4,984,928, compared to
      $6,582,958 at December 31, 2005. The decrease is attributable to $3,051,175
      of net cash used in operating activities and $1,022,861 used in investing
      activities. At June 30, 2006 we had working capital of $4,029,118.





The
      Company is urgently continuing to pursue fund-raising possibilities through
      the
      sale of its equity securities. If the Company is unsuccessful in its efforts
      to
      raise additional funds through the sale of additional equity securities or
      if
      the level of cash and cash equivalents falls below anticipated levels, Alteon
      will not have the ability to continue as a going concern after the third quarter
      of 2006. As a result of the merger with HaptoGuard, which closed on July 21,
      2006, the Company was required to make payment of severance and insurance costs
      in the amount of approximately $2.0 million. In addition, the Company has
      incurred transaction fees and expenses of approximately $1,259,000 in connection
      with the merger, which fees and expenses are currently due and payable.





The
      amount and timing of the Company’s future capital requirements will depend on
      numerous factors, including the timing of resuming its research and development
      programs, if at all, the number and characteristics of product candidates that
      it pursues, the conduct of pre-clinical tests and clinical studies, the status
      and timelines of regulatory submissions, the costs associated with protecting
      patents and other proprietary rights, the ability to complete strategic
      collaborations and the availability of third-party funding, if any.





Selling
      securities to satisfy the Company’s s capital requirements may have the effect
      of materially diluting the current holders of its outstanding stock. Alteon
      may
      also seek additional funding through corporate collaborations and other
      financing vehicles. There can be no assurance that such funding will be
      available at all or on terms acceptable to the Company. The Company is in the
      process of significantly curtailing or its research and development programs,
      until additional financing is obtained. If funds are obtained through
      arrangements with collaborative partners or others, the Company may be required
      to relinquish rights to certain of its technologies or product candidates and
      alter its plans for the development of its product candidates. If Alteon is
      unable to obtain the necessary funding, it may need to cease operations. There
      can be no assurance that the products or technologies acquired in the merger
      will result in revenues to the combined company or any meaningful return on
      investment to its stockholders.





We
      do not
      have any approved products and currently derive cash from sales of our
      securities, sales of our New Jersey state net operating loss carryforwards
      and
      interest on cash and cash equivalents. We are highly susceptible to conditions
      in the global financial markets and in the pharmaceutical industry. Positive
      and
      negative movement in those markets will continue to pose opportunities and
      challenges to us. Previous downturns in the market valuations of biotechnology
      companies and of the equity markets more generally have restricted our ability
      to raise additional capital on favorable terms.




In
      April
      2006, we completed an equity financing that resulted in net proceeds to Alteon
      of approximately $2.5 million. (See Note 5 - Stockholders’ Equity).





On
      April
      19, 2006, the Company entered into a definitive merger agreement pursuant to
      which it has combined operations with HaptoGuard, Inc. The merger and associated
      preferred stock restructuring transactions were subject to the approval of
      Alteon and HaptoGuard shareholders and closed on July 21, 2006. (See Note 6
      -
      Subsequent Events).





**Critical
      Accounting Policies** ****





In
      December 2001, the SEC issued a statement concerning certain views of the SEC
      regarding the appropriate amount of disclosure by publicly held companies with
      respect to their critical accounting policies. In particular, the SEC expressed
      its view that in order to enhance investor understanding of financial
      statements, companies should explain the effects of critical accounting policies
      as they are applied, the judgments made in the application of these policies
      and
      the likelihood of materially different reported results if different assumptions
      or conditions were to prevail. We have since carefully reviewed the disclosures
      included in our filings with the SEC, including, without limitation, this
      Quarterly Report on Form 10-Q and accompanying unaudited financial statements
      and related notes thereto. We believe the effect of the following accounting
      policy is significant to our results of operations and financial condition.





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces “Accounting for Stock-Based
      Compensation,” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
      all share-based payments to employees, including grants of employee stock
      options, to be recognized in the financial statements based on their fair values
      beginning with the first annual reporting period that begins after December
      15,
      2005. Under SFAS 123R, the pro forma disclosures previously permitted under
      SFAS
      123 are no longer an alternative to financial statement
      recognition.




15




**ITEM
        2.** **Management's Discussion and Analysis of Financial
        Condition—Continued.**


The
      Company accounts for employee stock-based compensation, awards issued to
      non-employee directors, and stock options issued to consultants and contractors
      in accordance with SFAS 123R, SFAS No. 148 “Accounting for Stock-Based
      Compensation—Transition and Disclosure” and Emerging Issues Task Force Issue No.
      96-18, “Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring or in Conjunction with Selling Goods or
      Services.”





The
      Company has adopted the new standard, SFAS 123R, effective January 1, 2006
      and
      has selected the Black-Scholes method of valuation for share-based compensation.
      The Company has adopted the modified prospective transition method which
      requires that compensation cost be recorded, as earned, for all unvested stock
      options and restricted stock outstanding at the beginning of the first quarter
      of adoption of SFAS 123R, and is recognized over the remaining service period
      after the adoption date based on the options’ original estimate of fair
      value.





On
      December 15, 2005, the Compensation Committee of the Board of Directors of
      the
      Company approved the acceleration of the vesting date of all previously issued,
      outstanding and unvested options, effective December 31, 2005. The acceleration
      and the fact that no options were issued in the six months ended June 30, 2006,
      resulted in the Company not being required to recognize aggregate compensation
      expense under SFAS 123R for the three and six months ended June 30,
      2006.





Prior
      to
      adoption of SFAS 123R, the Company applied the intrinsic-value method under
      APB
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations, under which no compensation cost (excluding those options
      granted below fair market value) has been recognized. SFAS 123, “Accounting for
      Stock-Based Compensation,” established accounting and disclosure requirements
      using a fair-value based method of accounting for stock-based employee
      compensation plans. As permitted by SFAS 123, the Company elected to continue
      to
      apply the intrinsic-value based method of accounting described above, and
      adopted only the disclosure requirements of SFAS 123, as amended, which were
      similar in most respects to SFAS 123R.





***Forward-Looking
      Statements and Cautionary Statements***





Statements
      in this Form 10-Q that are not statements or descriptions of historical facts
      are "forward-looking" statements under Section 21E of the Securities Exchange
      Act of 1934, as amended, and the Private Securities Litigation Reform Act of
      1995, and are subject to numerous risks and uncertainties. These forward-looking
      statements and other forward-looking statements made by us or our
      representatives are based on a number of assumptions. The words "believe,"
      "expect," "anticipate," "intend," "estimate" or other expressions, which are
      predictions of or indicate future events and trends and which do not relate
      to
      historical matters, identify forward-looking statements. Readers are cautioned
      not to place undue reliance on these forward-looking statements, as they involve
      risks and uncertainties, and actual results could differ materially from those
      currently anticipated due to a number of factors, including those set forth
      in
      this section and elsewhere in this Form 10-Q. These factors include, but are
      not
      limited to, the risks set forth below.





The
      forward-looking statements represent our judgments and expectations as of the
      date of this Report. We assume no obligation to update any such forward-looking
      statements. See Part II, Item 1A - Risk Factors.




**ITEM
      3.** **Qualitative and Quantitative Disclosures about Market
      Risk.**





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment in marketable securities. We do not use derivative financial
      instruments in our investments. All of our investments resided in money market
      accounts. Accordingly, we do not believe that there is any material market
      risk
      exposure with respect to derivative or other financial instruments that would
      require disclosure under this Item.





**ITEM
      4.** **Controls and Procedures.**





a)  *Evaluation* ****** *of
      Disclosure Controls and Procedures.* Our
      management has evaluated, with the participation of our Chief Executive Officer,
      who is currently our acting principal financial officer, the effectiveness
      of
      our disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the
      Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
      end
      of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based
      upon
      that evaluation, the Chief Executive Officer concluded that as of the end of
      such fiscal quarter, our current disclosure controls and procedures were not
      effective, because of the material weakness in internal control over financial
      reporting described below. We have taken, and are continuing to take, steps
      to
      address this weakness as described below. With the exception of such weakness,
      however, the Chief Executive Officer believes that our current disclosure
      controls and procedures are adequate to ensure that information required to
      be
      disclosed in the reports we file under the Exchange Act is recorded, processed,
      summarized and reported on a timely basis.




16




b)   *Material
      Weaknesses and Changes in Internal Controls* .
      During
      the audit of our financial statements for the year ended December 31, 2005,
      our
      independent registered public accounting firm identified a material weakness,
      as
      of December 31, 2005, regarding our internal controls over the identification
      of
      and the accounting for non-routine transactions, including certain costs related
      to potential strategic transactions, severance benefits and the financial
      statement recording and disclosure of stock options that we have granted to
      non-employee consultants in accordance with Emerging Issues Task Force (“EITF”)
      96-18. As defined by the Public Company Accounting Oversight Board Auditing
      Standard No. 2, a material weakness is a significant control deficiency or
      a
      combination of significant control deficiencies that results in there being
      more
      than a remote likelihood that a material misstatement of the annual or interim
      financial statements will not be prevented or detected. This material weakness
      did not result in the restatement of any previously reported financial
      statements or any other related financial disclosure. In addition, the changes
      that would have resulted in the financial statements for the year ended December
      31, 2005, as a consequence of the material weakness, were deemed to be
      immaterial but were nevertheless recorded by the Company. Management has
      implemented remedial controls to address these matters including additional
      third party review of non-routine strategic transactions and Board of Director
      meeting minutes.





c)  There
      were no changes in our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
      covered by this Quarterly Report on Form 10-Q that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.




17


**PART
      II - OTHER INFORMATION**





**ITEM
      1A. Risk Factors.**





**Risks
      Related to Our Business**





***If
      we are unable to obtain sufficient additional funding in the near term, we
      may
      be forced to cease operation, and a*** ***s
      a result of a decrease in our available financial resources, we have
      significantly curtailed the research, product development, preclinical testing
      and clinical trials of our product candidates*** ***.***





While
      we
      intend to pursue development of alagebrium in high potential cardiovascular
      indications such as heart failure, any continued development of alagebrium
      by us
      is contingent upon additional funding or a strategic partnership.





The
      Company is urgently continuing to pursue fund-raising possibilities through
      the
      sale of its equity securities. If the Company is unsuccessful in its efforts
      to
      raise additional funds through the sale of additional equity securities or
      if
      the level of cash and cash equivalents falls below anticipated levels, Alteon
      will not have the ability to continue as a going concern after the third quarter
      of 2006.





As
      of
      June 30, 2006, we had working capital of $4,029,118, including $4,984,928 of
      cash and cash equivalents. Our cash used in operating activities for the six
      months ended June 30, 2006 was $3,051,175.





As
      a
      result of the merger with HaptoGuard, which closed on July 21, 2006, the Company
      was required to make payment of severance and insurance costs in the amount
      of
      approximately $2.0 million. In addition, the Company has incurred transaction
      fees and expenses of approximately $1,259,000 in connection with the merger,
      which fees and expenses are currently due and payable. There
      can
      be no assurance that the products or technologies acquired in the merger will
      result in revenues to the combined company or any meaningful return on
      investment to our stockholders .





The
      amount and timing of our future capital requirements will depend on numerous
      factors, including the timing of resuming our
      research and development programs, if
      at
      all, the
      number and characteristics of product candidates that we pursue, the conduct
      of
      preclinical tests and clinical studies, the status and timelines of regulatory
      submissions, the costs associated with protecting patents and other proprietary
      rights, the ability to complete strategic collaborations and the availability
      of
      third-party funding, if any.





Selling
      securities to satisfy our capital requirements may have the effect of materially
      diluting the current holders of our outstanding stock. We may also seek
      additional funding through corporate collaborations and other financing
      vehicles. If funds are obtained through arrangements with collaborative partners
      or others, we may be required to relinquish rights to our technologies or
      product candidates.








***We
      will need additional capital in the future, but access to such capital is
      uncertain.***




Alteon’s
      current resources are insufficient to fund its own commercialization efforts
      as
      well as the combined company’s commercialization efforts. As of June 30, 2006,
      Alteon had cash on hand of approximately $4,984,928. As described elsewhere
      in
      this report, in April, 2006 we closed on approximately $2.6 million in
      financing. Prior to the financing, Alteon was expending approximately $450,000
      in cash per month., The combined company expects to spend approximately $560,000
      in cash per month. Our capital needs beyond the third quarter of 2006 will
      depend on many factors, including our research and development activities and
      the success thereof, the scope of our clinical trial program, the timing of
      regulatory approval for our products under development and the successful
      commercialization of our products. Our needs may also depend on the magnitude
      and scope of these activities, the progress and the level of success in our
      clinical trials, the costs of preparing, filing, prosecuting, maintaining and
      enforcing patent claims and other intellectual property rights, competing
      technological and market developments, changes in or terminations of existing
      collaboration and licensing arrangements, the establishment of new collaboration
      and licensing arrangements and the cost of manufacturing scale-up and
      development of marketing activities, if undertaken by the combined company.
      Other than the recently completed financing described in this report, we do
      not
      have committed external sources of funding and may not be able to secure
      additional funding on any terms or on terms that are favourable to us. If we
      raise additional funds by issuing additional stock, further dilution to our
      existing stockholders will result, and new investors may negotiate for rights
      superior to existing stockholders. If adequate funds are not available, the
      combined company may be required to:




·
            delay,
                reduce the scope of or eliminate one or more of its development programs;




18




·
            obtain
                funds through arrangements with collaboration partners or others
                that may
                require it to relinquish rights to some or all of its technologies,
                product candidates or products that it would otherwise seek to develop
                or
                commercialize itself;




·
            license
                rights to technologies, product candidates or products on terms that
                are
                less favorable to it than might otherwise be available; or




·
            seek
                a buyer for all or a portion of its business, or wind down its operations
                and liquidate its assets on terms not favorable to it.




***Alteon’s
      ability to continue as a going concern is dependent on future financing.***




J.H.
      Cohn
      LLP, our independent registered public accounting firm, has included an
      explanatory paragraph in their report on our financial statements for the fiscal
      year ended December 31, 2005, which expresses substantial doubt about our
      ability to continue as a going concern. The inclusion of a going concern
      explanatory paragraph in J.H. Cohn LLP’s report on our financial statements
      could have a detrimental effect on our stock price and our ability to raise
      additional capital, either alone or as a combined company.





Our
      financial statements have been prepared on the basis of a going concern, which
      contemplates the realization of assets and the satisfaction of liabilities
      in
      the normal course of business. We have not made any adjustments to the financial
      statements as a result of the outcome of the uncertainty described above.
      Accordingly, the value of the company in liquidation may be different from
      the
      values set forth in our financial statements.




The
      continued success of the combined company will depend on its ability to continue
      to raise capital in order to fund the development and commercialization of
      its
      products. Failure to raise additional capital may result in substantial adverse
      circumstances, including delisting of our common stock shares from the American
      Stock Exchange, which could substantially decrease the liquidity and value
      of
      such shares, or ultimately result in the liquidation of the combined
      company.





***If
      we are unable to form the successful collaborative relationships that our
      business strategy requires, then our programs will suffer and we may not be
      able
      to develop products.***





Our
      strategy for developing and deriving revenues from our products depends, in
      large part, upon entering into arrangements with research collaborators,
      corporate partners and others. The potential market, preclinical and clinical
      study results and safety profile of our product candidates may not be attractive
      to potential corporate partners. A two-year toxicity study found that male
      rats
      exposed to high doses of alagebrium over their natural lifetime developed
      dose-related increases in liver cell alterations including hepatocarcinomas,
      and
      that the alteration rate was slightly over the expected background rate in
      this
      gender and species of rat. Also, our Phase 2a EMERALD study in erectile
      dysfunction, the IND for which has since been withdrawn, was placed on clinical
      hold by the Reproductive and Urologic Division which may adversely affect our
      ability to enter into research and development collaborations with respect
      to
      alagebrium. We face significant competition in seeking appropriate collaborators
      and these collaborations are complex and time-consuming to negotiate and
      document. We may not be able to negotiate collaborations on acceptable terms,
      or
      at all. If that were to occur, we may have to curtail the development of a
      particular product candidate, reduce or delay our development program or one
      or
      more of our other development programs, delay our potential commercialization
      or
      reduce the scope of our sales or marketing activities, or increase our
      expenditures and undertake development or commercialization activities at our
      own expense. If we elect to increase our expenditures to fund development or
      commercialization activities on our own, we may need to obtain additional
      capital, which may not be available to us on acceptable terms, or at all. If
      we
      do not have sufficient funds, we will not be able to bring our product
      candidates to market and generate product revenue.





***If
      we are unable to attract and retain the key personnel on whom our success
      depends, our product development, marketing and commercialization plans could
      suffer.***





We
      depend
      heavily on the principal members of our management and scientific staff to
      realize our strategic goals and operating objectives. Over the past few months,
      due to the reduction in our clinical trial activities, the number of our
      employees has decreased from 30 as of June 30, 2005 to 7 as of June 30, 2006.
      Mary Phelan resigned from her position as our Director of Finance and Financial
      Reporting as of May 31, 2006. The loss of services in the near term of any
      of
      our other principal members of management and scientific staff could impede
      the
      achievement of our development priorities. Furthermore, recruiting and retaining
      qualified scientific personnel to perform research and development work in
      the
      future will also be critical to our success, and there is significant
      competition among companies in our industry for such personnel. We have
      established retention programs for our current key employees, and we may be
      required to provide additional retention and severance benefits to our employees
      as we curtail operations or prepare to effect a strategic transaction such
      as a
      sale or merger with another company. However, we cannot assure you that we
      will
      be able to attract and retain personnel on acceptable terms given the
      competition between pharmaceutical and healthcare companies, universities and
      non-profit research institutions for experienced managers and scientists, and
      given the recent clinical and regulatory setbacks that we have experienced.
      In
      addition, we rely on consultants to assist us in formulating our research and
      development strategy. All of our consultants are employed by other entities
      and
      may have commitments to or consulting or advisory contracts with those other
      entities that may limit their availability to us.




19




***Clinical
      studies required for our product candidates are time-consuming, and their
      outcome is uncertain.***





Before
      obtaining regulatory approvals for the commercial sale of any of our products
      under development, we must demonstrate through preclinical and clinical studies
      that the product is safe and effective for use in each target indication.
      Success in preclinical studies of a product candidate may not be predictive
      of
      similar results in humans during clinical trials. None of our products has
      been
      approved for commercialization in the United States or elsewhere. In December
      2004, we announced that findings of a routine two-year rodent toxicity study
      indicated that male Sprague Dawley rats exposed to high doses of alagebrium
      over
      their natural lifetime developed dose-related increases in liver cell
      alterations and tumors, and that the liver tumor rate was slightly over the
      expected background rate in this gender and species of rat. In February 2005,
      based on the initial results from one of the follow-on preclinical toxicity
      experiments, we voluntarily and temporarily suspended enrollment of new subjects
      into each of the ongoing clinical studies pending receipt of additional
      preclinical data. We withdrew our IND for the EMERALD study in February 2006
      in
      order to focus our resources on the development of alagebrium in cardiovascular
      indications.





In
      June
      2005, our Phase 2b SPECTRA trial in systolic hypertension was discontinued
      after
      an interim analysis found that the data did not indicate a treatment effect
      of
      alagebrium and we have ceased development of alagebrium for this indication.





We
      cannot
      predict at this time when enrollment in any of our clinical studies, will
      resume, if ever. If we are unable to resume enrollment in our clinical studies
      in a timely manner, or at all, our business will be materially adversely
      affected.





If
      we do
      not prove in clinical trials that our product candidates are safe and effective,
      we will not obtain marketing approvals from the FDA and other applicable
      regulatory authorities. In particular, one or more of our product candidates
      may
      not exhibit the expected medical benefits in humans, may cause harmful side
      effects, may not be effective in treating the targeted indication or may have
      other unexpected characteristics that preclude regulatory approval for any
      or
      all indications of use or limit commercial use if approved.





The
      length of time necessary to complete clinical trials varies significantly and
      is
      difficult to predict. Factors that can cause delay or termination of our
      clinical trials include:





·
            slower
                than expected patient enrollment due to the nature of the protocol,
                the
                proximity of subjects to clinical sites, the eligibility criteria
                for the
                study, competition with clinical trials for other drug candidates
                or other
                factors;




·
            adverse
                results in preclinical safety or toxicity
                studies;




·
            lower
                than expected retention rates of subjects in a clinical
                trial;




·
            inadequately
                trained or insufficient personnel at the study site to assist in
                overseeing and monitoring clinical
                trials;




·
            delays
                in approvals from a study site’s review board, or other required
                approvals;




·
            longer
                treatment time required to demonstrate effectiveness or determine
                the
                appropriate product dose;




·
            lack
                of sufficient supplies of the product
                candidate;




·
            adverse
                medical events or side effects in treated
                subjects;




·
            lack
                of effectiveness of the product candidate being tested;
                and




·
            regulatory
                changes.




Even
      if
      we obtain positive results from preclinical or clinical studies for a particular
      product, we may not achieve the same success in future studies of that product.
      Data obtained from preclinical and clinical studies are susceptible to varying
      interpretations that could delay, limit or prevent regulatory approval. In
      addition, we may encounter delays or rejections based upon changes in FDA policy
      for drug approval during the period of product development and FDA regulatory
      review of each submitted new drug application. We may encounter similar delays
      in foreign countries. Moreover, regulatory approval may entail limitations
      on
      the indicated uses of the drug. Failure to obtain requisite governmental
      approvals or failure to obtain approvals of the scope requested will delay
      or
      preclude our licensees or marketing partners from marketing our products or
      limit the commercial use of such products and will have a material adverse
      effect on our business, financial condition and results of operations.




20


In
      addition, some or all of the clinical trials we undertake may not demonstrate
      sufficient safety and efficacy to obtain the requisite regulatory approvals,
      which could prevent or delay the creation of marketable products. Our product
      development costs will increase if we have delays in testing or approvals,
      if we
      need to perform more, larger or different clinical or preclinical trials than
      planned or if our trials are not successful. Delays in our clinical trials
      may
      harm our financial results and the commercial prospects for our products.





Before
      a
      clinical trial may commence in the United States, we must submit an IND,
      containing preclinical studies, chemistry, manufacturing, control and other
      information and a study protocol to the FDA. If the FDA does not object within
      30 days after submission of the IND, then the trial may commence. If commenced,
      the FDA may delay, limit, suspend or terminate clinical trials at any time,
      or
      may delay, condition or reject approval of any of our product candidates, for
      many reasons. For example:





·
            ongoing
                preclinical or clinical study results may indicate that the product
                candidate is not safe or effective;




·
            the
                FDA may interpret our preclinical or clinical study results to indicate
                that the product candidate is not safe or effective, even if we interpret
                the results differently; or




·
            the
                FDA may deem the processes and facilities that our collaborative
                partners,
                our third-party manufacturers or we propose to use in connection
                with the
                manufacture of the product candidate to be
                unacceptable.





***If
      we do not successfully develop any products, or are unable to derive revenues
      from product sales, we will never be profitable.***





Virtually
      all of our revenues to date have been generated from collaborative research
      agreements and investment income. We have not received any revenues from product
      sales. We may not realize product revenues on a timely basis, if at all, and
      there can be no assurance that we will ever be profitable.





At
      June
      30, 2006, we had an accumulated deficit of $227,847,026. We anticipate that
      we
      will incur substantial, potentially greater, losses in the future as we continue
      our research, development and clinical studies. We have not yet requested or
      received regulatory approval for any product from the FDA or any other
      regulatory body. All of our product candidates, including our lead candidate,
      alagebrium, are still in research, preclinical or clinical development. We
      may
      not succeed in the development and marketing of any therapeutic or diagnostic
      product. We do not have any product other than alagebrium in clinical
      development, and there can be no assurance that we will be able to bring any
      other compound into clinical development. Adverse results of any preclinical
      or
      clinical study could cause us to materially modify our clinical development
      programs, resulting in delays and increased expenditures, or cease development
      for all or part of our ongoing studies of alagebrium.





To
      achieve profitable operations, we must, alone or with others, successfully
      identify, develop, introduce and market proprietary products. Such products
      will
      require significant additional investment, development and preclinical and
      clinical testing prior to potential regulatory approval and commercialization.
      The development of new pharmaceutical products is highly uncertain and expensive
      and subject
      to a number of significant risks. Potential products that appear to be promising
      at early stages of development may not reach the market for a number of reasons.
      Potential products may be found ineffective or cause harmful side effects during
      preclinical testing or clinical studies, fail to receive necessary regulatory
      approvals, be difficult to manufacture on a large scale, be uneconomical, fail
      to achieve market acceptance or be precluded from commercialization by
      proprietary rights of third parties. We may not be able to undertake additional
      clinical studies. In addition, our product development efforts may not be
      successfully completed, we may not have
      the
      funds to complete any ongoing clinical trials, we may not obtain
      regulatory approvals, and our products, if introduced, may not be successfully
      marketed or achieve customer acceptance. We do not expect any of our products,
      including alagebrium, to be commercially available for a number of years, if
      at
      all.





***Failure
      to remediate the material weaknesses in our internal controls and to achieve
      and
      maintain effective internal control in accordance with Section 404 of the
      Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business
      and stock price.***





During
      the audit of our financial statements for the year ended December 31, 2005,
      our
      independent registered public accounting firm identified a material weakness,
      as
      of December 31, 2005, regarding our internal controls over the identification
      of
      and the accounting for non-routine transactions including certain costs related
      to potential strategic transactions, severance benefits and the financial
      statement recording and disclosure of stock options that we have granted to
      non
      employee consultants in accordance with Emerging Issues Task Force (“EITF”)
      96-18. As defined by the Public Company Accounting Oversight Board Auditing
      Standard No. 2, a material weakness is a significant control deficiency or
      a
      combination of significant control deficiencies that results in there being
      more
      than a remote likelihood that a material misstatement of the annual or interim
      financial statements will not be prevented or detected. This material weakness
      did not result in the restatement of any previously reported financial
      statements or any other related financial disclosure Management continues the
      process of implementing remedial controls to address these matters. In addition,
      the changes that would have resulted in the financial statements for the year
      ended December 31, 2005, as a consequence of the material weakness, were deemed
      by the Company to be immaterial but were nevertheless recorded by the Company.




21




On
      April
      22, 2005, we filed an amendment to our Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004 (the “10-K Amendment”), in which we reported that,
      as of December 31, 2004, and as required by Section 404 of the Sarbanes-Oxley
      Act of 2002, management, with the participation of our principal executive
      officer and principal financial officer, had assessed the effectiveness of
      our
      internal control over financial reporting based on the framework established
      in
      Internal Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”). Management’s assessment
      included an evaluation of the design of our internal control over financial
      reporting and testing of the operational effectiveness of our internal control
      over financial reporting. Management reviewed the results of its assessment
      with
      the Audit Committee of our Board of Directors, and based on this assessment,
      management determined that as of December 31, 2004, there were three material
      weaknesses in our internal control over financial reporting. In light of these
      material weaknesses, management concluded that, as of December 31, 2004, we
      did
      not maintain effective internal control over financial reporting.





The
      three
      material weaknesses identified were in the areas of audit committee oversight
      of
      the internal control review process, information technology controls and process
      controls, and control over cash disbursements. With respect to each of these
      matters, as set forth in the Form 10-K Amendment, management has implemented
      remedial measures or procedures to address these matters. However, we cannot
      currently assure that the remedial measures that are currently being implemented
      will be sufficient to result in a conclusion that our internal controls no
      longer contain any material weaknesses, and that our internal controls are
      effective. In addition, we cannot assure you that, even if we are able to
      achieve effective internal control over financial reporting, our internal
      controls will remain effective for any period of time.





***If
      we are able to form collaborative relationships, but are unable to maintain
      them, our product development may be delayed and disputes over rights to
      technology may result.***





We
      may
      form collaborative relationships that, in some cases, will make us dependent
      upon outside partners to conduct preclinical testing and clinical studies and
      to
      provide adequate funding for our development programs.





In
      general, collaborations involving our product candidates pose the following
      risks to us:





·
            collaborators
                may fail to adequately perform the scientific and preclinical studies
                called for under our agreements with
                them;




·
            collaborators
                have significant discretion in determining the efforts and resources
                that
                they will apply to these
                collaborations;




·
            collaborators
                may not pursue further development and commercialization of our product
                candidates or may elect not to continue or renew research and development
                programs based on preclinical or clinical study results, changes
                in their
                strategic focus or available funding or external factors, such as
                an
                acquisition that diverts resources or creates competing
                priorities;




·
            collaborators
                may delay clinical trials, provide insufficient funding for a clinical
                program, stop a clinical study or abandon a product candidate, repeat
                or
                conduct new clinical trials or require a new formulation of a product
                candidate for clinical testing;




·
            collaborators
                could independently develop, or develop with third parties, products
                that
                compete directly or indirectly with our products or product candidates
                if
                the collaborators believe that competitive products are more likely
                to be
                successfully developed or can be commercialized under terms that
                are more
                economically attractive; collaborators with marketing and distribution
                rights to one or more products may not commit enough resources to
                their
                marketing and distribution;




·
            collaborators
                may not properly maintain or defend our intellectual property rights
                or
                may use our proprietary information in such a way as to invite litigation
                that could jeopardize or invalidate our proprietary information or
                expose
                us to potential litigation;




22




·
            disputes
                may arise between us and the collaborators that result in the delay
                or
                termination of the research, development or commercialization of
                our
                product candidates or that result in costly litigation or arbitration
                that
                diverts management attention and resources;
                and




·
            collaborations
                may be terminated and, if terminated, may result in a need for additional
                capital to pursue further development of the applicable product
                candidates.




In
      addition, there have been a significant number of business combinations among
      large pharmaceutical companies that have resulted in a reduced number of
      potential future collaborators. If a present or future collaborator of ours
      were
      to be involved in a business combination, the continued pursuit and emphasis
      on
      our product development program could be delayed, diminished or terminated.





***Our
      product candidates will remain subject to ongoing regulatory review even if
      they
      receive marketing approval. If we fail to comply with continuing regulations,
      we
      could lose these approvals and the sale of our products could be suspended.***





Even
      if
      we receive regulatory approval to market a particular product candidate, the
      approval could be granted with the condition that we conduct additional costly
      post-approval studies or that we limit the indicated uses included in our
      labeling. Moreover, the product may later cause adverse effects that limit
      or
      prevent its widespread use, force us to withdraw it from the market or impede
      or
      delay our ability to obtain regulatory approvals in additional countries. In
      addition, the manufacturer of the product and its facilities will continue
      to be
      subject to FDA review and periodic inspections to ensure adherence to applicable
      regulations. After receiving marketing approval, the manufacturing, labeling,
      packaging, adverse event reporting, storage, advertising, promotion and record
      keeping related to the product will remain subject to extensive regulatory
      requirements. We may be slow to adapt, or we may never adapt, to changes in
      existing regulatory requirements or adoption of new regulatory requirements.





If
      we
      fail to comply with the regulatory requirements of the FDA and other applicable
      United States and foreign regulatory authorities or if previously unknown
      problems with our products, manufacturers or manufacturing processes are
      discovered, we could be subject to administrative or judicially imposed
      sanctions, including:





·
            restrictions
                on the products, manufacturers or manufacturing
                processes;




·
            warning
                letters;




·
            civil
                or criminal penalties;




·
            fines;




·
            injunctions;




·
            product
                seizures or detentions;




·
            import
                bans;




·
            voluntary
                or mandatory product recalls and publicity
                requirements;




·
            suspension
                or withdrawal of regulatory
                approvals;




·
            total
                or partial suspension of production;
                and




·
            refusal
                to approve pending applications for marketing approval of new drugs
                or
                supplements to approved
                applications.




***If
        we cannot successfully form and maintain suitable arrangements with third
        parties for the manufacturing of the products we may develop, our ability
        to
        develop or deliver products may be impaired.***
 
 We
        have
        no experience in manufacturing products and do not have manufacturing
        facilities. Consequently, we will depend on contract manufacturers for the
        production of any products for development and commercial purposes. The
        manufacture of our products for clinical trials and commercial purposes is
        subject to current cGMP, regulations promulgated by the FDA. In the event
        that
        we are unable to obtain or retain third-party manufacturing capabilities
        for our
        products, we will not be able to commercialize our products as planned. Our
        reliance on third-party manufacturers will expose us to risks that could
        delay
        or prevent the initiation or completion of our clinical trials, the submission
        of applications for regulatory approvals, the approval of our products by
        the
        FDA or the commercialization of our products or result in higher costs or
        lost
        product revenues. In particular, contract manufacturers:




23





·
            could
                encounter difficulties in achieving volume production, quality control
                and
                quality assurance and suffer shortages of qualified personnel, which
                could
                result in their inability to manufacture sufficient quantities of
                drugs to
                meet our clinical schedules or to commercialize our product
                candidates;




·
            could
                terminate or choose not to renew the manufacturing agreement, based
                on
                their own business priorities, at a time that is costly or inconvenient
                for us;




·
            could
                fail to establish and follow FDA-mandated cGMPs, as required for
                FDA
                approval of our product candidates, or fail to document their adherence
                to
                cGMPs, either of which could lead to significant delays in the
                availability of material for clinical study and delay or prevent
                filing or
                approval of marketing applications for our product candidates;
                and




·
            could
                breach, or fail to perform as agreed, under the manufacturing
                agreement.




Changing
      any manufacturer that we engage for a particular product or product candidate
      may be difficult, as the number of potential manufacturers is limited, and
      we
      will have to compete with third parties for access to those manufacturing
      facilities. cGMP processes and procedures typically must be reviewed and
      approved by the FDA, and changing manufacturers may require re-validation of
      any
      new facility for cGMP compliance, which would likely be costly and
      time-consuming. We may not be able to engage replacement manufacturers on
      acceptable terms quickly or at all. In addition, contract manufacturers located
      in foreign countries may be subject to import limitations or bans. As a result,
      if any of our contract manufacturers is unable, for whatever reason, to supply
      the contracted amounts of our products that we successfully bring to market,
      a
      shortage would result which would have a negative impact on our revenues.





Drug
      manufacturers are subject to ongoing periodic unannounced inspection by the
      FDA,
      the U.S. Drug Enforcement Agency and corresponding state and foreign agencies
      to
      ensure strict compliance with cGMPs, other government regulations and
      corresponding foreign standards. While we are obligated to audit the performance
      of third-party contractors, we do not have control over our third-party
      manufacturers’ compliance with these regulations and standards. Failure by our
      third-party manufacturers or us to comply with applicable regulations could
      result in sanctions being imposed on us, including fines, injunctions, civil
      penalties, failure of the government to grant pre-market approval of drugs,
      delays, suspension or withdrawal of approvals, seizures or recalls of product,
      operating restrictions and criminal prosecutions. Our dependence upon others
      for
      the manufacture of any products that we develop may adversely affect our profit
      margin, if any, on the sale of any future products and our ability to develop
      and deliver such products on a timely and competitive basis.





***If
      we are not able to protect the proprietary rights that are critical to our
      success, the development and any possible sales of our product candidates could
      suffer and competitors could force our products completely out of the market.***





Our
      success will depend on our ability to obtain patent protection for our products,
      preserve our trade secrets, prevent third parties from infringing upon our
      proprietary rights and operate without infringing upon the proprietary rights
      of
      others, both in the United States and abroad.





The
      degree of patent protection afforded to pharmaceutical inventions is uncertain
      and our potential products are subject to this uncertainty. Competitors may
      develop competitive products outside the protection that may be afforded by
      the
      claims of our patents. We are aware that other parties have been issued patents
      and have filed patent applications in the United States and foreign countries
      with respect to other agents that have an effect on A.G.E.s., or the formation
      of A.G.E. crosslinks. In addition, although we have several patent applications
      pending to protect proprietary technology and potential products, these patents
      may not be issued, and the claims of any patents that do issue, may not provide
      significant protection of our technology or products. In addition, we may not
      enjoy any patent protection beyond the expiration dates of our currently issued
      patents.





We
      also
      rely upon unpatented trade secrets and improvements, unpatented know-how and
      continuing technological innovation to maintain, develop and expand our
      competitive position, which we seek to protect, in part, by confidentiality
      agreements with our corporate partners, collaborators, employees and
      consultants. We also have invention or patent assignment agreements with our
      employees and certain, but not all, corporate partners and consultants. Relevant
      inventions may be developed by a person not bound by an invention assignment
      agreement. Binding agreements may be breached, and we may not have adequate
      remedies for such breach. In addition, our trade secrets may become known to
      or
      be independently discovered by competitors.




24




***The
      effect of accounting rules relating to our equity compensation arrangements
      may
      have an adverse effect on our stock price, results of operations, and financial
      condition.***





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces “Accounting for Stock-Based
      Compensation,” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
      all share-based payments to employees, including grants of employee stock
      options, to be recognized in the financial statements based on their fair values
      effective for the Company January 1, 2006. Under SFAS 123R, the pro forma
      disclosures previously permitted under SFAS 123 are no longer an alternative
      to
      financial statement recognition.





The
      Company accounts for employee stock-based compensation, awards issued to
      non-employee directors, and stock options issued to consultants and contractors
      in accordance with SFAS 123R and Emerging Issues Task Force Issue No. 96-18,
      “Accounting for Equity Instruments that are Issued to Other Than Employees for
      Acquiring or in Conjunction with Selling Goods or Services.”





The
      Company has adopted the new standard, SFAS 123R, effective January 1, 2006
      and
      has selected the Black-Scholes method of valuation for share-based compensation.
      The Company has adopted the modified prospective transition method which
      requires that compensation cost be recorded, as earned, for all unvested stock
      options and restricted stock outstanding at the beginning of the first quarter
      of adoption of SFAS 123R, and that such costs be recognized over the remaining
      service period after the adoption date based on the options’ original estimate
      of fair value.





On
      December 15, 2005, the Compensation Committee of the Board of Directors of
      the
      Company approved the acceleration of the vesting date of all previously issued,
      outstanding and unvested options, effective December 31, 2005. The acceleration
      and the fact that no options were issued in the six months ended June 30, 2006,
      resulted in the Company incurring any compensation expense under SFAS 123R
      for
      the three and six months ended June 30, 2006.





Prior
      to
      adoption of SFAS 123R, the Company applied the intrinsic-value method under
      APB
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations, under which no compensation cost (excluding those options
      granted below fair market value) had been recognized. SFAS 123 established
      accounting and disclosure requirements using a fair-value based method of
      accounting for stock-based employee compensation plans. As permitted by SFAS
      123, the Company elected to continue to apply the intrinsic-value based method
      of accounting described above, and adopted only the disclosure requirements
      of
      SFAS 123, as amended.





***If
      we are not able to compete successfully with other companies in the development
      and marketing of cures and therapies for cardiovascular diseases, diabetes,
      and
      the other conditions for which we seek to develop products, we may not be able
      to continue our operations.***





We
      are
      engaged in pharmaceutical fields characterized by extensive research efforts
      and
      rapid technological progress. Many established pharmaceutical and biotechnology
      companies with financial, technical and human resources greater than ours are
      attempting to develop, or have developed, products that would be competitive
      with our products. Many of these companies have extensive experience in
      preclinical and human clinical studies. Other companies may succeed in
      developing products that are safer, more efficacious or less costly than any
      we
      may develop and may also be more successful than us in production and marketing.
      Rapid technological development by others may result in our products becoming
      obsolete before we recover a significant portion of the research, development
      or
      commercialization expenses incurred with respect to those products.





Certain
      technologies under development by other pharmaceutical companies could result
      in
      better treatments for cardiovascular disease, and diabetes and its related
      complications. Several large companies have initiated or expanded research,
      development and licensing efforts to build pharmaceutical franchises focusing
      on
      these medical conditions, and some companies already have products approved
      and
      available for commercial sale to treat these indications. It is possible that
      one or more of these initiatives may reduce or eliminate the market for some
      of
      our products. In addition, other companies have initiated research in the
      inhibition or crosslink breaking of A.G.E.s.





***If
      governments and third-party payers continue their efforts to contain or decrease
      the costs of healthcare, we may not be able to commercialize our products
      successfully.***





In
      certain foreign markets, pricing and/or profitability of prescription
      pharmaceuticals are subject to government control. In the United States, we
      expect that there will continue to be federal and state initiatives to control
      and/or reduce pharmaceutical expenditures. In addition, increasing emphasis
      on
      managed care in the United States will continue to put pressure on
      pharmaceutical pricing. Cost control initiatives could decrease the price that
      we receive for any products for which we may receive regulatory approval to
      develop and sell in the future and could have a material adverse effect on
      our
      business, financial condition and results of operations. Further, to the extent
      that cost control initiatives have a material adverse effect on our corporate
      partners, our ability to commercialize our products may be adversely affected.
      Our ability to commercialize pharmaceutical products may depend, in part, on
      the
      extent to which reimbursement for the products will be available from government
      health administration authorities, private health insurers and other third-party
      payers. Significant uncertainty exists as to the reimbursement status of newly
      approved healthcare products, and third-party payers, including Medicare,
      frequently challenge the prices charged for medical products and services.
      In
      addition, third-party insurance coverage may not be available to subjects for
      any products developed by us. Government and other third-party payers are
      attempting to contain healthcare costs by limiting both coverage and the level
      of reimbursement for new therapeutic products and by refusing in some cases
      to
      provide coverage for uses of approved products for disease indications for
      which
      the FDA has not granted labeling approval. If government and other third-party
      payers for our products do not provide adequate coverage and reimbursement
      levels, the market acceptance of these products would be adversely affected.




25




***If
      the users of the products that we are developing claim that our products have
      harmed them, we may be subject to costly and damaging product liability
      litigation, which could have a material adverse effect on our business,
      financial condition and results of operations.***





The
      use
      of any of our potential products in clinical studies and the sale of any
      approved products, including the testing and commercialization of alagebrium
      or
      other compounds, may expose us to liability claims resulting from the use of
      products or product candidates. Claims could be made directly by participants
      in
      our clinical studies, consumers, pharmaceutical companies or others. We maintain
      product liability insurance coverage for claims arising from the use of our
      products in clinical studies. However, coverage is becoming increasingly
      expensive, and we may not be able to maintain or acquire insurance at a
      reasonable cost or in sufficient amounts to protect us against losses due to
      liability that could have a material adverse effect on our business, financial
      condition and results of operations. We may not be able to obtain commercially
      reasonable product liability insurance for any product approved for marketing
      in
      the future, and insurance coverage and our resources may not be sufficient
      to
      satisfy any liability resulting from product liability claims. A successful
      product liability claim or series of claims brought against us could have a
      material adverse effect on our business, financial condition and results of
      operations.





**Risks
      Relating to the Merger**





***Alteon
      and HaptoGuard have each historically incurred operating losses and these losses
      will continue after the merger.***




Alteon
      and HaptoGuard have each historically incurred substantial operating losses
      due
      to their research and development activities and expect these losses to continue
      after the merger for the foreseeable future. As of December 31, 2005, Alteon
      and
      HaptoGuard had an accumulated deficit of $222,813,445 and $2,425,258,
      respectively. Alteon’s fiscal year 2005, 2004 and 2003 net losses were
      $12,614,459, $13,958,646, and $14,452,418, respectively. HaptoGuard’ fiscal year
      2005 and 2004 net losses were $1,654,695 and $770,563, respectively. Alteon’s
      fiscal year 2005, 2004 and 2003 net losses applicable to common stockholders
      were $17,100,795, $18,093,791 and $18,243,265, respectively. The combined
      company currently expects to continue its research and development activities
      at
      the same or at a more rapid pace than prior periods. The combined company will
      expend significant amounts on research and development programs for alagebrium
      and ALT-2074. These activities will take time and expense, both to identify
      appropriate partners, to reach agreement on basic terms, and to negotiate and
      sign definitive agreements. We will actively seek new financing from time to
      time to provide financial support for our research and development activities.
      However, at this time we are not able to assess the probability of success
      in
      our fundraising efforts or the terms, if any, under which we may secure
      financial support from strategic partners or other investors. It is expected
      that we will continue to incur operating losses for the foreseeable
      future.




***The
      success of the combined company will also depend on the products and systems
      formerly under development by HaptoGuard, including ALT-2074, and we cannot
      be
      sure that the efforts to commercialize ALT-2074 will succeed.***




ALT-2074, HaptoGuard’s lead compound, is in development for the treatment of
      heart complications in patients with diabetes. It has demonstrated efficacy
      in
      mouse models.





ALT-2074
      is still in early clinical trials and any success to date should not be seen
      as
      indicative of the probability of any future success. The failure to complete
      clinical development and commercialize ALT-2074 for any reason or due to a
      combination of reasons will have a material adverse impact on the combined
      company.





We
      are dependent on the successful outcome of clinical trials and will not be
      able
      to successfully develop and commercialize products if clinical trials are not
      successful.




26




HaptoGuard
      received approval from Israel’s Ministry of Health to conduct Phase II
      trials in diabetic patients recovering from a recent myocardial infarction
      or
      acute coronary syndrome. The purpose of the study is to evaluate the biological
      effects on cardiac tissue in patients treated with ALT-2074.  HaptoGuard
      received Institutional Review Board approval for 3 sites in Israel. And the
      study was opened for enrollment in May.  The Israel-Lebanon conflict that
      began in July, 2006, has adversely impacted our ability to recruit patients
      to
      the study.  While the Company is evaluating modifications to the protocol
      to simplify its management in Israel, including transferring management of
      the
      project from a CRO to our internal team, the conflict will slow down any benefit
      that can be seen from those operational modifications.  Additionally, the
      completion of that trial is contingent on the successful raising of additional
      financing by the Company.





None
      of Alteon’s or HaptoGuard’s product candidates are currently approved for sale
      by the FDA or by any other regulatory agency in the world, and may never receive
      approval for sale or become commercially viable. Before obtaining regulatory
      approval for sale, each of the combined company’s product candidates will be
      subjected to extensive preclinical and clinical testing to demonstrate safety
      and efficacy for a particular indication for humans in addition to meeting
      other
      regulatory standards. The combined company’s success will depend on the
      successful outcome of clinical trials for one or more product candidates.





There
      are a number of difficulties and risks associated with clinical trials. The
      possibility exists that:





**•**
            
            we
                may discover that a product candidate may cause, alone or in combination
                with another therapy, harmful side effects;**•**
            
            we
                may discover that a product candidate, alone or in combination with
                another therapy, does not exhibit the expected therapeutic results
                in
                humans;**•**
            
            results
                from early trials may not be statistically significant or predictive
                of
                results that may be obtained from large-scale, advanced clinical
                trials;**•**
            
            we,
                the FDA, other similar foreign regulatory agencies or an institutional
                review board may suspend clinical trials for any reason
                whatsoever;**•**
            
            patient
                recruitment may be slower than expected;**•**
            
            patients
                may drop out of our clinical trials; and**•**
            
            we
                may be unable to produce sufficient supplies of products in a timely
                fashion for clinical trials.





Given
      the
      uncertainty surrounding the regulatory and clinical trial process, we may not
      be
      able to develop safety, efficacy or manufacturing data necessary for approval
      for any product candidate. In addition, even if we receive approval, such
      approval may be limited in scope and hurt the commercial viability of such
      product. If the combined company is unable to successfully obtain approval
      of
      and commercialize a product, this would materially harm the business, impair
      our
      ability to generate revenues and adversely impact our stock price.





The
      combined company is subject to significant government regulation and failure
      to
      achieve regulatory approval of our drug candidates would harm our business.





The
      FDA regulates the development, testing, manufacture, distribution, labeling
      and
      promotion of pharmaceutical products in the United States pursuant to the
      Federal Food, Drug, and Cosmetic Act and related regulations. We must receive
      pre-market approval by the FDA prior to any commercial sale of any drug
      candidates. Before receiving such approval we must provide preclinical data
      and
      proof in human clinical trials of the safety and efficacy of our drug
      candidates, which trials can take several years. In addition, we must show
      that
      we can produce any drug candidates consistently at quality levels sufficient
      for
      administration in humans. Pre-market approval is a lengthy and expensive
      process. We may not be able to obtain FDA approval for any commercial sale
      of
      any drug candidate. By statute and regulation, the FDA has 180 days to
      review an application for approval to market a drug candidate; however, the
      FDA
      frequently exceeds the 180-day time period, at times taking up to
      18 months. In addition, based on its review, the FDA or other regulatory
      bodies may determine that additional clinical trials or preclinical data are
      required. Except for any potential licensing or marketing arrangements with
      other pharmaceutical or biotechnology companies, we will not generate any
      revenues in connection with any of our other drug candidates unless and until
      we
      obtain FDA approval to sell such products in commercial quantities for human
      application.





Even
      if the combined company’s products receive approval for commercial sale, their
      manufacture, storage, marketing and distribution are and will be subject to
      extensive and continuing regulation in the United States by the federal
      government, especially the FDA, and state and local governments. The failure
      to
      comply with these regulatory requirements could result in enforcement action,
      including, without limitation, withdrawal of approval, which would have a
      material adverse effect on the combined company’s business. Later discovery of
      problems with the combined company’s products may result in additional
      restrictions on the product, including withdrawal of the product from the
      market. Regulatory authorities may also require post-marketing testing, which
      can involve significant uncontemplated expense. Additionally, governments may
      impose new regulations, which could further delay or preclude regulatory
      approval of the combined company’s products or result in significantly increased
      compliance costs.




27




In
      similar fashion to the FDA, foreign regulatory authorities require demonstration
      of product quality, safety and efficacy prior to granting authorization for
      product registration which allows for distribution of the product for commercial
      sale. International organizations, such as the World Health Organization, and
      foreign government agencies including those for the Americas, Middle East,
      Europe, and Asia and the Pacific, have laws, regulations and guidelines for
      reporting and evaluating the data on safety, quality and efficacy of new drug
      products. Although most of these laws, regulations and guidelines are very
      similar, each of the individual nations reviews all of the information available
      on the new drug product and makes an independent determination for product
      registration. A finding of product quality, safety or efficiency in one
      jurisdiction does not guarantee approval in any other jurisdiction, even if
      the
      other jurisdiction has similar laws, regulations and guidelines.





***Failure
      to integrate the companies’ operations successfully could result in delays and
      increased expenses in the companies’ clinical trial
      programs.***





Alteon
      and HaptoGuard entered into the merger with the expectation that the merger
      will
      result in beneficial synergies, including:





·
            improved
                ability to raise new capital through access to new classes of investors
                focused on public companies engaged in small molecule drug
                development;


·
            shared
                expertise in developing innovative small molecule drug technologies
                and
                the potential for technology
                collaboration;


·
            a
                broader pipeline of products;


·
            greater
                ability to attract commercial
                partners;


·
            larger
                combined commercial opportunities;
                and


·
            a
                broader portfolio of patents and
                trademarks.





Achieving
      these anticipated synergies and the potential benefits underlying the two
      companies’ reasons for the merger will depend on a number of factors, some of
      which include:





·
            retention
                of scientific staff;


·
            significant
                litigation, if any, adverse to Alteon and HaptoGuard, including,
                particularly, product liability litigation and patent and trademark
                litigation; and


·
            the
                ability of the combined company to continue development of Alteon
                and
                HaptoGuard product candidates;


·
            success
                of our research and development
                efforts;


·
            increased
                capital expenditures;


·
            general
                market****conditions
                relating to small cap biotech investments;
                and


·
            competition
                from other drug development
                companies.





Achieving
      the benefits of the merger will depend in part on the successful integration
      of
      Alteon and HaptoGuard in a timely and efficient manner. The integration will
      require significant time and efforts from each company, including the
      coordination of research, development, regulatory, manufacturing, commercial,
      administrative and general functions. Integration may be difficult and
      unpredictable because of possible cultural conflicts and different opinions
      on
      scientific and regulatory matters. Delays in successfully integrating and
      managing employee benefits could lead to dissatisfaction and employee turnover.
      The combination of Alteon’s and HaptoGuard’s organizations may result in greater
      competition for resources and elimination of research and development programs
      that might otherwise be successfully completed. If we cannot successfully
      integrate our operations and personnel, we may not recognize the expected
      benefits of the merger.





Even
      if
      the two companies are able to integrate their operations, there can be no
      assurance that these anticipated synergies will be achieved. The failure to
      achieve such synergies could have a material adverse effect on the business,
      results of operations and financial condition of the combined
      company.





***Integrating
      Alteon and HaptoGuard may divert management’s attention away from our core
      research and development activities.***





Successful
      integration of our operations, products and personnel may place a significant
      burden on our management and our internal resources. The diversion of
      management’s attention and any difficulties encountered in the transition and
      integration process could result in delays in the companies’ clinical trial
      programs and could otherwise significantly harm our business, financial
      condition and operating results.




28




We
      expect
      to incur significant costs integrating our operations, product candidates and
      personnel, which cannot be estimated accurately at this time. These costs
      include:





·
            severance;


·
            conversion
                of information systems;


·
            combining
                research, development, regulatory, manufacturing and commercial teams
                and
                processes;


·
            reorganization
                of facilities; and


·
            relocation
                or disposition of excess equipment.





We
      expect
      that Alteon and HaptoGuard will incur aggregate direct transaction costs of
      approximately $3,284,000 associated with or resulting from the merger. If the
      total costs of the merger exceed our estimates or benefits of the merger do
      not
      exceed the total costs of the merger, the financial results of our combined
      company could be adversely affected.





***The
      combined company will remain dependent on third parties for research and
      development activities necessary to commercialize certain of our
      patents.***





We
      utilize the services of several scientific and technical consultants to oversee
      various aspects of our protocol design, clinical trial oversight and other
      research and development functions. Alteon and HaptoGuard both contract out
      most
      of our research and development operations utilize third-party contract
      manufacturers for drug inventory and shipping services and third-party contract
      research organizations in connection with preclinical and/or clinical studies
      in
      accordance with our designed protocols, as well as conducting research at
      medical and academic centers.





Because
      we rely on third parties for much our research and development work, we have
      less direct control over our research and development. We face risks that these
      third parties may not be appropriately responsive to our time frames and
      development needs and could devote resources to other customers. In addition,
      certain of these third parties may have to comply with FDA regulations or other
      regulatory requirements in the conduct of this research and development work,
      which they may fail to do.





***If
      the combined company does not successfully distinguish and commercialize its
      technology, it may be unable to compete successfully or to generate significant
      revenues.***




The
      biotechnology industry, including the field of small molecule drugs to treat
      and
      prevent cardiovascular disease and diabetes, is highly competitive and subject
      to significant and rapid technological change. Accordingly, the combined
      company’s success will depend, in part, on its ability to respond quickly to
      such change through the development and introduction of new products and
      systems.




***The
      combined company will have substantial competition, including competitors with
      substantially greater resources.***





Many
      of
      the combined company’s competitors or potential competitors have substantially
      greater financial and other resources than Alteon has and may also have greater
      experience in conducting pre-clinical studies, clinical trials and other
      regulatory approval procedures as well as in marketing their products. Major
      competitors in the market for our potential products include large,
      publicly-traded pharmaceutical companies, public development stage public
      companies and private development stage companies. If the combined company
      or
      its corporate partners commence commercial product sales, the combined company
      or its corporate partners will be competing against companies with greater
      marketing and manufacturing capabilities.




The
      combined company’s ability to compete successfully against currently existing
      and future alternatives to its product candidates and systems, and competitors
      who compete directly with it in the small molecule drug industry will depend,
      in
      part, on its ability to:




·
            attract
                and retain skilled scientific and research personnel;




·
            develop
                technologically superior products;




·
            develop
                competitively priced products;




·
            obtain
                patent or other required regulatory approvals for the combined company’s
                products;




·
            be
                early entrants to the market; and




·
            manufacture,
                market and sell its products, independently or through collaborations.




29




***The
      success of the combined company is dependent on the extent of third-party
      reimbursement for its products.***





Third-party
      reimbursement policies may also adversely affect the combined company’s ability
      to commercialize and sell its products. The combined company’s ability to
      successfully commercialize its products depends in part on the extent to which
      appropriate levels of reimbursement for its products and related treatments
      are
      obtained from government authorities, private health insurers, third party
      payers, and other organizations, such as managed care organizations, or MCOs.
      Any failure by doctors, hospitals and other users of the combined company’s
      products or systems to obtain appropriate levels of reimbursement could
      adversely affect the combined company’s ability to sell these products and
      systems.




Federal
      legislation, enacted in December 2003, has altered the way in which
      physician-administered drug programs covered by Medicare are reimbursed,
      generally leading to lower reimbursement levels. The new legislation has also
      added an outpatient prescription drug benefit to Medicare, effective January
      2006. In the interim, the U.S. Congress has established a discount drug card
      program for Medicare beneficiaries. Both benefits will be provided through
      private entities, which will attempt to negotiate price concessions from
      pharmaceutical manufacturers. These negotiations may increase pressures to
      lower
      prices. On the other hand, the drug benefit may increase the volume of
      pharmaceutical drug purchases, offsetting at least in part these potential
      price
      discounts. While the new law specifically prohibits the U.S. government from
      interfering in price negotiations between manufacturers and Medicare drug plan
      sponsors, some members of Congress are pursuing legislation that would permit
      de
      facto price controls on prescription drugs. In addition, the law triggers,
      for
      congressional consideration, cost containment measures for Medicare in the
      event
      Medicare cost increases exceed a certain level. These cost containment measures
      could include limitations on prescription drug prices. This legislation could
      adversely impact the combined company’s ability to commercialize any of its
      products successfully.




Significant
      uncertainty exists about the reimbursement status of newly approved medical
      products and services. Reimbursement in the United States or foreign countries
      may not be available for any of the combined company’s products, reimbursement
      granted may not be maintained, and limits on reimbursement available from
      third-party payers may reduce the demand for, or negatively affect the price
      of,
      the combined company’s products. Alteon anticipates that the combined company
      will need to work with a variety of organizations to lobby government agencies
      for improved reimbursement policies for its products. However, Alteon cannot
      guarantee that such lobbying efforts will take place or that they will
      ultimately be successful.





Internationally,
      where national healthcare systems are prevalent, little if any funding may
      be
      available for new products, and cost containment and cost reduction efforts
      can
      be more pronounced than in the United States.




***If
      the combined company is unable to protect its intellectual property, it may
      not
      be able to operate its business profitably.***




The
      combined company’s success will depend on its ability to develop proprietary
      products and technologies, to obtain and maintain patents, to protect trade
      secrets, and to prevent others from infringing on its proprietary rights. The
      combined company has exclusive patents, licenses to patents or patent
      applications covering critical components of its technologies, including certain
      jointly owned patents. We also seek to protect our proprietary technology and
      processes, in part, by confidentiality agreements with our employees and certain
      contractors. Patents, pending patent applications and licensed technologies
      may
      not afford adequate protection against competitors, and any pending patent
      applications now or hereafter filed by or licensed to us may not result in
      patents being issued. In addition, certain of the combined company’s technology
      relies on patented inventions developed using university resources. Universities
      may have certain rights, as defined by law or applicable agreements, in such
      patents, and may choose to exercise such rights. To the extent that employees,
      consultants or contractors of the combined company use intellectual property
      owned by others, disputes may arise as to the rights related to or resulting
      from the know-how and inventions. In addition, the laws of certain non-U.S.
      countries do not protect intellectual property rights to the same extent as
      do
      the laws of the United States. Medical technology patents involve complex legal
      and factual questions and, therefore, the combined company cannot predict with
      certainty their enforceability.




The
      combined company is a party to various license agreements that give it exclusive
      and partial exclusive rights to use specified technologies applicable to
      research, development and commercialization of its products, including
      alagebrium and ALT-2074. The agreements pursuant to which such technology is
      used permit the licensors to terminate agreements in the event that certain
      conditions are not met. If these conditions are not met and the agreements
      are
      terminated, the combined company’s product development, research and
      commercialization efforts may be altered or delayed.




Patents
      or patent applications, if issued, may be challenged, invalidated or
      circumvented, or may not provide protection or competitive advantages against
      competitors with similar technology. Furthermore, competitors of the combined
      company may obtain patent protection or other intellectual property rights
      for
      technology similar to the combined company’s that could limit its ability to use
      its technology or commercialize products that it may develop.




30




Litigation may be necessary to assert claims of infringement, to enforce patents
      issued to the combined company, to protect trade secrets or know-how or to
      determine the scope and validity of the proprietary rights of others. Litigation
      or interference proceedings could result in substantial additional costs and
      diversion of management focus. If the combined company is ultimately unable
      to
      protect its technology, trade secrets or know-how, it may be unable to operate
      profitably. Although we have not been involved with any threats of litigation
      or
      negotiations regarding patent issues or other intellectual property, or other
      related court challenges or legal actions, it is possible that the combined
      company could be involved with such matters in the future.




***If
      the combined company is unable to operate its business without infringing upon
      intellectual property rights of others, it may not be able to operate its
      business profitably.***




The
      combined company’s success depends on its ability to operate without infringing
      upon the proprietary rights of others. We are aware that patents have been
      applied for and/or issued to third parties claiming technologies for Advanced
      Glycation End-Products or glutathione peroxidase mimetics that may be similar
      to
      those needed by us. To the extent that planned or potential products are covered
      by patents or other intellectual property rights held by third parties, the
      combined company would need a license under such patents or other intellectual
      property rights to continue development and marketing of its products. Any
      required licenses may not be available on acceptable terms, if at all. If the
      combined company does not obtain such licenses it may not be able to proceed
      with the development, manufacture or sale of its products.




Litigation
      may be necessary to defend against claims of infringement or to determine the
      scope and validity of the proprietary rights of others. Litigation or
      interference proceedings could result in substantial additional costs and
      diversion of management focus. If the combined company is ultimately
      unsuccessful in defending against claims of infringement, it may be unable
      to
      operate profitably.





***ALT-2074
      and other former HaptoGuard compounds are licensed by third parties and if
      the
      combined company is unable to continue licensing this technology our future
      prospects may be materially adversely affected.***





HaptoGuard
      licensed technology, including technology related to ALT-2074, from third
      parties. We anticipate that we will continue to license technology from third
      parties in the future. To maintain the license to ALT-2074 from Oxis
      International, we are obligated to meet certain development and clinical trial
      milestones and to make certain payments. There can be no assurance that we
      will
      be able to meet any milestone or make any payment required under the license
      with Oxis International. In addition, if we fail to meet any milestone or make
      any payment, there can be no assurance that we may be able to negotiate a
      compromise with Oxis.





The
      technology HaptoGuard licensed from third parties would be difficult or
      impossible to replace and the loss of this technology would materially adversely
      affect our business, financial condition and any future prospects.





***If
      the combined company loses or is unable to hire and retain qualified personnel,
      it may not be able to develop its products and technology.***




The
      combined company is highly dependent on the members of its scientific and
      management staff. In particular, the combined company depends on Dr. Noah
      Berkowitz as the combined company’s Chief Executive Officer and Dr. Malcolm
      MacNab as the combined company’s Vice-President of Clinical Development. We may
      not be able to attract and retain scientific and management personnel on
      acceptable terms, if at all, given the competition for such personnel among
      other companies and research and academic institutions. If the combined company
      loses an executive officer or certain key members of its clinical or research
      and development staff or is unable to hire and retain qualified management
      personnel, then its ability to develop and commercialize its products and
      technology and to raise capital and effect strategic opportunities may be
      hindered. We have not purchased and do not anticipate purchasing any key-man
      life insurance.




***The
      combined company may face exposure to product liability claims.***




The
      combined company may face exposure to product liability and other claims due
      to
      allegations that its products cause harm. These risks are inherent in the
      clinical trials for pharmaceutical products and in the testing, and future
      manufacturing and marketing of, the combined company’s products. Although we
      currently maintain product liability insurance, such insurance may not be
      adequate and the combined company may not be able to obtain adequate insurance
      coverage in the future at a reasonable cost, if at all. If the combined company
      is unable to obtain product liability insurance in the future at an acceptable
      cost or to otherwise protect against potential product liability claims, it
      could be inhibited in the commercialization of its products which could have
      a
      material adverse effect on its business. We currently have a policy covering
      $10
      million of product liability for our clinical trials. We do not have sales
      of
      any products. The coverage will be maintained and limits reviewed from time
      to
      time as the combined company progresses to later stages of its clinical trials
      and as the length of the trials and the number of patients enrolled in the
      trials changes. The combined company intends to obtain a combined coverage
      policy that includes tail coverage in order to cover any claims that are made
      for any events that have occurred prior to the merger. Currently, our annual
      premium for product liability insurance is approximately $219,000.




31




**Risks
      Related to Owning Alteon's Common Stock**





***Our
      stock price is volatile and you may not be able to resell your shares at a
      profit.***




We
      first
      publicly issued common stock on November 8, 1991 at $15.00 per share in our
      initial public offering and it has been subject to fluctuations since that
      time.
      For example, during 2005, the closing sale price of our common stock has ranged
      from a high of $1.43 per shares to a low of $0.17 per share. The market price
      of
      our common stock could continue to fluctuate substantially due to a variety
      of
      factors, including:




·
            quarterly
                fluctuations in results of operations;




·
            the
                announcement of new products or services by the combined company
                or
                competitors;




·
            sales
                of common stock by existing stockholders or the perception that these
                sales may occur;




·
            adverse
                judgments or settlements obligating the combined company to pay damages;




·
            negative
                publicity;




·
            loss
                of key personnel;




·
            developments
                concerning proprietary rights, including patents and litigation matters;
                and




·
            clinical
                trial or regulatory developments in both the United States and foreign
                countries.




In
      addition, overall stock market volatility has often significantly affected
      the
      market prices of securities for reasons unrelated to a company’s operating
      performance. In the past, securities class action litigation has been commenced
      against companies that have experienced periods of volatility in the price
      of
      their stock. Securities litigation initiated against the combined company could
      cause it to incur substantial costs and could lead to the diversion of
      management’s attention and resources, which could have a material adverse effect
      on revenue and earnings.




***We
      have a large number of authorized but unissued shares of common stock, which
      our
      Board of Directors may issue without further stockholder approval, thereby
      causing dilution of your holdings of our common stock.***




After
      the
      closing of the merger and the financing, there are approximately 180,000,000
      shares of authorized but unissued shares of our common stock. Our management
      will continue to have broad discretion to issue shares of our common stock
      in a
      range of transactions, including capital-raising transactions, mergers,
      acquisitions, for anti-takeover purposes, and in other transactions, without
      obtaining stockholder approval, unless stockholder approval is required for
      a
      particular transaction under the rules of the American Stock Exchange, Delaware
      law, or other applicable laws. We currently have no specific plans to issue
      shares of our common stock for any purpose other than in connection with the
      merger. However, if our management determines to issue shares of our common
      stock from the large pool of such authorized but unissued shares for any purpose
      in the future without obtaining stockholder approval, your ownership position
      would be diluted without your further ability to vote on that transaction.




***The
      sale of a substantial number of shares of our common stock could cause the
      market price of our common stock to decline and may impair the combined
      company’s ability to raise capital through additional offerings.***




We
      currently have outstanding warrants to purchase an aggregate of 12,591,455
      shares of our common stock, including warrants to purchase 10,960,400 shares
      of
      out common stock issued together with 10,960,400 shares of common stock all
      of
      which such warrants and common stock were issued in connection with a private
      equity financing completed in April 2006. The shares issued in the private
      placement financing, together with the shares underlying the warrants issued
      in
      such financing, represent approximately 37.8% of the total number of shares
      of
      our common stock outstanding immediately prior to the financing, and not
      including shares issued in the merger with HaptoGuard.




Sales
      of
      these shares in the public market, or the perception that future sales of these
      shares could occur, could have the effect of lowering the market price of our
      common stock below current levels and make it more difficult for us and our
      shareholders to sell our equity securities in the future.




32




Our
      executive officers, directors and holders of more than 5% of our common stock
      and collectively beneficially own approximately 3.6% of the outstanding common
      stock as of June 30, 2006 and owned 31.5% subsequent to the merger completed
      July 21, 2006. In addition, approximately 23,435,778 shares of common stock
      issuable upon exercise of vested stock options could become available for
      immediate resale if such options were exercised.




Sale
      or
      the availability for sale, of shares of common stock by stockholders could
      cause
      the market price of our common stock to decline and could impair our ability
      to
      raise capital through an offering of additional equity securities.




***Anti-takeover
      provisions may frustrate attempts to replace our current management and
      discourage investors from buying our common stock.***




We
      have
      entered into a Stockholders’ Rights Agreement pursuant to which each holder of a
      share of common stock is granted a Right to purchase our Series F Preferred
      Stock under certain circumstances if a person or group acquires, or commences
      a
      tender offer for, 20 percent of our outstanding common stock. We also have
      severance obligations to certain employees in the event of termination of their
      employment after or in connection with a change in control of the Company. 
In addition, the Board of Directors has the authority, without further action
      by
      the stockholders, to fix the rights and preferences of, and issue shares of,
      Preferred Stock. The staggered board terms, Fair Price Provision, Stockholders’
Rights Agreement, severance arrangements, Preferred Stock provisions and
      other provisions of our charter and Delaware corporate law may discourage
      certain types of transactions involving an actual or potential change in
      control.





**ITEM
      4.**  **Submission
      of Matters to a Vote of Security-Holders**





The
      Annual Meeting of Stockholders of Alteon Inc. (the “Meeting”) was held on July
      19, 2006. The following matters were voted upon at the Meeting: (i) the approval
      of the merger, the Agreement and Plan of Merger, dated as of April 19, 2006,
      by
      and among Alteon Inc., HaptoGuard Inc., Alteon Merger Sub. Inc., and Genentech
      Inc., and the related transactions contemplated thereby, (ii) a proposal to
      amend Alteon’s Certificate of Designation of Series G Preferred Stock, to change
      the written notice requirements to Alteon for conversion of the preferred stock
      in order to allow for the conversion pursuant to the merger agreement, (iii)
      a
      proposal to amend Alteon’s Certificate of Designation of Series H Preferred
      Stock, to change the written notice requirements to Alteon for conversion of
      the
      preferred stock in order to allow for the conversion pursuant to the merger
      agreement, (iv) the election of two directors, (v) a proposal to amend Alteon’s
      2005 Stock Plan in order to reserve an additional 5,000,000 shares of common
      stock for issuance thereunder, and (vi) the ratification of the appointment
      of
      J.H. Cohn LLP as independent public accountants for the fiscal year ending
      December 31, 2006.





(i)  The
      number of votes cast for, against and abstaining from the proposal to approve the
      merger, the Agreement and Plan of Merger, dated as of April 19, 2006, by and
      among Alteon Inc., HaptoGuard Inc., Alteon Merger Sub. Inc., and Genentech
      Inc.,
      and the issuance of shares, and the transfer and conversion of shares
      contemplated thereby were as follows:





Votes
                For
            
            Votes
                Against
            
            Abstentions
            
            Broker
                Non-Votes37,056,365
            
            1,433,576
            
            313,464
            
            23,776,209





(ii)  The
      number of votes cast for, against and abstaining from the proposal to amend
      Alteon’s Certificate of Designation of Series G Preferred Stock, to change the
      written notice requirements to Alteon for conversion of the preferred stock
      in
      order to allow for the conversion pursuant to the merger agreement, were as
      follows:





Votes
                For
            
            Votes
                Against
            
            Abstentions
            
            Broker
                Non-Votes36,273,602
            
            2,133,311
            
            396,492
            
            23,776,209





(iii)  The
      number of votes cast for, against and abstaining from the proposal to amend
      Alteon’s Certificate of Designation of Series H Preferred Stock, to change the
      written notice requirements to Alteon for conversion of the preferred stock
      in
      order to allow for the conversion pursuant to the merger agreement, were as
      follows:





Votes
                For
            
            Votes
                Against
            
            Abstentions
            
            Broker
                Non-Votes36,272,996
            
            2,146,028
            
            384,381
            
            23,776,209




33




(iv)  The
      following table sets forth the names of the nominees who were elected to serve
      as directors and the number of votes cast for or withheld from the election
      of
      such nominee:





Name
            
            Votes
                For
            
            Votes
                WithheldDavid
                K. McCurdy
            
            56,526,157
            
            6,053,457Mark
                Novitch, M.D.
            
            56,482,157
            
            6,097,457





The
      others directors of the Company whose terms continued after the Meeting are
      Dr.
      Edwin Bransome, Jr., Marilyn G. Breslow, Alan J. Dalby, Kenneth I. Moch, Thomas
      A. Moore, Dr. George Naimark. However, pursuant to the terms of the merger
      agreement, Drs. Bransome and Novitch and Messrs. McCurdy and Dalby have since
      resigned their positions as members of the board of directors.





(v)  The
      number of votes cast for, against and abstaining from the proposal for the
      approval to amend Alteon’s 2005 Stock Plan in order to reserve an additional
      5,000,000 shares of common stock for issuance were as follows:





Votes
                For
            
            Votes
                Against
            
            Abstentions
            
            Broker
                Non-Votes29,219,280
            
            9,227,556
            
            356,569
            
            23,776,209





(vi)  The
      number of votes cast for, against and abstaining from the ratification of the
      appointment of J.H. Cohn LLP as our independent registered public accounting
      firm for the fiscal year ending December 31, 2006, were as follows:





Votes
                For
            
            Votes
                Against
            
            Abstentions60,881,049
            
            1,393,331
            
            305,234




**ITEM
      6.** **Exhibits.**





Exhibits





See
      the
“Exhibit Index” on page 33 for exhibits required to be filed with this Quarterly
      Report on Form 10-Q.





34




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Report to be signed on its behalf by the undersigned thereunto
      duly authorized.




Date: August 14, 2006**ALTEON INC.**By:
                /s/Noah
                Berkowitz
              Noah
                Berkowitz, M.D., Ph.D.
              President
                and Chief Executive Officer
              (principal
                executive officer)By:
                /s/ Jeffrey P. Stein
              Jeffrey
                P. Stein, CPA
              (acting
                principal financial and accounting
                officer)








35




**EXHIBIT
      INDEX**




Exhibit  
                No.
            
            Description
              of Exhibit10.1
            
            Exclusive
              License and Supply Agreement dated as of September 28, 2004, as amended,
              by and between Oxis International and HaptoGuard, Inc.31.1
            
            Certification
              Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            
            Certification
              Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            
            Certification
              Pursuant to Section 906 of the Sarbanes-Oxley Act of
              2002.







36