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** **September
      30, 2006**





OR





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




**For
              the transition period from**
            
            **to**





Commission
      file number 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 former fiscal
                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 o  Accelerated filer
      o 
Non-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
      November 7, 2006, 129,318,858 shares of the registrant’s Common Stock were
      outstanding.




1




**ALTEON
      INC.**





**INDEX**





Page


PART I - FINANCIAL INFORMATIONItem 1.
            Condensed Consolidated Financial Statements
                (Unaudited)Condensed Consolidated Balance Sheets
              as of
              September 30, 2006and December 31, 2005
            3Condensed Consolidated Statements of
              Operations for the three and nine monthsended September 30, 2006 and 2005
            4Condensed Consolidated Statement of
              Changes
              in Stockholders’ Equityfor the nine
                months ended September 30, 2006
            5Condensed Consolidated Statements of
              Cash
              Flows for the nine monthsended September 30, 2006 and 2005
            6Notes to Condensed Consolidated Financial
                Statements
            7Item 2.
            Management’s Discussion and Analysis
              ofFinancial Condition and Results of
                Operations
            15Item 3.
            Qualitative and Quantitative Disclosures about
                Market
                Risk
            20Item 4.
            Controls and Procedures
            20PART II - OTHER INFORMATIONItem 1A.
            Risk Factors
            22Item 6.
            Exhibits
            37SIGNATURES
            
            38INDEX TO EXHIBITS
            39




2





**PART
      I - FINANCIAL INFORMATION**





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


**ALTEON
                  INC.****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**(Unaudited)
 **September
                    30,**
                
                **December
                    31,****2006**
                
                **2005****ASSETS****Current
                    Assets:**Cash
                    and cash equivalents
                
                $
                2,308,323
                
                $
                6,582,958Other
                    current assets
                
                
                402,705
                
                
                216,290Total
                    current assets
                
                
                2,711,028
                
                
                6,799,248Property
                    and equipment, net
                
                
                21,671
                
                
                55,154Restricted
                    cash
                
                
                150,000
                
                
                150,000Other
                    assets
                
                
                529,264
                
                
                129,195Total
                    assets
                
                $
                3,411,963
                
                $
                7,133,597**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    Liabilities:**Accounts
                    payable
                
                $
                806,060
                
                $
                351,232Accrued
                    expenses
                
                
                461,663
                
                
                790,705Total
                    current liabilities
                
                
                1,267,723
                
                
                1,141,937**Stockholders'
                    Equity:**Preferred
                    stock, $.01 par value; 1,993,329 shares authorized,0
                    shares issued and outstanding at September 30, 2006 and1,389
                    shares of Series G Preferred Stock, and 4,172 shares ofof
                    Series H Preferred Stock issued and outstandingat
                    December 31, 2005
                
                
                -
                
                
                56Common
                    stock, $.01 par value; 300,000,000 sharesauthorized
                    and 129,318,858 and 57,996,711 shares issuedand
                    outstanding, as of September 30, 2006 and December 31,2005
                
                
                1,293,189
                
                
                579,967Additional
                    paid-in capital
                
                
                243,057,880
                
                
                228,225,082Accumulated
                    deficit
                
                
                (242,206,829
                )
                
                (222,813,445
                )Total
                    stockholders' equity
                
                
                2,144,240
                
                
                5,991,660Total
                    liabilities and stockholders' equity
                
                $
                3,411,963
                
                $
                7,133,597




See
      accompanying notes to unaudited condensed consolidated financial
      statements.




3




**ALTEON
                  INC.****CONDENSED
                  CONSOLIDATED STATEMENTS OPERATIONS**(Unaudited)
  **Three
                    Months Ended**
                  **September
                    30,**
                ****
                **Nine
                    Months Ended**
                  **September
                    30,**
                ********
                ****
                ****
                ****
                ****
                ****
                ****
                ****
                ****
                ********
                ****
                **2006**
                ****
                **2005**
                ****
                **2006**
                ****
                **2005**Revenues:Investment
                    income
                
                $
                38,560
                
                $
                87,235
                
                $
                165,122
                
                $
                286,789Other
                    income
                
                
                —
                
                
                —
                
                
                50,000
                
                
                100,000Total
                    income
                
                $
                38,560
                
                $
                87,235
                
                $
                215,122
                
                $
                386,789Expenses:Research
                    and development
                
                
                635,126
                
                
                1,981,136
                
                
                1,579,902
                
                
                8,115,615In-process
                    research and development
                
                
                11,379,348
                
                
                —
                
                
                11,379,348
                
                
                —General
                    and administrative
                
                
                2,100,282
                
                
                1,062,503
                
                
                3,996,577
                
                
                3,245,946Total
                    expenses
                
                
                14,114,756
                
                
                3,043,639
                
                
                16,955,827
                
                
                11,361,561Net
                    loss
                
                $
                (14,076,196
                )
                $
                (2,956,404
                )
                $
                (16,740,705
                )
                $
                (10,974,772
                )Preferred
                    stock dividends
                
                
                283,608
                
                
                1,142,016
                
                
                2,652,679
                
                
                3,319,787Net
                    loss applicable to common shares
                
                $
                (14,359,804
                )
                $
                (4,098,420
                )
                $
                (19,393,384
                )
                $
                (14,294,559
                )Net
                    loss per common share:Basic
                    and diluted
                
                $
                (0.13
                )
                $
                (0.07
                )
                $
                (0.25
                )
                $
                (0.25
                )Weighted
                    average common shares outstanding:Basic
                    and diluted
                
                
                110,638,065
                
                
                57,996,711
                
                
                78,667,458
                
                
                57,518,794




See
      accompanying notes to unaudited condensed consolidated financial
      statements.




4




**ALTEON
      INC.**




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


**(Unaudited)**




Additional
                    
                    
                    
                    TotalPreferred
                        Stock
                    
                    Common
                        Stock
                    
                    Paid-in
                    
                    Accumulated
                    
                    Stockholders'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
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (16,740,705
                    )
                    
                    (16,740,705
                    )Private
                        placement of common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    10,960,400
                    
                    
                    109,604
                    
                    
                    2,366,402
                    
                    
                    -
                    
                    
                    2,476,006Issuance
                        of Series G and H preferredstock
                        dividends
                    
                    
                    238
                    
                    
                    2
                    
                    
                    -
                    
                    
                    -
                    
                    
                    2,652,677
                    
                    
                    (2,652,679
                    )
                    
                    -Common
                        stock issued inconnection
                        with the merger
                    
                    
                    -
                    
                    
                    -
                    
                    
                    37,399,065
                    
                    
                    373,991
                    
                    
                    8,426,009
                    
                    
                    -
                    
                    
                    8,800,000Preferred
                        stock converted to commonstock
                        as a result of the merger
                    
                    
                    (5,799
                    )
                    
                    (58
                    )
                    
                    13,492,349
                    
                    
                    134,923
                    
                    
                    (134,865
                    )
                    
                    -
                    
                    
                    -Assumption
                        of HaptoGuardvested
                        stock options
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    235,000
                    
                    
                    -
                    
                    
                    235,000Private
                        placement of common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    9,470,333
                    
                    
                    94,704
                    
                    
                    1,235,316
                    
                    
                    -
                    
                    
                    1,330,020Stock-based
                        compensation
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    34,652
                    
                    
                    -
                    
                    
                    34,652Options
                        issued for consulting services
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    7,666
                    
                    
                    -
                    
                    
                    7,666Compensation
                        costs related torestricted
                        stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    9,941
                    
                    
                    -
                    
                    
                    9,941Balance,
                        September 30, 2006
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    129,318,858
                    
                    $
                    1,293,189
                    
                    $
                    243,057,880
                    
                    $
                    (242,206,829
                    )
                    $
                    2,144,240


See
      accompanying notes to unaudited condensed consolidated financial
      statements.




5




**ALTEON
      INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**







**Nine
                    Months Ended **September
                    30,******2006**
                
                **2005**Cash
                    Flows from Operating Activities:Net
                    loss
                
                $
                (16,740,705
                )
                $
                (10,974,772
                )Adjustments
                    to reconcile net loss to cashused
                    in operating activities:Stock-based
                    compensation
                
                
                34,652
                
                
                28,300Options
                    issued for consulting services
                
                
                7,666
                
                
                -Compensation
                    costs related to restricted stock
                
                
                9,941
                
                
                -In-process
                    research and development
                
                
                11,379,348
                
                
                -Depreciation
                    and amortization
                
                
                37,945
                
                
                49,497Changes
                    in operating assets and liabilities, net of acquisition:Other
                    current assets
                
                
                (496,576
                )
                
                (297,500
                )Other
                    assets
                
                
                (529,264
                )
                
                -Accounts
                    payable and accrued expenses
                
                
                (161,739
                )
                
                (1,316,708
                )Net
                    cash used in operating activities
                
                
                (6,458,732
                )
                
                (12,511,183
                )Cash
                    Flows from Investing Activities:Capital
                    expenditures
                
                
                -
                
                
                (13,108
                )Acquisition
                    costs, net of cash acquired
                
                
                (1,621,929
                )
                
                -Net
                    cash used in investing activities
                
                
                (1,621,929
                )
                
                (13,108
                )Cash
                    Flows from Financing Activities:Net
                    proceeds from issuance of common stock
                
                
                3,806,026
                
                
                9,532,295Net
                    cash provided by financing activities
                
                
                3,806,026
                
                
                9,532,295Net
                    decrease in cash and cash equivalents
                
                
                (4,274,635
                )
                
                (2,991,996
                )Cash
                    and cash equivalents, beginning of period
                
                
                6,582,958
                
                
                11,175,762Cash
                    and cash equivalents, end of period
                
                $
                2,308,323
                
                $
                8,183,766Supplemental
                    disclosure of non-cash investing and financingactivities:Common
                    stock and other equity consideration issued asa
                    result of the merger
                
                $
                9,035,058
                
                $
                -


See
      accompanying notes to unaudited condensed consolidated financial
      statements.




6




**ALTEON
      INC.**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**Note
        1 - Significant Accounting Policies**
 
 Basis
        of Presentation
 
 The
        accompanying unaudited condensed consolidated
        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 nine months ended September 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, the Company’s Proxy Statement on Schedule 14A
        dated June 22, 2006, and the Company’s Current Report on Form 8-K/A dated
        September 5, 2006 as filed with the Securities and Exchange
        Commission.
 
 Principles
        of Consolidation
 
 The
        condensed consolidated financial statements include the accounts of Alteon
        Inc.
        and its wholly-owned subsidiary, HaptoGuard, Inc. (from July 21, 2006, date
        of
        acquisition), collectively the “Company”. All intercompany balances and
        transactions have been eliminated in consolidation.


**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 $ 242,206,829
      as of September 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
      September 30, 2006, the Company had working capital of $1,443,305, including
      $2,308,323 of cash and cash equivalents. The Company’s net cash used in
      operating activities was $6,458,732 for the nine months ended September 30,
      2006, $12,511,183 for the nine months ended September 30, 2005, and $14,032,796
      for the year ended December 31, 2005.





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 was accounted
      for in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
      141, “Business Combinations”. (See Note 6 - Merger with
      HaptoGuard).





As
      a
      result of the merger with HaptoGuard, which closed on July 21, 2006, the Company
      was 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 $1,758,928 through September 30, 2006, in connection with
      the merger.





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
      2006.





7




The
      amount and timing of the Company’s future capital requirements will depend on
      numerous factors, including the timing and extent of resuming its research
      and
      development programs, the number and characteristics of product candidates
      that
      it pursues, 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 the Company’s capital requirements may have the effect of
      materially diluting the current holders of its outstanding stock. The Company
      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 has
      significantly curtailed its research and development programs, until additional
      financing is obtained, if ever. 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 the Company 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.





**Note
      3 – 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
      September 30, 2006 and 2005, was 33,172,066 and 188,203,378 shares,
      respectively. (See Note 6 - Merger with HaptoGuard).





**Note
      4 – Stock-Based Compensation**





The
      Company has stockholder-approved stock incentive plans for employees, directors,
      officers and consultants. Prior to January 1, 2006, the Company accounted for
      the employee, director and officer plans using the intrinsic value method under
      the recognition and measurement provisions of Accounting Principles Board
      (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and
      related interpretations, as permitted by Statement of Financial Accounting
      Standards (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based
      Compensation.”





Effective
      January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
      transition method. Statement 123(R) revised Statement 123 to eliminate the
      option to use the intrinsic value method and required the Company to expense
      the
      fair value of all employee options over the vesting period. Under the modified
      prospective transition method, the Company recognized compensation cost for
      the
      three- and nine-month periods ending September 30, 2006 which includes
      compensation cost related to share-based payments granted on or after January
      1,
      2006, based on the grant date fair value estimated in accordance with Statement
      123(R). In accordance with the modified prospective method, the Company has
      not
      restated prior period results.





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. As such there
      was
      no compensation recognized under Statement 123(R) related to options granted
      prior to January 1, 2006.





Options
      granted to consultants and other non-employees are accounted for in accordance
      with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
      than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services."  Accordingly, such options are recorded at fair value at the
      date of grant and subsequently adjusted to fair value at the end of each
      reporting period until such options vest, and the fair value of the
      options, as adjusted, is charged to consulting expense over the related
      vesting period.  For the three- and nine-month periods ended September 30,
      2006, the Company recognized research and development consulting expenses of
      $7,666.





8




The
      Company recognized compensation cost of $9,941, which was recorded as general
      and administrative expense for the three- and nine-month periods ended September
      30, 2006 as a result of the granting of 960,000 shares of restricted
      stock.





A
      summary
      of the status of the Company’s nonvested shares as of September 30, 2006 and
      changes during the nine months ended September 30, 2006, is presented
      below:





**Nonvested
                  Shares**
              
              **Shares**
              
              **Weighted
                  average grant date fair value**Nonvested
                  at January 1,
                  2006
              
              
              —
              
              $
              —Granted
              
              
              960,000
              
              $
              0.15Vested
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —Nonvested
                  at September
                  30, 2006
              
              
              960,000
              
              $
              0.15


As
      of
      September 30, 2006, there was $134,059 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted. That cost
      is
      expected to be recognized over a weighted-average period of 2.94 years. The
      total fair value of shares vested during the nine months ended September 30,
      2006 was $0.





For
      the
      three- and nine-month periods ended September 30, 2006, the Company recognized
      share-based employee compensation cost of $34,652 in accordance with Statement
      123(R), which was recorded as general and administrative expense. This expense
      related to the granting of stock options to employees, directors and officers
      on
      or after January 1, 2006. None of this expense resulted from the grants of
      stock
      options prior to January 1, 2006. The Company recognized compensation expense
      related to these stock options, taking into consideration a forfeiture rate
      of
      ten percent based on historical experience, on a straight line basis over the
      vesting period. The Company did not capitalize any share-based compensation
      cost.





As
      a
      result of adopting Statement 123(R), net losses for the three- and nine-month
      periods ended September 30, 2006 were greater than if the Company had continued
      to account for share-based compensation under APB 25 by $34,652. The effect
      of
      adopting Statement 123(R) on basic and diluted earnings per share for the three-
      and nine-month periods ended September 30, 2006 was immaterial.





As
      of
      September 30, 2006, the total compensation cost related to non-vested option
      awards not yet recognized is $154,145. The weighted average period over which
      it
      is expected to be recognized is approximately 1.06 years.





The
      net
      loss for the three- and nine-month periods ended September 30, 2005 does not
      include any compensation charges related to options granted to employees. The
      following table illustrates the pro forma effect on net loss and loss per share
      assuming the Company had applied the fair value recognition provisions of SFAS
      No. 123 instead of the intrinsic value method under APB 25 to stock-based
      employee compensation:





9







**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2005**
            
            **2005**Net
                loss applicable to common shares, as reported
            
            $
            (2,956,404
            )
            $
            (10,974,772
            )Deduct: 
                Total stock-based employee and director
                compensation expense
              determined
                under fair value method
            
            
            (231,914
            )
            
            (943,493
            )Net
                loss, pro forma
            
            
            (3,188,318
            )
            
            (11,918,265
            )Preferred
                stock dividends
            
            
            (1,142,016
            )
            
            (3,319,787
            )Net
                loss applicable to common shares, pro forma
            
            $
            (4,330,334
            )
            $
            (15,238,052
            )Net
                loss per common share – basic and dilutedAs
                reported
            
            $
            (0.07
            )
            $
            (0.25
            )Pro
                forma
            
            $
            (0.07
            )
            $
            (0.26
            )






As
      noted
      above, the Company has shareholder-approved stock incentive plans for employees
      under which it has granted non-qualified and incentive stock options. Options
      granted under these plans must be at a price per share not less than the fair
      market value per share of common stock on the date the option is granted. The
      options generally vest over a four-year period and expire ten years from the
      date of grant.





In
      March
      2005, the Company’s Board of Directors approved the adoption of the Alteon Inc.
      2005 Stock Plan, (the “2005 Stock Plan”). Upon shareholder approval of the 2005
      Stock Plan at the Company’s 2005 annual meeting of stockholders, the two
      existing stock option plans were terminated. However, between the three plans,
      9,630,078 stock options remain outstanding. The 2005 Stock Plan provided for
      options to purchase up to 5,000,000 shares of the Company’s common stock. On
      July 19, 2006, the Company’s stockholders approved an amendment to the 2005
      Stock Plan which was previously approved by the Company’s Board of Directors,
      providing for an increase in the number of shares available under the 2005
      Stock
      Plan from 5,000,000 shares to 10,000,000 shares, an increase of 5,000,000
      shares. The options have a maximum term of ten years and vest over a period
      to
      be determined by the Company’s Board of Directors (generally over a four-year
      period) and are issued at an exercise price equal to the fair market value
      of
      the shares at the date of grant. The 2005 Stock Plan expires on April 19, 2015
      or may be terminated at an earlier date by vote of the shareholders or the
      Board
      of Directors of the Company. Under the 2005 Stock Plan, the Company granted
      directors options to purchase an aggregate of 520,000 shares of common stock
      at
      an exercise price of $0.15 in the third quarter of 2006. In addition, under
      the
      2005 Stock Plan, the Company assumed options related to HaptoGuard option
      holders (see Note 6 - Merger with HaptoGuard) in the amount of 2,816,800 shares
      of common stock at an exercise price of $0.16 in the third quarter of 2006.





The
      Company estimated the fair value of each option award on the date of grant
      using
      the Black-Scholes model. The Company based expected volatility on historical
      volatility. The expected term of options granted represents the period of time
      that options granted are expected to be outstanding. The Company estimated
      the
      expected term of stock options using historical exercise and employee forfeiture
      experience.





The
      following table shows the weighted average assumptions the Company used to
      develop the fair value estimates for the determination of the compensation
      charges in 2006:




10




Three
                months ended
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Expected
                volatility
            
            
            139
            %
            
            150
            %
            
            139
            %
            
            150
            %Dividend
                yield
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expected
                term (in years)
            
            
            6.11
            
            
            5
            
            
            6.11
            
            
            5Risk-free
                interest rate
            
            
            4.50
            %
            
            3.40
            %
            
            4.50
            %
            
            3.40
            %







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






**Shares**
              
              **Weighted
                  average exercise price**
              
              **Weighted
                  Average Remaining Contractual Term (years)**
              
              **Aggregate
                  Intrinsic Value**Outstanding
                    atDecember
                    31, 2005
              
              
              6,486,665
              
              $
              2.12Granted/assumed
              
              
              3,336,800
              
              
              0.16Exercised
              
              
              —
              
              
              —Cancelled
              
              
              (193,387
              )
              
              4.20Outstanding
                    atSeptember
                    30, 2006
              
              
              9,630,078
              
              $
              1.40
              
              
              6.27
              
              $
              105,304Options
                    exercisable atSeptember
                    30, 2006
              
              
              8,092,800
              
              $
              1.64
              
              
              5.78
              
              $
              53,989Weighted-average
                  fair
                  value of options granted
                  during the nine
                  months ended September 30, 3006
              
              $
              0.14




**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
      10,960,400 shares of Company common stock and warrants to purchase 10,960,400
      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.





11




Prior
      to
      the merger with HaptoGuard, 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 September 30, 2006 and 2005, preferred
      stock dividends of $283,608 and $1,142,016, respectively, were recorded. As
      of
      September 30, 2006, the Series G and Series H Preferred Stock had been cancelled
      or converted into common stock as a result of the merger. The Series G and
      Series H Preferred Stock had no voting rights. (See
      Note
      6 - Merger with HaptoGuard).





As
      a
      result of the July 21, 2006 merger with HaptoGuard, the Company issued
      37,399,065 shares of common stock to the shareholders of HaptoGuard. In
      addition, the Company issued 13,492,349 shares of common stock to Genentech
      upon
      conversion of the preferred stock described above as a result of the merger.
      (See Note 6 - Merger with HaptoGuard).





On
      September 13, 2006, the Company completed a private placement of Units,
      consisting of common stock and warrants, for net proceeds, after expenses and
      fees, of approximately $1.3 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 9,470,333 shares of Company common stock and
      warrants to purchase 9,470,333 shares of Company common stock. In addition,
      the
      Company issued a warrant to purchase 520,200 shares of Company common stock
      to
      the placement agent. 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
      Units
      were sold at a price of $0.15 per Unit, and the warrants are exercisable for
      a
      period of five years, commencing six months from the date of issuance, at an
      exercise price of $0.1875 per share. Rodman & Renshaw, LLC served as
      placement agent in the transaction and received a 6% placement fee on 8,670,000
      of the shares issued, which was paid in cash and warrants. On October 20, 2006,
      the Company paid an aggregate of $28,411 as a penalty to the investors of the
      September 13, 2006 private placement as a result of the Company’s failure to
      timely file a registration statement covering the resale of such Units pursuant
      to a certain Registration Rights Agreement dated as of September 13, 2006.
      This
      Registration Rights Agreement specifies in certain instances a cash penalty
      of
      2% of the gross amount of the financing for each month the Company is out of
      compliance. This is subject to an overall limit of 18%, or $255,699. These
      instances include failure to file a registration statement within 30 days of
      the
      date of the Registration Rights Agreement, failure to achieve an effective
      registration within 90 days of the date of the Registration Rights Agreement
      (120 days in the case of a full review by the Securities and Exchange
      Commission), and failure to maintain an effective registration for more than
      15
      consecutive calendar days or more than an aggregate of 25 calendar days during
      any 12-month period.




**Note
      6 – Merger with HaptoGuard**





On
      April 19, 2006, the Company (“Alteon”), entered into a definitive Agreement
      and Plan of Merger (the “Merger Agreement”) with Alteon Merger Sub, Inc., a
      Delaware corporation and wholly-owned subsidiary of Alteon (“Merger Sub”),
      HaptoGuard, Inc., a Delaware corporation (“HaptoGuard”), and Genentech, Inc., a
      Delaware corporation (“Genentech”). The Merger Agreement provided that upon the
      terms and subject to the conditions set forth in the Merger Agreement, Merger
      Sub merge with and into HaptoGuard, with HaptoGuard becoming the surviving
      corporation (the “Surviving Corporation”) and a wholly-owned subsidiary of
      Alteon (the “Merger”). On July 19, 2006, Alteon’s ’s shareholders approved the
      Merger and on July 21, 2006, the Merger was completed.





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.  As
      an
      additional part of the  merger,
      a
      portion of existing shares of Alteon preferred stock held by Genentech, Inc.
      was
      converted into 13,492,349
      shares of Alteon common stock.





12




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.





The
      acquisition of HaptoGuard has been accounted for by the Company under the
      purchase method of accounting in accordance with Statement of Financial
      Accounting Standards No. 141, “Business Combinations”. Under the purchase
      method, assets acquired and liabilities assumed by the Company are recorded
      at
      their estimated fair values and the results of operations of the acquired
      company are consolidated with those of the Company from the date of
      acquisition.





On
      July
      21, 2006, the Company assumed the obligations of HaptoGuard under an employment
      agreement between HaptoGuard and Dr. Noah Berkowitz dated March 1, 2005.
      Under the terms of the agreement, Dr. Berkowitz serves as President and Chief
      Executive Officer of the Company and performs such other executive and
      administrative duties as he may reasonably be expected to be capable of
      performing on behalf of the Company as may from time to time be authorized
      or
      directed by the Company’s Board of Directors. Dr. Berkowitz’s employment by the
      Company is at-will and not for any specified period and may be terminated at
      any
      time, with or without cause by either Dr. Berkowitz or the Company.





The
      Company will pay Dr. Berkowitz an annual base salary of $240,000 . Dr. Berkowitz
      will also be granted an annual cash bonus of up to 30% of his base salary for
      that year based on the achievement of certain milestones. Subject to the
      approval by the Board of Directors, the Company shall grant Dr. Berkowitz an
      option to purchase common stock of the Company on at least an annual basis.
      The
      options shall vest monthly over a period of three years.   In addition, the
      agreement provides for severance payments to Dr. Berkowitz in the event he
      is
      terminated for disability, cause, or he leaves the Company for good reason,
      each
      as more specifically set forth in the agreement.




The
      excess purchase price paid by the Company to acquire the net assets of
      HaptoGuard was allocated to acquired in-process research and development
      totaling $11,379,348. As required by FASB Interpretation No. 4, “Applicability
      of FASB Statement No. 2 to Business combinations Accounted for by the Purchase
      Method (“FIN4”), the Company recorded a charge in its statements of
      operations for the nine months ended September 30, 2006 for the in-process
      research and development. 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. Results of operations of HaptoGuard are included
      in the condensed consolidated financial statements since July 21,
      2006.




A
      summary
      of the allocation of the purchase price, including acquisition costs of
      $1,758,928 is as follows:







Assets
                  purchased:Cash
              
              $
              5,314Prepaid
                  expenses and other current assets
              
              
              25,839Property
                  and equipment
              
              
              4,462Other
                  assets
              
              
              2,490Acquired
                  in-process research and development
              
              
              11,379,348Total
              
              
              11,417,453


13





Liabilities
                  assumed:Accounts
                  payable and accrued expenses
              
              
              623,467Net
                  purchase price
              
              $
              10,793,986Common
                  stock and other equity consideration issued
              
              
              9,035,058Acquisition costs
                  incurred
              
              $
              1,758,928





The
      following unaudited pro forma financial information presents the condensed
      consolidated 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 unaudited pro forma information
      does not necessarily reflect the results of operations that would have occurred
      had the entities been a single company during these periods.




**Three
                  months ended**
              
              **Nine
                  months
                  ended****September
                  30,**
              
              **September
                  30,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Net
                  loss
              
              $
              (2,696,848
              )
              $
              (3,299,415
              )
              $
              (6,417,150
              )
              $
              (23,667,550
              )Weighted
                  average number of common shares outstanding
              
              
              121,701,416
              
              
              108,888,125
              
              
              116,136,960
              
              
              108,410,208Loss
                  per common share - basic and fully diluted
              
              $
              (0.02
              )
              $
              (0.03
              )
              $
              (0.06
              )
              $
              (0.22
              )


The
      nine-month period ended September 30, 2005 includes a one-time non-recurring
      acquired in-process research and development charge of $11,379,348.




14


**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.





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 lead products in clinical development:




·
            ALT-2074,
                formerly HaptoGuard’s licensed lead compound BXT-51072, is a glutathione
                peroxidase mimetic in clinical development for reducing the morbidity
                and
                mortality of patients with diabetes following a myocardial infarction.
                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 was slowed in the current quarter
                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 diastolic
                heart failure (“DHF”). The most recent data on alagebrium from one Phase 2
                clinical study presented 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 this study, 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
            We 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 first quarter of 2007.




o
            Additionally, we
                have 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 our 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 we are allowed to initiate the
                study at our 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% 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.






15




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.





We
      had
      been evaluating potential preclinical and clinical studies in other therapeutic
      indications in which alagebrium may address significant unmet needs. During
      the
      period ended September 30, 2006 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 $242,206,829 as of September 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
      preclinical 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.





16




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




**Results
      of Operations**




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





Total
      revenues for the three months ended September 30, 2006 and 2005, were
      $ 38,560
      and $87,235, 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.





Our
      total
      expenses were $14,114,756 for the three months ended September 30, 2006,
      compared to $3,043,639 for the three months ended September 30, 2005. The
      increase was primarily a result of an in-process research and development charge
      of $11,379,348 in the third quarter of 2006 as a result of the merger with
      HaptoGuard. In addition, general and administrative expenses increased by
      $1,037,779 over the prior year. Partially offsetting the increase in total
      expenses was a decrease in research and development expenses of $1,346,010
      from
      the prior year.





Research
      and development expenses were $635,126 for the three months ended September
      30,
      2006, as compared to $1,981,136 for the same period in 2005, a decrease of
      $1,346,010, or 68%. This decrease was attributed to decreased pre-clinical
      and
      clinical trial costs as well as a reduction in research and development
      personnel and personnel related costs. In 2006, of the total amount spent on
      research and development expenses, we incurred $123,341 in personnel and
      personnel-related expenses, $49,799 in product liability insurance and $129,855
      in third-party consulting. In 2005, we incurred $893,333 in personnel and
      personnel-related expenses, $472,276 in preclinical expenses, $220,934 in
      clinical trial expense and $88,061 related to manufacturing (packaging and
      distribution). Research and development expenses normally include third-party
      expenses associated with preclinical and clinical studies, manufacturing costs,
      including the development and preparation of clinical supplies, personnel and
      personnel-related expenses and facility expenses.





General
      and administrative expenses were $2,100,282 for the three months ended September
      30, 2006, as compared to $1,062,503 for the same period in 2005. The increase
      for 2006 is in large part a result of severance costs of $1,230,702 in the
      three
      months ended September 30, 2006 which we did not have in the prior year. This
      increase is partially offset by a decrease in normal personnel costs of $247,782
      over the prior year.





Our
      net
      loss applicable to common shares was $14,359,804 for the three months ended
      September 30, 2006, compared to $4,098,420 in the same period in 2005, an
      increase of 250%. This increase was primarily a result of an in-process research
      and development charge of $11,379,348 as a result of the merger with HaptoGuard.
      This increase was partially offset by the fact that preferred stock dividends
      of
      $1,142,016 were paid in the three months ended September 30, 2005 as compared
      with $283,608 in the three months ended September 30, 2006, as a result of
      the
      merger.





**Nine
      Months ended September 30, 2006 and 2005**





Total
      revenues for the nine months ended September 30, 2006 and 2005, were
      $ 215,122
      and $386,789, 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 $16,955,827 for the nine months ended September 30, 2006, as
      compared to $11,361,561 for the nine months ended September 30, 2005. The
      increase was primarily a result of an in-process research and development charge
      of $11,379,348 in the third quarter of 2006 as a result of the merger with
      HaptoGuard. In addition, general and administrative expenses increased by
      $750,631 from the prior year. Offsetting the increase was a decrease in research
      and development expenses of $6,535,713.





Research
      and development expenses were $1,579,902 for the nine months ended September
      30,
      2006, as compared to $8,115,615 for the same period in 2005, a decrease of
      $6,535,713, or 81%. 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 $471,742 in personnel and personnel-related expenses, $214,229 in
      product liability insurance and $360,287 in third party consulting. In 2005,
      we
      incurred $ 3,087,654 in
      personnel and personnel-related expenses, $2,217,790 in clinical trial expenses
      primarily related to SPECTRA, $1,307,373 in preclinical expenses, $541,657
      related to manufacturing (packaging and on-going stability studies), $353,076
      in
      third-party consulting fees and $281,664 of facility and other overhead related
      costs. Research and development expenses normally include third-party expenses
      associated with preclinical and clinical studies, manufacturing costs, including
      the development and preparation of clinical supplies, personnel and
      personnel-related expenses and facility expenses.




17
 
  **ITEM
                  2.**
                ******Management's
                    Discussion and Analysis of Financial Condition** **and
                    Results of Operations –
Continued.**


General
      and administrative expenses were $3,996,577 for the nine months ended September
      30, 2006, as compared to $3,245,946 for the same period in 2005. The increase
      for 2006 is in large part a result of severance costs of $1,616,809 in the
      nine
      months ended September 30, 2006 which we did not have in the prior year. This
      increase is partially offset by a decrease in normal personnel costs of $642,871
      over the prior year.





Our
      net
      loss applicable to common shares was $19,393,384 for the nine months ended
      September 30, 2006, as compared to $14,294,559 in the same period in 2005,
      an
      increase of 36%. This increase was primarily a result of an in-process research
      and development charge of $11,379,348 as a result of the merger with HaptoGuard.
      The increase is partially offset by a reduction of research and development
      expenses of $6,535,713. Included in the net loss applicable to common shares
      are
      preferred stock dividends of $2,652,679 and $3,319,787 for the nine months
      ended
      September 30, 2006 and 2005, respectively. The reduction of preferred stock
      dividends in the current period is a result of the fact that we have ceased
      paying these dividends subsequent to the merger with HaptoGuard.





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





We
      had
      cash and cash equivalents at September 30, 2006, of $2,308,323, as compared
      to
      $6,582,958 at December 31, 2005. The decrease is attributable to $6,458,732
      of net cash used in operating activities and $1,621,929 used in investing
      activities. At September 30, 2006 we had working capital of
      $1,443,305.





We
      are
      urgently continuing to pursue fund-raising possibilities through the sale of
      our
      equity securities. If we are unsuccessful in our 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, we will not have the
      ability to continue as a going concern after 2006. As a result of the merger
      with HaptoGuard, which closed on July 21, 2006, we were required to make payment
      of severance and insurance costs in the amount of approximately $2.0 million.
      In
      addition, we incurred transaction costs of approximately $1,759,000 in
      connection with the merger.





The
      amount and timing of our future capital requirements will depend on numerous
      factors, including the timing of resumption of 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. There can be no assurance that such funding will be available at
      all
      or on terms acceptable to us. We are in the process of significantly curtailing
      our research and development programs, until additional financing is obtained.
      If funds are obtained through arrangements with collaborative partners or
      others, we may be required to relinquish rights to certain of our technologies
      or product candidates and alter our plans for the development of our product
      candidates. If we are unable to obtain the necessary funding, we 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 our stockholders.





18
 
  **ITEM
                  2.**
                ******Management's
                    Discussion and Analysis of Financial Condition** **and
                    Results of Operations –
Continued.**


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, we entered into a definitive merger agreement pursuant to which we
      have 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
      -
      Merger with HaptoGuard).




In
      September 2006, we completed an equity financing that resulted in net proceeds
      to Alteon of approximately $1.3 million. On October 20, 2006, we paid an
      aggregate of $28,411 as a penalty to the investors of the September 13, 2006
      private placement as a result of the Company’s failure to timely file a
      registration statement covering the resale of such Units pursuant to a certain
      Registration Rights Agreement dated as of September 13, 2006. This Registration
      Rights Agreement specifies in certain instances a cash penalty of 2% of the
      gross amount of the financing for each month the Company is out of compliance.
      This is subject to an overall limit of 18%, or $255,699. These instances include
      failure to file a registration statement within 30 days of the date of the
      Registration Rights Agreement, failure to achieve an effective registration
      within 90 days of the date of the Registration Rights Agreement (120 days in
      the
      case of a full review by the Securities and Exchange Commission), and failure
      to
      maintain an effective registration for more than 15 consecutive calendar days
      or
      more than an aggregate of 25 calendar days during any 12-month period. (See
      Note
      5 - Stockholders’ Equity).




On
          October 13, 2006, we reported that we had received a notice from the staff
          (the
“Staff'') of the American Stock Exchange, Inc. (“AMEX'') indicating that we are
          not in compliance with certain AMEX continued listing standards set forth
          in
          Section 1003(a) of the AMEX Company Guide due to (i) sustaining losses
          from
          continuing operations and/or net losses in two out of our three most recent
          fiscal years with stockholders' equity below $2,000,000; (ii) sustaining
          losses
          from continuing operations and/or net losses in three out of our four
          most recent fiscal years with stockholders' equity below $4,000,000; and
          (iii)
          sustaining losses from continuing operations and/or net losses in our five
          most recent fiscal years with stockholders' equity below
          $6,000,000.
 
 We
          were
          afforded the opportunity to submit a plan of compliance (a “Plan'') to AMEX by
          November 8, 2006 advising AMEX of the action we have taken, or will take,
          that
          would bring us into compliance with all the continuing listing standards
          of the
          Company Guide by April 9, 2008. We submitted our plan to regain
          compliance to AMEX on November 7, 2006. If AMEX accepts the Plan, we will
          be able to continue our listing during the Plan period for up to seventeen
          months, during which time we will be subject to periodic review to determine
          whether it is making progress consistent with the Plan. If AMEX does not
          accept
          our Plan or if we do not make progress consistent with the Plan during
          the Plan
          period or if we are not in compliance with the continued listing standards
          at
          the end of the Plan period, AMEX may then initiate delisting proceedings.
          However, there is no assurance that the Plan will be accepted by AMEX,
          or that
          we will be able to make progress consistent with the Plan if it is
          accepted.
 
 While
          the
          Plan is under review by AMEX, we expect that our common stock will continue
          to
          trade without interruption on AMEX; however, the trading symbol for our
          common
          stock will have an indicator (.BC) added as an extension to signify
          noncompliance with the continued listing standards. Within five days of
          the
          October 9, 2006 letter from AMEX, we were included in a list on the AMEX
          website
          of issuers that do not comply with the listing standards. The .BC indicator
          will
          remain as an extension on our trading symbol until we have regained compliance
          with all applicable continued listing standards.


**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.





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.” For
      the three- and nine-month periods ended September 30, 2006, the Company
      recognized research and development consulting expenses of $7,666.





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. For
      the
      three- and nine-month periods ended September 30, 2006, the Company recognized
      share-based employee compensation cost of $34,652 in accordance with SFAS 123R,
      which was recorded as general and administrative expense.




19


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. As such there
      was
      no compensation recognized under Statement 123(R) related to options granted
      prior to January 1, 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 and 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 and the acting principal financial 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.


20
 
 b)
            Material Weaknesses and Changes in Internal Controls. During the audit
            of our
            financial statements for the year ended December 31, 2005, the review
            of our
            financial statements for the three months ended March 31, 2006 and the
            review of
            our financial statements for the three- and nine-month periods ended
            September
            30, 2006, our independent registered public accounting firm identified
            a
            material weakness, as of December 31, 2005, March 31, 2006 and September
            30,
            2006, 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, 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,
            accounting for the acquisition of HaptoGuard and the adoption of SFAS
            123(R). 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 is in the process of
            implementing remedial controls to address these matters, including additional
            third party review of non-routine strategic transactions and Board of
            Director
            meeting minutes as well as the hiring of outside financial consultants
            to handle
            accounting and financial reporting.


c) There
        were 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. These changes included the hiring of outside financial consultants
        to
        address the deficiencies described above.


21


**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.***





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 2006.





As
      of
      September 30, 2006, we had working capital of $1,443,305, including $2,308,323
      of cash and cash equivalents. Our cash used in operating activities for the
      nine
      months ended September 30, 2006 was $6,458,732.





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 $1,759,000 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 .





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 . 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
      need additional capital, but access to such capital is uncertain.***


Our
        current resources are insufficient both to fund our commercialization efforts
        and to continue our future operations beyond 2006. As of September 30, 2006,
        we
        had cash on hand of $2,308,323. In September 2006, we closed on approximately
        $1.4 million in financing. Prior to the financing, we were expending
        approximately $450,000 in cash per month. Following the merger, we currently
        expect to spend approximately $560,000 in cash per month. Our capital needs
        beyond 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 the 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 us. We currently 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 favorable 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, we
        may
        be required to:




22




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




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




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




·
            seek
                a buyer for all or a portion of our business; or




·
            wind
                down our operations and liquidate our assets on terms that are unfavorable
                to us.




***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.





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
      amounts set forth in our financial statements.




Our
      continued success will depend on our ability to continue to raise capital in
      order to fund the development and commercialization of our 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 our liquidation.





***Alteon
      and HaptoGuard have each historically incurred operating losses and we expect
      these losses to continue.***




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’s 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. If
      we
      are able to obtain sufficient additional funding, we expect to expend
      significant amounts on research and development programs for alagebrium and
      ALT-2074. Research and development activities are time consuming and expensive,
      and will involve the need to engage in additional fund-raising activities,
      identify appropriate strategic and collaborative partners, reach agreement
      on
      basic terms, and negotiate and sign definitive agreements. We are actively
      seeking new financing 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. We expect to continue to incur significant operating losses for
      the
      foreseeable future.





23




***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 of
      alagebrium will resume, if ever. If we are unable to resume enrollment in our
      clinical studies of alagebrium 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 recruitment or 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.




24




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.





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.





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 drug candidates unless and until we
      obtain FDA approval to sell such products in commercial quantities for human
      application.





Even
      if a
      clinical trial is 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.





***Our
      success 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 prior to the merger, 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 our business.





25




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.





HaptoGuard
      received approval from Israel’s Ministry of Health to conduct Phase 2
      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 three sites in Israel, and
      the
      study was opened for enrollment in May 2006.  The Israel-Lebanon conflict
      that occurred in July 2006 has adversely impacted our ability to recruit
      patients for the study. While we are evaluating modifications to the protocol
      to
      simplify its management in Israel, including transferring management of the
      project from a Contract Research Organization, or CRO, to our internal team,
      we
      believe that the conflict has continued to compromise any benefit that is likely
      to be realized from those operational modifications. Additionally, the
      continuation of that trial is contingent on the successful raising of additional
      financing by the Company.





***If
      we are unable to form the successful collaborative relationships that our
      business strategy requires, 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 FDA’s 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 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;




26




·
            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;




·
            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.





***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 year, due
      to
      the reduction in our clinical trial activities, the number of our employees
      has
      decreased from 22 as of September 30, 2005 to 7 as of September 30, 2006.
      Following the merger with HaptoGuard, we depend 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. The loss of services
      in the near term of any of our 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 may be required to provide additional retention and severance benefits to
      our
      employees in the future if we 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.





***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
      September 30, 2006, we had an accumulated deficit of $242,206,829. 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 candidates other
      than alagebrium and ALT-2074 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.





27




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,
      the
      review of our financial statements for the three months ended March 31, 2006
      and
      the review of our financial statements for the three- and nine-month periods
      ended September 30, 2006, our independent registered public accounting firm
      identified a material weakness, as of December 31, 2005, March 31, 2006 and
      September 30, 2006, 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, 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”) Issue No.
      96-18, accounting for the acquisition of HaptoGuard and the adoption of SFAS
      123(R). 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, March 31, 2006 and September 30, 2006 as a consequence
      of the material weakness, were deemed by the Company to be immaterial but were
      nevertheless recorded by the Company.





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.





28




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 you 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. The failure
      to
      maintain effective internal control over financial reporting could have a
      material adverse effect on our business and stock price.





***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.




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, 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.





29




***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 good manufacturing practices, or 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:





·
            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 cGMP, as required for FDA
                approval of our product candidates, or fail to document their adherence
                to
                cGMP, 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 are 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 cGMP, 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.





30




***If
      we are not able to protect the intellectual property 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.





***If
      we are unable to operate our business without infringing upon intellectual
      property rights of others, we may not be able to operate our business
      profitably.***




Our
      success depends on our 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 A.G.E.s 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, we would need a license under such
      patents or other intellectual property rights to continue development and
      marketing of our products. Any required licenses may not be available on
      acceptable terms, if at all. If we do not obtain such licenses on reasonable
      terms, we may not be able to proceed with the development, manufacture or sale
      of our 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 we are ultimately unsuccessful in defending
      against claims of infringement, we may be unable to operate profitably.





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





We
      are a
      party to various license agreements with third parties that give us exclusive
      and partial exclusive rights to use specified technologies applicable to
      research, development and commercialization of our products, including
      alagebrium and ALT-2074. We anticipate that we will continue to license
      technology from third parties in the future. To maintain the license for certain
      technology related to ALT-2074 that we received 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 an
      arrangement with Oxis, as we have successfully done in the past, whereby we
      will
      continue to have access to the ALT-2074 technology.





31





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.





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





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 us 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.





We
      account 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.” For the three- and nine-month
      periods ended September 30, 2006, we recognized research and development
      consulting expenses of $7,666.





We
      have
      adopted the new standard, SFAS 123R, effective January 1, 2006 and have selected
      the Black-Scholes method of valuation for share-based compensation. We have
      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. For the three- and nine-month periods ended September 30, 2006, we
      recognized share-based employee compensation cost of $34,652 in accordance
      with
      SFAS 123R, which was recorded as general and administrative expense.





On
      December 15, 2005, the Compensation Committee of our Board of Directors approved
      the acceleration of the vesting date of all previously issued, outstanding
      and
      unvested options, effective December 31, 2005. As such there was no compensation
      recognized under SFAS 123R related to options granted prior to January 1,
      2006.





Prior
      to
      adoption of SFAS 123R, we 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, we 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.





32




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.





Our
      ability to compete successfully against currently existing and future
      alternatives to our product candidates and systems, and competitors who compete
      directly with us in the small molecule drug industry will depend, in part,
      on
      our 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 our products;




·
            be
                early entrants to the market; and




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







***We
      depend 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. We contract out most of our research and
      development operations using 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 of 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
      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
      the
      United States, we expect that there will continue to be federal and state
      initiatives to control and/or reduce pharmaceutical expenditures. In certain
      foreign markets, pricing and/or profitability of prescription pharmaceuticals
      are subject to government control. 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.





33




***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.***




We
      may
      face exposure to product liability and other claims due to allegations that
      our
      products cause harm. These risks are inherent in the clinical trials for
      pharmaceutical products and in the testing, and future manufacturing and
      marketing of, our products. Although we currently maintain product liability
      insurance, such insurance is becoming increasingly expensive, and we may not
      be
      able to obtain adequate insurance coverage in the future at a reasonable cost,
      if at all. If we are unable to obtain product liability insurance in the future
      at an acceptable cost or to otherwise protect against potential product
      liability claims, we could be inhibited in the commercialization of our
      products, which could have a material adverse effect on our business. 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.





We
      intend
      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. We currently have a policy covering $10 million of product liability
      for
      our clinical trials, for which our annual premium is approximately $118,000.
      However, 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**





***Failure
      to integrate the operations of Alteon and HaptoGuard 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:





·
            the
                ability of the combined company to obtain financing to fund its continued
                operations;







34




·
              retention
                  of scientific staff;
 
 ·
              significant
                  litigation, if any, adverse to Alteon and HaptoGuard, including,
                  particularly, product liability litigation and patent and trademark
                  litigation;
 
 ·
              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,
      financial condition and results of operations 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 results of operations.





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
                payments;





·
            conversion
                of information systems;





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





·
            reorganization
                of facilities; and





·
            relocation
                or disposition of excess equipment.





Alteon
      and HaptoGuard incurred aggregate direct transaction costs of approximately
      $3,758,000 associated with or resulting from the merger. If the benefits of
      the
      merger do not exceed the total costs of the merger, the financial results of
      the
      combined company could be adversely affected.





35




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





***We
      have been notified by the American Stock Exchange ("AMEX") that we are
      not in compliance with continued listing standards, which may result in a
      delisting of our common stock if we cannot regain
      compliance.***




On October
      13, 2006, we reported that we had received a notice
      from AMEX indicating that we are below certain AMEX continuing listing
      standards due to (i) sustaining losses from continuing operations and/or net
      losses in two out of our three most recent fiscal years with stockholders'
      equity below $2,000,000; (ii) sustaining losses from continuing operations
      and/or net losses in three out of our four most recent fiscal years
      with stockholders' equity below $4,000,000; and (iii) sustaining losses from
      continuing operations and/or net losses in our five most recent fiscal
      years with stockholders' equity below $6,000,000, and that, in accordance
      with AMEX rules, we have until April 9, 2008 to regain compliance
      with the continued listing standards.  We had not regained compliance
      with these standards as of November 14, 2006 and cannot assure you
      that we will be able to achieve compliance with these standards. 
AMEX has requested that we provide it with our plan to achieve and sustain
      compliance with all listing standards by November 8, 2006 to
      facilitate its review of our eligibility for continued listing.  We 
submitted our plan to regain compliance to AMEX on November 7, 2006.  
We cannot assure you that AMEX will find our compliance plan acceptable or,
      if it does, that we can achieve the plan in such a way as to regain
      compliance with AMEX's continuing listing standards.





***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;




·
            material
                weaknesses in our internal control over financial
                reporting;




·
            the
                announcement of new products or services by us 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.***




36





After
      the
      closing of the merger and the financings, there are approximately 170,681,000
      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. 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 22,581,988
      shares of our common stock, including warrants to purchase 9,990,533 shares
      of
      our common stock issued together with 9,470,333 shares of our common stock
      in
      connection with a private equity financing completed in September 2006. The
      shares issued in the private placement financing, together with the shares
      underlying the warrants issued in such financing, represent approximately 16%
      of
      the total number of shares of our common stock outstanding immediately prior
      to
      the financing.




Sales
      of
      these shares in the public market, or the perception that future sales of such
      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
      stockholders to sell our equity securities in the future.





Our
      executive officers, directors and holders of more than 5% of our common stock
      collectively beneficially own approximately 31.1% of the outstanding common
      stock, which includes fully vested options to purchase common stock. In
      addition, approximately 4,740,312 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 our 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% 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 triggering event as defined in the
      Alteon Severance Plan.   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
      6.**  **Exhibits.**





Exhibits





See
      the
“Exhibit Index” on page 39 for exhibits required to be filed with this Quarterly
      Report on Form 10-Q.




37


**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: November 14, 2006**ALTEON
              INC.**By:
            /s/ Noah
              Berkowitz, M.D., Ph.D.Noah
                Berkowitz, M.D., Ph.D.President
                and
                Chief Executive Officer
              (principal executive
                officer)


By:
            /s/ Nicholas
              J. Rossettos, CPANicholas
              J. Rossettos, CPA(acting
              principal financial and accounting
              officer)






38




**EXHIBIT
      INDEX**


ExhibitNo.
                Description
                    of Exhibit31.1
                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.





39