UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




Annual
Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of
1934




For
the fiscal year ended September 30, 2008




Commission
File Number: 000-1174228




NURX
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)




NEVADA
                
                87-0681500(State
      or other jurisdiction of incorporation
                
                (I.R.S.
      Employer Identification No.)or
      organization)18
      Technology, Suite 130
                  Irvine,
      CA
                
                92618(Address
      of principal executive offices)
                
                (Zip
      code)




Registrant’s
telephone number: 949-336-7111




Securities
registered under Section 12(b) of the Act:   None




Securities
registered under Section 12(g) of the Act:  Common Stock, par value
$0.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes þ No
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes þ No




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. þ
Yes o
No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o









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




Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). o Yes þ No




The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by using the closing price of registrant’s common stock, at
March 31, 2008, was approximately $37,900,000.




As of
December 17, 2008, 28,394,234 shares of common stock were
outstanding.




Documents
incorporated by reference





Document
      Description
              
              10-K Part IIIPortions
      of the Registrant’s proxy statement to be filed pursuant to Regulation 14A
      within 120 days after Registrant’s fiscal year end of September 30,
      2008 are incorporated by reference into Part III of this
      report.
              
              Items 10, 11, 12,
                13,
      14


TABLE
OF CONTENTS
  Section
                                                                                        
                                                                                        PagePART
      I
                                                                                        
                                                                                        1ITEM
      1.
                                                                                        DESCRIPTION
      OF BUSINESS
                                                                                        1ITEM
      1A.
                                                                                        RISK
      FACTORS
                                                                                        7ITEM
      1B.
                                                                                        UNRESOLVED
      STAFF COMMENTS
                                                                                        22ITEM
      2.
                                                                                        PROPERTIES
                                                                                        22ITEM
      3.
                                                                                        LEGAL
      PROCEEDINGS
                                                                                        22ITEM
      4.
                                                                                        SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                                        22PART
      II
                                                                                        
                                                                                        22ITEM
      5.
                                                                                        MARKET
      FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                                                                                        22ITEM
      6
                                                                                        SELECTED
      FINANCIAL DATA.
                                                                                        23ITEM
      7.
                                                                                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
                                                                                        24ITEM
      7A.
                                                                                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                                        27ITEM
      8.
                                                                                        FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                                        28ITEM
      9.
                                                                                        CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
                                                                                        28ITEM 9A.
                                                                                        CONTROLS
      AND PROCEDURES
                                                                                        28ITEM
      9B.
                                                                                        OTHER
      INFORMATION
                                                                                        28PART
      III
                                                                                        
                                                                                        28ITEM
      10.
                                                                                        DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
                                                                                        28ITEM
      11.
                                                                                        EXECUTIVE
      COMPENSATION.
                                                                                        29ITEM 12.
                                                                                        SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                                                                                        29ITEM
      13.
                                                                                        CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                                                                        29ITEM
      14.
                                                                                        PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                                                                                        29ITEM
      15.
                                                                                        EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                                                                                        29FINANCIAL
      STATEMENTS
                                                                                        F-1
  -i-
  PART
I
  Introductory
Comment
  Throughout
this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “our company,”
“Company” and “NuRx” refer to NuRx Pharmaceuticals, Inc., a Nevada corporation
formerly known as Quest Group International, Inc.
  Forward
Looking and Cautionary Statements
  This
Form 10-K contains certain forward-looking statements. For example, statements
regarding our financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
product demand, supply, manufacturing, costs, marketing and pricing factors are
all forward-looking statements. These statements are generally accompanied by
words such as “intend,” “anticipate,” “believe,” “estimate,” “potential(ly),”
“continue,” “forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,”
“should,” “expect” or the negative of such terms or other comparable
terminology.  We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to us on the date hereof, but we cannot assure you that
these assumptions and expectations will prove to have been correct or that we
will take any action that we may presently be planning.  However,
these forward-looking statements are inherently subject to known and unknown
risks and uncertainties.  Actual results or experience may differ
materially from those expected or anticipated in the forward-looking
statements.  Factors that could cause or contribute to such
differences include, but are not limited to, regulatory policies, competition
from other similar businesses, and market and general policies, competition from
other similar businesses, and market and general economic
factors.  This discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Annual Report.
  If
one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we project.  Any forward-looking statement you read in this
Annual Report reflects our current views with respect to future events and is
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy, and
liquidity.  All subsequent forward-looking statements attributable to
us or individuals acting on our behalf are expressly qualified in their entirety
by this paragraph.  You should specifically consider the factors
identified in this Annual Report, which would cause actual results to differ
before making an investment decision.  We are under no duty to update
any of these forward-looking statements after the date of this Annual Report or
to conform these statements to actual results.
  ITEM
      1
              DESCRIPTION
      OF BUSINESS
  Company
Overview
  We plan
to develop innovative therapies that change the paradigm of disease management
by redirecting gene regulation for the treatment of cancer,
chemotherapy-associated neutropenia (low white cell count), bone marrow
function, bone metabolism and lipid metabolism. Our mission is to make progress
towards individualized medicine allowing development of designer drugs for
precise disease therapies and to produce drugs that are cost effective thus
allowing the population at large to gain their benefits.
  Company
History
  We were
formed as a Nevada corporation on August 14, 2001 as Quest Group International,
Inc. We became a reporting company in March 2003. From our inception in 2001
until May, 2007, we were in the business of selling nutritional products to
independent distributors and consumers in the United States and Japan. As a
result of our entering into of a licensing agreement with Vitae Pharmaceuticals,
Inc. (“Vitae”) in May 2007, we spun off our nutritional products business line
and operate as a development stage pharmaceutical company with a focus on
nuclear receptor target therapeutics. In connection with this change in business
focus, we have changed our name to NuRx Pharmaceuticals, Inc.
  1
 
 Private
Placements
  In May
through June 2007, the Company raised approximately $20,500,000 from a small
group of accredited investors from the sale of 41,000,000 shares of common stock
at a price of $.50 per share in a private placement offering.  As
adjusted for the 1-for-4 reverse stock split that took place in May 2008, this
represents the sale of 10,250,000 shares of common stock at a price of $2.00 per
share.  Pursuant to the terms of the private placement, these
investors had certain anti-dilutive price protections until July 18,
2008.
  Hunter
World Markets, Inc. acted as the exclusive placement agent in the private
placement offering, and received a fee of $2,012,500 (approximately 10% of the
gross proceeds) and two six-year warrants to purchase an aggregate of 12,300,000
shares of the Company’s common stock at an exercise price of $1.00 per share (or
3,075,000 shares of the Company’s common stock at an exercise price of $4.00 per
share on a post-split basis). These warrants expire in 2013. Hunter World
Markets, Inc. also loaned us $125,000 at an interest rate of 6% per annum. This
loan together with accrued interest and a loan fee of $12,500 was repaid from
the proceeds of the private placement.
  In
connection with the private offering, stockholders who had acquired our common
stock prior to April 27, 2007 canceled an aggregate of 7,759,000 shares of
common stock (or 1,939,750 shares of common stock on a post-split basis) in
consideration for an aggregate amount of $750,000.
 
 During
the period between May 30, 2007 and June 27, 2007, we sold an aggregate of
1,000,000 shares of our common stock (or 250,000 shares of our common stock on a
post-split basis) and received aggregate proceeds of $500,000. In connection
with the aforementioned sales, Hunter World Markets received a commission of 5%
on half the gross proceeds and received a six-year warrant to purchase common
stock equal to 300,000 shares, or 30% of the number of shares sold, exercisable
at $1.00 per share (or 75,000 shares at an exercise price of $4.00 per share on
a post-split basis).
 
 Vitae
License Agreement
  On May
11, 2007, we entered into a license agreement with Vitae, a privately held
company, under which we have acquired an exclusive, worldwide sublicense, with
the right to grant further sublicenses, to certain compounds and technology for
all human and veterinary use. The indications for the lead compounds are acute
myeloid leukemia, solid cancers (lung and breast) and chemotherapy-induced
neutropenia (low white cell count).
  Vitae
originally licensed these compounds in May 2004 from Allergan, Inc., an Allergan
affiliate, and Ligand Pharmaceuticals Incorporated.  These compounds
and technology are covered by a number of issued U.S. and foreign patents and
patent applications, and the term of our sublicense will extend in each country
until the later of the last to expire of any patents that are issued covering
this technology or ten years from the first commercial sale of a product
agreement.  Vitae will retain its exclusive license from the existing
licensors for certain excluded licensed compounds.
  In
connection with the license agreement, we paid Vitae out of the net proceeds of
our private placement offering an upfront licensing fee of $2,100,000, and an
additional $50,000 on August 15, 2007.  We also agreed to issue Vitae
5.66% of our fully diluted common stock, as of the date of the agreement, upon
receiving investigational new drug application (“IND”) approval for clinical
trials of any of the transferred compounds that had not already received IND
approval.  This milestone was met on October 31, 2007 and the Company
issued Vitae 1,756,732 shares (representing 5.66% after issuance of these
shares).  We will be required on Vitae’s behalf to pay the existing
licensors additional specified milestone payments if we receive marketing
approval from the U.S. Food and Drug Administration (“FDA”) for a product
containing a licensed compound.
  In
addition to the foregoing fees and milestone payments, we have agreed to pay
Allergan (as well as its cross-licensee) and Vitae specified percentages of our
net sales of products based on the licensed technology, which vary from product
to product but which combined may total as much as 12% of our net sales. We have
also agreed to pay Vitae a specified percentage of any sublicense revenues that
we receive from our sublicensees. To maintain our rights to the licensed
technology, we must meet certain development milestones under the original
license agreements with the existing licensors. These milestones include, among
others, filing at least one new drug application (“NDA”) in the U.S. or another
major market for a product by May 10, 2011.  2
  The
Opportunity
  We have
acquired a large portfolio of intellectual property and know-how as well as a
library of small molecule compounds and three clinical or pre-clinical stage
therapeutic compounds pursuant to the license agreement with
Vitae.  Such technologies represent nearly 20 years of research and
development work in the fields of retinoids, rexinoids, cancer biology,
medicinal chemistry, manufacturing, pre-clinical and clinical drug
development.  The opportunities are four-fold: (1) a leukemia therapy
that is based on established mechanisms of action that is a more selective
entrant into an established class of cancer therapy, (2) an early candidate for
solid tumors (particularly lung and breast cancer), (3) a novel therapeutic
approach to addressing the impact of chemotherapy associated neutropenia (a
large, well established therapeutic need) and (4) a large library of other
retinoid and rexinoid compounds that represent an internal
pipeline.
    We are
focusing our research and development efforts on our two lead compounds in the
clinical stage of development.  Our third lead compound which is in
the pre-clinical stage of development will follow as resources permit. Each
compound represents a unique chemical structure, unique class of therapy and
biological function. One compound will be developed for the treatment of
leukemia, a second compound will be tested for safety in humans followed by
efficacy studies in some of the most common cancers including lung cancer and
breast cancer, and the third compound will be developed as a therapy to reduce
the toxicity of chemotherapy to the bone marrow, in particular, diminish the
risk of infection as consequence of reduction in white blood cell
count.  A platform of technology, intellectual property, and a large
library of small molecules, will be used for later implementation of additional
discoveries to make novel therapeutics.  We believe we have the
necessary skills and chemical resources to produce novel therapies for other
human diseases such as slow bone repair and healing, cartilage loss, lipid
metabolic defects, and diabetes mellitus.
  We do not
currently anticipate that we will derive any revenues from either product sales
or licensing in the near future.  We do not have any bank credit lines
and have financed all of our prior operations through the sale of
securities.  The estimated cost of completing the development of our
current product candidate and of obtaining all required regulatory approvals to
market that product candidate is substantially greater than the amount of funds
we currently have available.  We believe that our existing cash
balances will be sufficient to fund completion of our planned clinical trials
and to fund our currently planned level of operations through at least October,
2010.  We will seek to obtain additional funds through various
financing sources, including possible sales of our securities, and through
strategic alliances with other pharmaceutical or biopharmaceutical companies,
but there is no assurance that we will be able to obtain any additional funding
from any potential financing sources, or create any such alliances, or that the
terms under which we would obtain any funding will be sufficient to fund our
operations.
 Our
Research Programs
  We
entered Phase I clinical trials for our compound for the treatment of solid
cancers with dosing of the first patient on March 18, 2008.  We have
also received approval from the respective regulatory authorities to initiate
clinical trials for our other lead compound in the U.S.,  India and
Mexico.  In addition, we have also established third party
manufacturing for our two lead compounds in clinical trials, including
intermediate, API and GMP production of drug product, supporting pharmacology,
toxicology and stability testing and quality assurance.
  We
believe that the intellectual property and compounds we have licensed from Vitae
have significant potential in leading to individualized cancer therapies and the
Company will focus on these therapies.  These therapies would be based
on the retinoid and rexinoid classes of compounds. Retinoids and rexinoids are
small molecule hormones that elicit their biological effects by binding to and
regulating the function of two distinct families of nuclear receptors, the
Retinoic Acid Receptors (RARs) and Retinoid X Receptors (RXRs), respectively.
Each family consists of three distinct subtypes which separately mediate a broad
range of physiological functions including cell differentiation, proliferation
and apoptosis, bone and cartilage formation and lipid
metabolism.  Although this biology enables the potential therapeutic
application of the retinoid and rexinoid classes of drugs in many diseases, the
currently used, non-selective compounds are not suitable because of complicating
toxic effects. A next generation of retinoid and rexinoid drugs that have
receptor subtype and functional selectivity are required to unlock the full
therapeutic value of these compounds.  The portfolio of compounds
acquired through the license agreement with Vitae has been developed for this
receptor and functional selectivity and contains three lead “next generation”
compounds.  We are in the research and development phase of these
three lead compounds, two of which are in the active clinical stage of
development and one in the preclinical discovery stage.
 
 First Lead Compound –
NRX195183
 
 On
February 8, 2008, the FDA granted the Company’s application to re-activate its
IND for the first lead compound (NRX 195183), permitting it to move into active
Phase II clinical trials for the treatment of acute promyelocytic
leukemia.  The following activities with respect to NRX195183 have
been completed:
 
 ·
                Opened
      a site in the U.S. after receiving Ethics Committee approval of the
      protocol,
 ·
                Received
      approval from Drug Controller General (India) and the Ministry of Health
      (Mexico) to conduct the Phase II trial,
and
 ·
                Received
      Ethics Committee approval from three sites in India and two in
      Mexico.
 
 We are
anticipating recruiting an aggregate of 65 patients for this trial, in a total
of nine sites, the open site in the U.S., six in India and two in
Mexico.
 
 Our
clinical development plan for this compound current includes two other trials in
cancer.
 
 Based on
patent protection, which specifically covers NRX195183 as a new chemical entity
(“NCE”), the Company believes that this compound has a generic competition-free
product life until 2020.
  3
  Second Lead Compound –
NRX194204
 
 The
second lead compound (NRX194204) is being tested for safety in cancer patients
in a Phase I/IIa clinical trial and this will be followed by efficacy studies in
some of the most common cancers, including lung cancer.  On October
31, 2007, the FDA granted the Company’s IND application for this compound,
permitting it to move into active clinical development.  The initial
study is designed to characterize its safety, pharmacokinetics and pharmacology
in advanced cancer patients.
 
 Phase
I/IIa Clinical Trial
 
 We
received Ethics Committee approvals and have opened two sites in the
U.S,  We currently have enrolled 13 patients, and the Phase I segment
of this trial is nearing completion.
 
 Phase II
Clinical Trials
 
 Our
clinical development plan for Phase II includes three clinical trials at eight
sites within the United States, with an anticipated accrual of up to 174
patients. We are actively preparing protocols for submission to the respective
Ethics Committees.
 
 Based on
patent protection, which covers it as a NCE, the Company believes that this
compound has a generic competition-free product life until 2015. Additional
patents for specific methods of use of this compound could extend the protected
product life of the compound until 2026.
 
 Third Lead Compound –
NRX194310
 
 The third
lead compound (NRX194310) is derived from a discovery program directed towards
treatments for chemotherapy-induced neutropenia (low white cell
count).  This program is intended to evaluate and develop a lead
compound as therapy to reduce the toxicity of chemotherapy, and in particular,
diminish the risk of infection as a consequence of reduction in white blood cell
count.  Two patents cover this compound as a NCE and the Company
believes these patents will provide a generic competition-free product life
until 2016.  However, another patent application covers the method of
use of this compound in treating chemotherapy-induced neutropenia, and this
patent, if issued, could extend the product life of this compound until
2026.  Further development of this compound is not currently
budgeted.
 
 Drug
Development, Clinical Trials and Pre-Clinical Development Plan
 
 Our
research and drug development plans and activities include process chemistry
development, pharmacokinetics method development and validation, stability
testing and API, Intermediates, and GMP manufacturing activities.  We
also support collaborative research on our compounds conducted by investigators
outside the Company.
 
 Our
clinical trials plans and activities include protocol development and regulatory
affairs activities, interactions with regulatory agencies responsible for drug
development and clinical trials in the respective countries in which we carry on
those activities, multi-site trial management, supporting patient monitoring,
data collection, management, processing and analysis, and all required
regulatory reporting activities
 
 Preclinical
pharmacology studies, including extensive studies in animal models, using the
above lead compounds as well as other compounds from our library have identified
alternate therapeutic targets for retinoids and rexinoids including the
following:
  o
                Spinal fusion
  o
                Osteoarthritis
  o
                  Hypertriglyceridemia
  o
                Diabetes
     During
the year ended September 30, 2008, we added two full time clinical and
pre-clinical development senior managers.  We currently have eight
employees, two of whom are part time.  We do not expect significant
changes in the number of our employees over the next
year.
 4
 The
Corporation
  Our
principal executive offices are located at 18 Technology, Suite 130, Irvine,
California 92618, and our telephone number at that address is (949)
336-7111.
  Intellectual
Property
  We have
acquired exclusive worldwide rights from Vitae to the compounds described
herein. Our lead licensed compounds are covered by issued patents in the United
States and certain foreign countries. In November 2007, we entered into an
Annuity Payment Service Agreement with Computer Packages Inc. in order to help
maintain and service our patent library.
  Government
Regulation
  The
United States and other developed countries extensively regulate the preclinical
and clinical testing, manufacturing, labeling, storage, record-keeping,
advertising, promotion, export, marketing and distribution of drugs and biologic
products.  The FDA under the Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act and other federal statutes and regulations, regulates
pharmaceutical and biologic products.
  To obtain
approval of our product candidates from the FDA, we must, among other
requirements, submit data supporting safety and efficacy for the intended
indication as well as detailed information on the manufacture and composition of
the product candidate.  In most cases, this will require extensive
laboratory tests and preclinical and clinical trials.  The collection
of this data, as well as the preparation of applications for review by the FDA
involve significant time and expense.  The FDA also may require
post-marketing testing to monitor the safety and efficacy of approved products
or place conditions on any approvals that could restrict the therapeutic claims
and commercial applications of these products.  Regulatory authorities
may withdraw product approvals if we fail to comply with regulatory standards or
if we encounter problems at any time following initial marketing of our
products.
  The first
stage of the FDA approval process for a new biologic or drug involves completion
of preclinical studies and the submission of the results of these studies to the
FDA. This data, together with proposed clinical protocols, manufacturing
information, analytical data and other information must be submitted to the FDA
in an IND.  The IND must become effective before human clinical trials
may commence.  Preclinical studies generally involve FDA regulated
laboratory evaluation of product characteristics and animal studies to assess
the efficacy and safety of the product candidate.
  After
the IND becomes effective, a company may commence human clinical
trials.  These are typically conducted in three sequential phases, but
the phases may overlap.  Phase I trials consist of testing of the
product candidate in a small number of patients or healthy volunteers, primarily
for safety at one or more doses.  Phase I trials in cancer are often
conducted with patients who are not healthy and who have end-stage or metastatic
cancer. Phase II
trials usually involve studies in a limited patient population to:
(1) assess the efficacy of the drug in specific, targeted indications;
(2) assess dosage tolerance and optimal dosage; and (3) identify
possible adverse effects and safety risks.  If a compound is found to
be potentially effective and to have an acceptable safety profile in Phase II
evaluations, Phase III clinical trials, also called pivotal studies, major
studies or advanced clinical trials, are undertaken to further demonstrate
clinical efficacy and to further test for safety within an expanded patient
population at geographically dispersed clinical trial sites.  In
general, the FDA requires that at least two adequate and well-controlled Phase
III clinical trials be conducted. A company must submit to the FDA a
clinical protocol, accompanied by the approval of the Institutional Review
Boards at the institutions participating in the trials, prior to commencement of
each clinical trial.
  To obtain
FDA marketing authorization, a company must submit to the FDA the results of the
preclinical and clinical testing, together with, among other things, detailed
information on the manufacture and composition of the product candidate, in the
form of a NDA. The FDA
may request additional information before accepting an NDA for filing, in which
case the application must be resubmitted with the additional
information.  Once the submission has been accepted for filing, the
FDA has 180 days to review the application and respond to the
applicant.  The review process is often significantly extended by FDA
requests for additional information or clarification.  The FDA may
refer the NDA to an appropriate advisory committee for review, evaluation and
recommendation as to scientific issues relevant to whether the application
should be approved, but the FDA is not bound by the recommendation of an
advisory committee.
  The
amount of time taken by the FDA for approval of an NDA will depend upon a number
of factors, including whether the product candidate has received priority
review, the quality of the submission and studies presented, the potential
contribution that the compound will make in improving the treatment of the
disease in question, and the workload at the FDA.
  5
  The FDA
may, during its review of an NDA, ask for additional test data that may require
the conduct of additional clinical trials. If the FDA does ultimately approve
the product candidate for marketing, it may require post-marketing testing to
monitor the safety and effectiveness of the product. The FDA also may in some
circumstances impose restrictions on the use of the product, which may be
difficult and expensive to administer and may require prior approval of
promotional materials.
  If FDA
evaluations of the NDA and associated support, such as manufacturing and
clinical sites, are favorable, the FDA may grant us either an approval letter or
an approvable letter.  An approvable letter will usually contain a
number of conditions that must be met, which may include additional testing, in
order to secure final approval of the NDA and authorization of commercial
marketing of the drug for particular indications; however, the receipt of an
approvable letter does not guarantee the final approval of a
product.  The FDA may refuse to approve the NDA or grant us a
non-approvable letter, outlining the deficiencies in the
submission.  If regulatory approval of a product is granted, it will
be limited to particular disease states and conditions of use, which are
described in the product label.
 
 After
approval, adverse experiences with the product must be reported to the
FDA.  In addition, the FDA may impose restrictions on the use of the
drug that may be difficult and expensive to administer.  Product
approvals may be withdrawn if compliance with regulatory requirements is not
maintained or if problems occur or are discovered after the product reaches the
market.  Finally, the FDA requires reporting of certain safety and
other information, often referred to as “adverse events” that become known to a
manufacturer of an approved drug.  Safety information collected
through this process can result in changes to a product’s labeling or withdrawal
of a product from the market.  If an active ingredient of a drug
product has been previously approved, drug applications can be filed that may be
less time-consuming and costly.
  The FDA
may, in some cases, confer upon an investigational product the status of a Fast
Track product. A Fast Track product is defined as a new drug or biologic
intended for the treatment of a serious or life-threatening condition that
demonstrates the potential to address unmet medical needs for this condition.
The FDA can base approval of an NDA for a Fast Track product on an effect on a
surrogate endpoint, or on another endpoint that is reasonably likely to predict
clinical benefit. If a preliminary review of clinical data suggests that a Fast
Track product may be effective, the FDA may initiate review of entire sections
of a marketing application for a Fast Track product before the sponsor completes
the application.
  We will
also be subject to a variety of regulations governing clinical trials and sales
of our products outside the United States. Whether or not FDA approval has been
obtained, approval of a product candidate by the comparable regulatory
authorities of foreign countries and regions must be obtained prior to the
commencement of marketing the product in those countries. The approval process
varies from one regulatory authority to another and the time may be longer or
shorter than that required for FDA approval. In the European Union, Canada and
Australia, regulatory requirements and approval processes are similar, in
principle, to those in the United States.
  We also
will be subject to federal regulation by the Occupational Safety and Health
Administration and the Environmental Protection Agency as well as regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and other federal and state regulatory statutes, and may, in the future, be
subject to other federal, state or local regulations.
  Commercial
Markets
  Because
we are a development stage company, it is unclear what commercial markets may be
available for the products we develop, if any. The Company plans to make
progress towards individualized medicine allowing development of designer drugs
for precise disease causation and to produce drugs that are cost effective thus
allowing population at large to gain their benefits. Our research programs may
initially show promise in identifying potential product candidates, yet fail to
yield product candidates for clinical development due to harmful side effects or
other characteristics that indicate they are unlikely to be effective drugs.
While our research may lead to marketable products, we are unable to measure
such marketability in commercial terms at this time.
  Competition
  The
pharmaceutical and biopharmaceutical industry is characterized by intense
competition and rapid and significant technological changes and advancements.
Many companies, research institutions and universities are doing research and
development work in a number of areas similar to those that we focus on that
could lead to the development of new products which could compete with and be
superior to our product candidates.
  Most of
the companies with which we compete have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than those
of ours. A number of these companies may have or may develop technologies for
developing products for treating various diseases that could prove to be
superior to ours. We expect technological developments in the pharmaceutical and
biopharmaceutical and related fields to occur at a rapid rate, and we believe
competition will intensify as advances in these fields are made. Accordingly, we
will be required to continue to devote substantial resources and efforts to
research and development activities in order to potentially achieve and maintain
a competitive position in this field. Products that we develop may become
obsolete before we are able to market them or to recover all or any portion of
our research and development expenses. We will be competing with respect to our
products with companies that have significantly more experience in undertaking
preclinical testing and human clinical trials with new or improved therapeutic
products and obtaining regulatory approvals of such products. A number of these
companies already market and may be in advanced phases of clinical testing of
various drugs that may compete with our lead product candidate or any future
product candidates. Our competitors may develop or commercialize products more
rapidly than we do or with significant advantages over any products we develop.
Our competitors may therefore be more successful in commercializing their
products than we are, which could adversely affect our competitive position and
business.
  6
 
 Colleges,
universities, governmental agencies and other public and private research
organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technologies that they
have developed, some of which may be directly competitive with our lead product
candidate or any future product candidates.
  Our
competitive position will be significantly impacted by the following factors,
among others:
  
                our
      ability to obtain FDA marketing approval for our product candidates on a
      timely basis;
  
                the
      level of acceptance of our products by physicians, compared to those of
      competing products or therapies;
  
                our
      ability to have our products manufactured on a commercial
      scale;
  
                the
      effectiveness of sales and marketing efforts on behalf of our
      products;
  
                our
      ability to meet demand for our
products;
  
                our
      ability to secure insurance reimbursement for our products
      candidates;
  
                the
      price of our products relative to competing products or
      therapies;
  
                our
      ability to recruit and retain appropriate management and scientific
      personnel; and
  
                our
      ability to develop a commercial scale research and development,
      manufacturing and marketing infrastructure either on our own or with one
      or more future strategic partners.
  ITEM
1A. RISK
FACTORS
  An
investment in our securities involves a high degree of risk.  You
should carefully consider the risks described below before deciding to invest in
or maintain your investment in our Company.  The risks described below
are not intended to be an all-inclusive list of all of the potential risks
relating to an investment in our securities.  If any of the following
or other risks actually occur, our business, financial condition or operating
results and the trading price or value of our securities could be materially
adversely affected.
  Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
faced by us described below and elsewhere in this Annual
Report.
  7
  RISKS
RELATED TO OUR BUSINESS
  We
are engaged in early stage research and as such may not be successful in our
efforts to develop a portfolio of commercially viable products.
  A key
element of our strategy is to develop and commercialize a portfolio of new
drugs. We are seeking to do so through our internal research
programs.  A significant portion of the research that we are
conducting involves new strategies and targets, some based on previously
established pharmacology and some that is novel.  Research programs to
identify new disease targets and product candidates require substantial
technical, financial and human resources, whether or not any product candidates
or technologies are ultimately identified.  Our research programs may
initially show promise in identifying potential product candidates, yet fail to
yield product candidates for clinical development due to harmful side effects or
other characteristics that indicate they are unlikely to be effective
drugs.
  Although
we have identified potential product candidates in the areas of acute myeloid
leukemia, solid cancers (lung and breast), and chemotherapy associated
neutropenia (low white cell count), the work needed to demonstrate their
commercial viability is at a very early stage.  The follow-up research
needed to demonstrate the viability of the product is costly and time-consuming,
and may reveal that the product does not function as expected or that it is
otherwise not commercially viable. It may
take a number of years to develop our potential product
candidates.  During this time, a superior or equivalent product for
the treatment of the indications our products are designed to treat could
emerge.
  If we are
unable to confirm efficacy and safety of these candidates through internal
research programs, license suitable products or deliver technologies on
acceptable business terms, our business prospects will suffer.
  We cannot
predict how long the development of our investigational stage products will take
or whether they will be medically effective.
  We
do not expect to obtain any revenues for several years and there is no assurance
that we will ever generate revenue or be profitable.  If we do not
generate revenues and achieve profitability, we will be forced to cease or
substantially curtail our operations and you will likely lose your entire
investment.
  Because
we are currently engaged in research at a very early stage, significant time may
be required to develop any product or intellectual property capable of
generating revenues.  As such, our business is unlikely to generate
any revenue in the next several years, and may never do so.  Even if
we are able to generate revenues in the future through licensing our
technologies or through product sales, there is no assurance that our revenues
will exceed our expenses. Should we fail to generate revenues and achieve
profitability, you will likely lose your entire investment.
  8
  If we cannot
raise additional funding, we may be unable to complete development of our
product candidates.
 
 The
pharmaceutical development and commercialization process is time consuming and
costly, and any delays might result in higher costs which could adversely affect
our financial condition.  We may require additional funding to
continue our research and product development programs, to conduct preclinical
studies and clinical trials, for operating expenses and to pursue regulatory
approvals for product candidates, for the costs involved in filing and
prosecuting patent application and enforcing or defending patent claims, if any,
as well as costs associated with litigation matters, product in-licensing and
any possible acquisitions, and we may require additional funding to establish
manufacturing and marketing capabilities in the future.  We believe
that our existing capital resources, together with interest income, and future
payments due under our strategic alliances, will be sufficient to satisfy our
current and projected funding requirements through October,
2010.  However, these resources might be insufficient to conduct
research and development programs as planned.  If we cannot obtain
adequate funds, we may be required to curtail significantly one or more of our
research and development programs or obtain funds through additional
arrangements with corporate collaborators or others that may require us to
relinquish rights to some of our technologies or product
candidates.
 
 Our
future capital requirements will depend on many factors,
including:
 
 ·
                continued
      scientific progress in our research and development
    programs;
  ·
                the
      magnitude of our research and development
  programs;
  ·
                progress
      with preclinical testing and clinical
trials;
  ·
                the
      time and costs involved in obtaining regulatory
  approvals;
  ·
                the
      costs involved in filing and pursuing patent applications and enforcing
      patent claims;
  ·
                competing
      technological and market
developments;
  ·
                the
      establishment of additional strategic
alliances;
  ·
                the
      cost of commercialization activities and arrangements, including
      manufacturing of our product
  candidates; and
  ·
                the
      cost of product in-licensing and any possible
  acquisitions.
  We may
seek additional funding through public or private sales of our securities,
including equity securities or from strategic alliances or the out-licensing of
our intellectual property.  However, additional equity or debt
financing might not be available on reasonable terms, if at all.  Any
additional equity financings will be dilutive to our stockholders and any debt
financings may involve operating covenants that restrict our
business.
 
 Because the
results of preclinical studies are not necessarily predictive of future results,
we can provide no assurances that, even if our product candidates are successful
in preclinical studies, such product candidates will have favorable results in
clinical trials or receive regulatory approval.
 
 Positive
results from preclinical studies should not be relied upon as evidence that
clinical trials will succeed.  Even if our product candidates achieve
positive results in clinical studies, we will be required to demonstrate through
clinical trials that these product candidates are safe and effective for use in
a diverse population before we can seek regulatory approvals for their
commercial sale.  There is typically an extremely high rate of
attrition from the failure of drug candidates proceeding through clinical
trials.  If any product candidate fails to demonstrate sufficient
safety and efficacy in any clinical trial, then we would experience potentially
significant delays in, or be required to abandon, development of that product
candidate.  If we delay or abandon our development efforts of any of
our product candidates, then we may not be able to generate sufficient revenues
to become profitable, and our reputation in the industry and in the investment
community would likely be significantly damaged, each of which would cause our
stock price to decrease significantly.
 9
 Our clinical
trials may fail to demonstrate the safety and efficacy of our product
candidates, which could prevent or significantly delay their regulatory
approval.
 
 We have
limited experience conducting clinical trials.  Before obtaining
regulatory approval for the sale of any of our potential products, we must
subject these product candidates to extensive preclinical and clinical testing
to demonstrate their safety and efficacy for humans.  Our first lead
compound has just entered Phase II clinical testing while our second lead
compound is nearing completion of the Phase I segment of its clinical
testing.  Clinical trials are expensive, time-consuming and may take
years to complete.
 
 In
connection with the clinical trials of our product candidates, we face the risks
that:
 
 ·
                the
      product candidate may not prove to be
effective;
  ·
                we
      may not be able to manufacture the necessary quantity of our product
      candidates necessary for clinical
testing;
  ·
                the
      results may not replicate the results of earlier trials or clinical
      testing;
  ·
                we
      or the FDA or similar foreign regulatory authorities may suspend the
      trials;
  ·
                the
      results may not be statistically
significant;
  ·
                the
      product candidate may have undesirable or unintended side effects or
      toxicities that may prevent
commercialization;
  ·
                institutional
      review boards, ethics committees or the FDA could suspend or terminate our
      clinical trials;
  ·
                the
      third parties conducting or overseeing the operation of our clinical
      trials to perform their contractual or regulatory obligations in a timely
      fashion;
  ·
                patient
      recruitment may be slower than
  expected; and
  ·
                patients
      may drop out of the trials or die during the
  trials.
   Phase I
trials in cancer are often conducted with patients who are not healthy and who
have end-stage or metastatic cancer.  During the course of treatment,
these patients can die or suffer other adverse medical effects for reasons that
may not be related to the pharmaceutical agent being tested but which can
nevertheless adversely affect clinical trial results.  Any failure or
substantial delay in completing clinical trials for our product candidates may
severely harm our business.
  The
results of our clinical trials are based on a small number of patients over a
short period of time, and our progress may not be indicative of results in a
large number of patients or of long-term efficacy.
  Our
clinical testing is based upon limited numbers of patients and a limited
follow-up period.  Our Phase II clinical trial for our first lead
compound is expected to enroll 65 patients, and our Phase I clinical
trial for our second lead compound has only included 13
patients.  Results of later clinical trials that include more patients
and more data points may not confirm favorable results from these early stage
trials.  A number of companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in late stage clinical trials even
after achieving promising results in earlier stage clinical
trials.  If a larger population of patients does not experience
positive results, or if these results are reproducible, our products may not
receive approval from the FDA.  Failure to demonstrate the safety and
effectiveness of our products in larger patient populations could have a
material adverse effect on our business that would cause our stock price to
decline significantly.
  10
  If
we are unable to secure licenses to technologies or materials vital to our
business, or if the rights to technologies that we have licensed terminate, our
commercialization efforts could fail or be delayed.
  Since the
initial target therapies are compounds that have been licensed to us, the
failure to secure and maintain these licenses may cause the delay or termination
of our development plans.  While we do not anticipate any challenges,
unforeseen events can occur.  Intellectual property allowing for the
exclusive development of therapies has a finite lifespan.  Prolonged
delays in the successful development of therapies can lead to loss of exclusive,
or even non-exclusive, marketing.  The development of our current
clinical products is not subject to the need for additional licenses, however
unforeseen blockades can occur. For
instance, it may be necessary in the future for us to obtain additional licenses
to avoid infringement of third-party patents.
  If
we were to materially breach our present license agreement or any future license
or collaboration agreements, we could lose our ability to commercialize the
related technologies, and our business could be materially and adversely
affected.
  We are
party to intellectual property licenses and agreements which will be integral to
our business.  Even once we have all necessary agreements and patent
licenses in place to develop the compounds, subsequent unforeseen events may
cause a deviation from our current business plan.  These licenses
and agreements impose various research, development, commercialization,
sublicensing, royalty, indemnification, insurance and other obligations on
us.  If we or our collaborators fail to perform under these agreements
or otherwise breach obligations imposed by them, we could lose intellectual
property rights that are important to our business.
  We
may not be successful in establishing additional strategic collaborations, which
could adversely affect our ability to develop and commercialize
products.
  We may
seek opportunities to establish new collaborations, joint ventures and strategic
collaborations for the development and commercialization of products we discover
and/or develop. We face significant competition in seeking appropriate
collaborators and the negotiation process is time-consuming and
complex.  We may not be successful in our efforts to establish
additional strategic collaborations or other alternative
arrangements.  Even if we are successful in our efforts to establish a
collaboration or agreement, the terms that we establish may not be favorable to
us. Disputes
may arise in the future over the ownership of rights to any technology developed
with collaborators.  These and other possible disagreements between us
and our collaborators could lead to delays in the collaborative development or
commercialization of therapeutic or diagnostic products.  Such
disagreements could also result in litigation or require arbitration to resolve.We will also be dependent on several contractual services, the loss of
which could result in delays in product development.  Finally, such
strategic alliances or other arrangements may not result in successful products
and associated revenue.
  The
biotechnology and pharmaceutical industry is highly competitive and subject to
rapid technological change.
  The
biotechnology and pharmaceutical industry is highly competitive and subject to
rapid and profound technological changes.  Our present and potential
competitors include major pharmaceutical companies, as well as specialized
biotechnology and life sciences firms in the United States and in other
countries.  Most of these companies have considerably greater
financial, technical and marketing resources than us.  Additional
mergers and acquisitions in the pharmaceutical and biotechnology industries may
result in even more resources being concentrated in our
competitors.  Our existing or prospective competitors may develop
processes or products that are more effective than ours or may be more effective
at implementing their technologies to develop commercial products
faster.  Our competitors may succeed in obtaining patent protection
and/or receiving regulatory approval for commercializing products before
us.  Developments by our competitors may render our product candidates
obsolete or noncompetitive.
  We also
experience competition from universities and other research institutions, and we
are likely to compete with others in acquiring technology from those
sources.  There can be no assurance that others will not develop
technologies with significant advantages over those that we are seeking to
develop, which could harm our business.
  We
may be unable to compete successfully with our competitors.
  We face
competition from other companies seeking to identify and commercialize cancer
biomarkers.  We also compete with universities and other research
institutions engaged in research in these areas.  Many of our
competitors have greater technical and financial resources than
us.
  11
  Our
ability to compete successfully is based on numerous factors,
including:  the cost effectiveness of and levels of reimbursement for
any product we ultimately commercialize relative to competing products; the ease
of use and ready availability of any product we bring to market; the side
effects of our product and the relative speed with which we are able to
bring any product resulting from our research to market in our target
markets.
  If we are
unable to distinguish our products from competing products, or if competing
products reach the market first, we may be unable to compete successfully with
current or future competitors.  This would cause our revenues to
decline and affect our ability to achieve profitability.
  We
depend on certain key scientific personnel for our success.  The loss
of any such personnel could adversely affect our business, financial condition
and results of operations.
  The
scientific team is composed of individuals who have been involved in the
development of the patents upon which the three initial target therapies are
based.  The skill sets required to execute the development of
therapies is dependent upon the unique skills, knowledge in the field, and
knowledge around the specific technologies that represent the core of this
business.  Skilled individuals who headed the discovery and
development of many of our core programs, in particular Dr. Gill, our Chief
Medical Officer and the Chairman of our Scientific Board, and Dr. Chandraratna,
our Chief Scientific Officer, are a crucial part of this
business.  The loss of any of these individuals, especially early in
the life of this business can slow the progress.  Loss of one or more
of these individuals may have a detrimental effect on our abilities to continue
the development programs in a timely fashion.
  Our
dependence on collaborative relationships may lead to delays in product
development, lost revenues and disputes over rights to technology.
  Our
business strategy depends to some extent upon the formation of research
collaborations, licensing and/or marketing arrangements.  Our current
or any future collaborations or licensing arrangements ultimately may not be
successful.  We currently have a license agreement with Vitae
Pharmaceuticals, Inc. and agreements with contract research organizations to
help us conduct our clinical trials.  The termination of any
collaboration will result in the loss of any unmet development or commercial
milestone payments, may lead to delays in product development and disputes over
technology rights, and may reduce our ability to enter into collaborations with
other potential partners.  In the event we breach an agreement with a
collaborator, the collaborator is entitled to terminate our agreement with them
in the event we do not cure the breach within a specified period of
time.  Any future collaborations or licensing arrangements may not be
on terms favorable to us.
  It may be
necessary in the future for us to obtain additional licenses to avoid
infringement of third-party patents.  Additionally, we may enter into
license arrangements with other third parties as we build our product
portfolio.  We do not know the terms on which such licenses may be
available, if at all.
  We depend
on independent clinical investigators and contract research organizations
(“CROs”) to conduct our clinical trials under their agreements with
us.  The investigators are not our employees, and we cannot control
the amount or timing of resources that they devote to our
programs.  If independent investigators fail to devote sufficient time
and resources to our drug development programs, or if their performance is
substandard, it may delay or prevent the approval of our FDA applications and
our introduction of new drugs.  The CROs we contract with for
execution of our clinical trials play a significant role in the conduct of the
trials and the subsequent collection and analysis of data.  Failure of
the CROs to meet their obligations could adversely affect clinical development
of our products.  Moreover, these independent investigators and CROs
may also have relationships with other commercial entities, some of which may
compete with us.  If independent investigators and CROs assist our
competitors at our expense, it could harm our competitive position.
  Disputes
may arise in the future over the ownership of rights to any technology developed
with collaborators.  These and other possible disagreements between us
and our collaborators could lead to delays in the collaborative development or
commercialization of products. Such disagreements could also result in
litigation or require arbitration to resolve.
  12
  We
may be subject to product liability and other claims that could have a material
negative effect on our operations and on our financial condition.
  The
development and sale of medical products in general expose us to the risk of
significant damages from product liability and other claims.  Product
liability claims could delay or prevent completion of our clinical development
programs.  If we succeed in marketing our proposed lead product
candidate or any future product candidates, such claims could result in an FDA
investigation of the safety and effectiveness of our products or our marketing
programs, and potentially a recall of our products or more serious enforcement
action, or limitations on the indications for which they may be used, or
suspension or withdrawal of approval.  We plan to obtain and maintain
product liability insurance for coverage of our clinical trial
activities.  There is no assurance that we will be able to secure such
insurance in the amounts we are seeking, or at all, for any of the trials for
our proposed lead product candidate or any future product
candidates.  We intend to obtain coverage for our products when they
enter the marketplace (as well as requiring the manufacturers of our products to
maintain insurance), but we do not know if insurance will be available to us at
all or at acceptable costs.  The costs for many forms of liability
insurance have risen substantially in recent years, and such costs may continue
to increase in the future, which could materially impact our costs for clinical
or product liability insurance.  If the cost is too high, we will have
to self-insure, and we may have inadequate financial resources to pay the costs
of any claims.  A successful claim in excess of our product liability
coverage could have a material adverse effect on our business, financial
condition and results of operations.
  Before
we can market our lead product candidate or any future product candidates, we
must obtain governmental approval for each product candidate, the application
and receipt of which is time-consuming, costly and uncertain.
  Our lead
product candidate and any future product candidates that we will be developing
will require approval of the FDA before they can be marketed in the United
States.  Although our focus at this time is primarily on the U.S.
market, in the future similar approvals will need to be obtained from foreign
regulatory agencies before we can market our current or proposed product
candidates in other countries. We cannot predict whether we will obtain approval
for any of our product candidates. The process for filing and obtaining FDA
approval to market therapeutic products is both time-consuming and costly, with
no certainty of a successful outcome.  The historical failure rate for
companies seeking to obtain FDA approval of therapeutic products is
high.  This process includes conducting extensive preclinical research
and clinical testing, which may take longer and cost more than we initially
anticipate due to numerous factors, including without limitation, difficulty in
securing appropriate centers to conduct trials, difficulty in enrolling patients
in conformity with required protocols in a timely manner, unexpected adverse
reactions to our proposed product candidates by patients in the trials and
changes in the FDA’s requirements for our testing during the course of that
testing. The FDA may require additional preclinical work for our lead product
candidate, which could necessitate significant expenditures that we have not
budgeted and which could significantly delay the commencement of clinical
trials.  The formulation of our lead product candidate has not been
previously tested in patients, and we may encounter unexpected and adverse
immune responses or other side effects in the patients whom we test with this
product candidate.
  The time
required to obtain FDA and other approvals is unpredictable but often can exceed
five years following the commencement of clinical trials, depending upon the
complexity of the product.  Any analysis we perform of data from
preclinical and clinical activities is subject to confirmation and
interpretation by regulatory authorities, which could delay, limit or prevent
regulatory approval.  We may also encounter unexpected delays or
increased costs due to a variety of reasons, including new government
regulations from future legislation or administrative action, or from changes in
FDA policy during the period of product development, clinical trials and FDA
regulatory review.
  Any delay
or failure in our clinical trial program and in obtaining required approvals
would have a material adverse effect on our ability to generate revenues from
the particular product.  Furthermore, any regulatory approval to
market a product may be subject to limitations on the indicated uses for which
we may market the product.  These limitations may limit the size of
the market for the product.
  13
  The
Fast Track designation for development of our lead product candidate or any
other potential product candidate may not lead to a faster development,
regulatory review or approval process, and it does not increase the likelihood
that our product candidate will receive marketing approval.
  If a drug
is intended for the treatment of a serious or life threatening condition and the
drug demonstrates the potential to address unmet medical needs for this
condition, the drug sponsor may apply for FDA Fast Track designation for a
particular indication.  Marketing applications filed by sponsors of
products in Fast Track development may qualify for priority review under the
policies and procedures offered by the FDA, but the Fast Track designation does
not assure any such qualification or ultimate marketing approval by the
FDA.  Receipt of Fast Track designation may not result in a faster
development process, review or approval compared to drugs considered for
approval under conventional FDA procedures.  In addition, the FDA may
withdraw any Fast Track designation at any time. We may seek Fast Track
designation for our lead product candidate or any future product candidates, but
there is no assurance that the FDA will grant this status to any of our proposed
product candidates.
  Because
our lead product candidate represents and our other future potential product
candidates will represent novel approaches to the treatment of disease, there
are many uncertainties regarding the development, the market acceptance, third
party reimbursement coverage and the commercial potential of our product
candidates.
  There is
no assurance that the approaches offered by our lead product candidate or any
future product candidates will gain broad acceptance among doctors or patients
or that governmental agencies or third party medical insurers will be willing to
provide reimbursement coverage for our proposed product
candidates.  Moreover, we do not have internal marketing data research
resources and are not certain of and have not attempted to independently verify
the potential size of the commercial markets for our lead product candidates or
any future product candidates.  Since our lead product candidates and
any future product candidates will represent new approaches to treating various
conditions, it may be difficult, in any event, to accurately estimate the
potential revenues from these product candidates.  We may spend large
amounts of money trying to obtain approval for these product candidates, and
never succeed in doing so. In addition, these product candidates may not
demonstrate in large sets of patients the pharmacological properties ascribed to
them in the laboratory studies or smaller groups of patients, and they may
interact with human biological systems in unforeseen, ineffective or even
harmful ways either before or after they are approved to be
marketed.  We do not yet have sufficient information to reliably
estimate what it will cost to commercially manufacture our lead product
candidate or any future product candidates, and the actual cost to manufacture
these products could materially and adversely affect the commercial viability of
these products.  As a result, we may never succeed in developing a
marketable product.  If we do not successfully develop and
commercialize products based upon our approach, we will not become profitable,
which would materially, adversely affect the value of our common
stock.
  Other
factors that are presently unknown to us that we believe will materially affect
market acceptance of our lead product candidate or any future product candidates
include:
  ·
              the
      timing of our receipt of any marketing approvals, the terms of any
      approvals and the countries in which approvals are
    obtained;
  ·
              the
      safety, efficacy and ease of
administration;
  ·
              the
      availability of government and third-party payor
      reimbursement;
  ·
              the
      pricing of our product candidates, particularly as compared to alternative
      treatments;
  ·
              the
      availability of alternative effective forms of treatments, at that time,
      for the diseases that the product candidates we are developing are
      intended to treat;
 ·
                acceptance
      by patients and physicians;
  ·
                effectiveness
      of our sales and marketing efforts;
  ·
                marketing
      and sales activities of
competitors;
  ·
                market
      satisfaction with existing alternative
  therapies;
  ·
                regulatory
      approval in other jurisdictions;
  ·
                successful
      building and sustaining of manufacturing capability;
  and
  ·
                our
      ability to enter into managed care and governmental agreements on
      favorable terms.
 Since
some of our product candidates utilize new or different mechanisms of action and
in some cases there may be no regulatory precedents, conducting clinical trials
and obtaining regulatory approval may be difficult, expensive and prolonged,
which would delay any commercialization of our products.
  To
complete successful clinical trials, our product candidates must demonstrate
safety and provide substantial evidence of efficacy.  The FDA
generally evaluates efficacy based on the statistical significance of a product
candidate meeting predetermined clinical endpoints.  The design of
clinical trials to establish meaningful endpoints is done in collaboration with
the FDA prior to the commencement of clinical trials.  These endpoints
are established based on guidance from the FDA, including FDA guidance documents
applicable to establishing the efficacy, safety and tolerability measures
required for approval of products.  However, since some of our product
candidates utilize new or different mechanisms of action, the FDA may not have
established guidelines for the design of our clinical trials and may take longer
than average to consider our product candidates for approval.  The FDA
could change its view on clinical trial design and establishment of appropriate
standards for efficacy, safety and tolerability and require a change in clinical
trial design, additional data or even further clinical trials before granting
approval of our product candidates.  We could encounter delays and
increased expenses in our clinical trials if the FDA concludes that the
endpoints established for a clinical trial do not adequately predict a clinical
benefit.
 14
  If
we or our collaborators, manufacturers or service providers fail to comply with
regulatory laws and regulations, we or they could be subject to enforcement
actions, which could affect our ability to market and sell our lead product
candidate and any future product candidates and may harm our
reputation.
  If we or
our collaborators, manufacturers or service providers fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, which could affect our ability to develop, market and sell
our lead product candidate or any future product candidates under development
successfully and could harm our reputation and lead to reduced or non−acceptance
of our proposed product candidates by the market.  Even technical
recommendations or evidence by the FDA through letters, site visits, and overall
recommendations to academia or biotechnology companies may make the
manufacturing of a clinical product extremely labor intensive or expensive,
making the product candidate no longer viable to manufacture in a cost efficient
manner.  The very nature of the product may make the product candidate
not commercially viable.  The required testing of the product
candidate may make that candidate no longer commercially viable.  The
conduct of clinical trials may be critiqued by the FDA, Institutional Review
Board, or the Institutional Biosafety Committee, which may delay or make
impossible clinical testing of a product candidate.  The Data Safety
Monitoring Committee may stop a trial or deem a product unsafe to continue
testing.  This may have significant negative repercussions on the
value of the product and may have negative repercussions on the Company and on
the shareholders. Clinical
investigator misconduct could also result in delays or rejection of our
applications for approval of our product candidates.  Clinical
investigator misconduct that raises questions about the integrity of data in one
or more applications (e.g., fraud, bribery, omission of a material fact, gross
negligence) could be used by the FDA as grounds to suspend substantive
scientific review of all pending marketing applications until the data in
question have successfully undergone a validity assessment.  Product
candidates that fail validity assessments must be withdrawn from FDA review or,
if the drug is an approved, marketed product, such product must be removed from
the market.
 Failure
to comply with all applicable regulations, including those that require us to
obtain and maintain governmental approvals for our product candidates, may
result in fines, corrective actions, administrative sanctions and restrictions,
including the withdrawal of a product from the market.
  Pharmaceutical
companies are subject to significant regulation by a number of national, state
and local agencies, including the FDA.  Such regulations and their
authorizing statutes are amended from time to time.  Failure to comply
with applicable regulatory requirements could, among other things, result in
fines, corrective actions, administrative sanctions, suspensions or delays of
product manufacture or distribution or both, product recalls, delays in
marketing activities and sales, withdrawal of marketing approvals, and civil or
criminal sanctions including possible exclusion from eligibility for federal
government contracts payment of our products by Medicare, Medicaid, and other
third-party payors.
  After
initial regulatory approval, the manufacturing and marketing of drugs, including
our products, are subject to continuing FDA and foreign regulatory
review.  Additionally, the FDA encourages health professionals to
report significant adverse events associated with products.  The FDA
may require additional clinical studies, known as Phase IV studies, to evaluate
product safety effects.  In addition to studies required by the FDA
after approval, we may conduct our own Phase IV studies to explore the use of
the approved drug product for treatment of new indications or to broaden our
knowledge of the product.  The subsequent discovery of previously
unknown problems with a product’s safety or efficacy as a result of these
studies or as reported in their prescribed use may result in restrictions
through labeling changes or withdrawal of the product from the
market.
  The FDA
periodically inspects drug manufacturing facilities to ensure compliance with
applicable good manufacturing practice regulations. Failure to comply with
statutory and regulatory requirements subject the manufacturer to possible legal
or regulatory action, such as suspension of manufacturing, seizure of product or
voluntary recall of a product.
  Additional
authority to take post-approval actions was given to the FDA under the FDA
Amendments Act of 2007, which went into effect on October 1,
2007.  The FDA is authorized to revisit and change its prior
determinations if new information raises questions about our product’s safety
profile.  The FDA is authorized to impose additional post-marketing
requirements such as:
  ·
                testing
      and surveillance to monitor the product and its continued compliance with
      regulatory requirements;
  ·
                submitting
      products for inspection and, if any inspection reveals that the product is
      not in compliance, the prohibition of the sale of all products from the
      same lot;
  ·
                requiring
      us or our partners to conduct long-term safety studies if new information
      raises questions about our product’s safety
  profile;
  ·
                requiring
      labeling changes to help ensure the safe and effective use of
      products;
  ·
                requiring
      development and implementation of a Risk Evaluation and Mitigation
      Strategies plan if the FDA determines that it is necessary to help ensure
      that the drug’s benefits continue to outweigh the risks of a serious
      adverse drug experience;
  ·
                requiring
      corrective and preventive actions and/or suspending
      manufacturing;
  ·
                withdrawing
      marketing approval;
  ·
                seizing
      adulterated, misbranded or otherwise violative
  products;
  ·
                seeking
      to enjoin the manufacture or distribution, or both, of an approved
      product, or seeking an order to recall an approved product, that is found
      to be adulterated or misbranded;
and
  ·
                seeking
      monetary fines and penalties, including disgorgement of profits, if a
      court finds that we are in violation of applicable
  law.
  15
 Even
before any formal regulatory action, we could voluntarily decide to cease
distribution and sale, or recall, any of our products if concerns about safety
or effectiveness develop, if certain good manufacturing practice deviations are
found, or if economic conditions support such action.
  In its
regulation of advertising, the FDA may issue correspondence to pharmaceutical
companies alleging that its advertising or promotional materials are false,
misleading or deceptive.  The FDA has the power to impose a wide array
of sanctions on companies for such advertising practices and if we were to
receive correspondence from the FDA alleging these practices it may be necessary
for us to:
  ·
                incur
      substantial expenses, including fines, penalties, legal fees and costs to
      conform to the FDA’s limits on such
promotion;
  ·
                change
      our methods of marketing, promoting and selling
  products;
  ·
                take
      corrective action, which could include placing advertisements or sending
      letters to physicians correcting statements made in previous
      advertisements or promotions; or
  ·
                disrupt
      the distribution of products and stop sales until we are in compliance
      with the FDA’s interpretation of applicable laws and
      regulations.
  In
addition, in recent years some alleged violations of FDA requirements regarding
off-label promotion of products by manufacturers have been used to support
whistleblower and/or government actions under the federal civil False Claims
Act, resulting in substantial monetary settlements.  Also, various
legislative proposals have been offered in Congress and in some state
legislatures that include major changes in the health care
system.  These proposals have included price or patient reimbursement
constraints on medicines and restrictions on access to certain
products.  We cannot predict the outcome of such initiatives and it is
difficult to predict the future impact of the broad and expanding legislative
and regulatory requirements affecting us.
  We
are subject to “fraud and abuse” and similar government laws and regulations,
and a failure to comply with such laws and regulations, or an investigation into
our compliance with such laws and regulations, or a failure to prevail in any
litigation related to noncompliance, could harm our business.
  We are
subject to multiple state and federal laws pertaining to health care fraud and
abuse.  Pharmaceutical pricing, sales, and marketing programs and
arrangements, and related business practices in the health care industry
generally are under increasing scrutiny from federal and state regulatory,
investigative, prosecutorial, and administrative entities.  Many
health care laws, including the federal and state anti-kickback laws and federal
and state statutory and common law false claims laws, have been construed
broadly by the courts and permit government entities to exercise considerable
discretion.  In the event that any of these government entities
believed that wrongdoing had occurred, one or more of them could institute civil
administrative or criminal proceedings which, if instituted and resolved
unfavorably, could subject us to substantial fines, penalties, and injunctive
and administrative remedies, including exclusion from government reimbursement
programs.  Any such result could have a material adverse impact on our
results of operations, cash flows, financial condition, and our
business.  Such investigations could be costly, divert management’s
attention from our business, and result in damage to our
reputation.  We cannot guarantee that measures that we have taken to
prevent violations  will protect us from future violations, lawsuits
or investigations.  If any such actions are instituted against us, and
we are not successful in defending ourselves or asserting our rights, those
actions could have a significant negative impact on our business, including
the imposition of significant fines or other sanctions.
  Failure
to adequately control compliance with all applicable laws and regulations may
adversely affect our business, and we may become subject to investigative or
enforcement actions.
  There are
extensive state, federal and foreign laws and regulations applicable to
pharmaceutical companies engaged in the discovery, development and
commercialization of medicinal products.  There are laws and
regulations that govern areas including financial controls, clinical trials,
testing, manufacturing, labeling, safety, packaging, shipping, distribution and
promotion of pharmaceuticals, including those governing interactions with
prescribers and healthcare professionals in a position to prescribe, recommend,
or arrange for the provision of our products.
  In recent
years, pharmaceutical companies have been the targets of extensive whistleblower
actions in which the person bringing an action alleges a variety of violations
of the civil False Claims Act or its state equivalent, in such areas as pricing
practices, off-label product promotion, sales and marketing practices, improper
relationships with physicians and other healthcare professionals, among
others.  The potential ramifications are far-reaching if there are
areas identified as out of compliance by regulatory agencies including, but not
limited to, significant financial penalties, manufacturing and clinical trial
consent decrees, commercialization restrictions, exclusion from government
programs, product recalls or seizures, or other restrictions and
litigation.  Furthermore, there can be no assurance that we will not
be subject to a whistleblower or other investigative or enforcement action at
some time in the future.
  Failure
to obtain regulatory approval in foreign jurisdictions will prevent us from
marketing our products abroad.
  We intend
to market our products in international markets.  In order to market
our products in the European Union and many other foreign jurisdictions, we must
obtain separate regulatory approvals.  The approval procedure varies
among countries and can involve additional testing, and the time required to
obtain approval may differ from that required to obtain FDA
approval.  The foreign regulatory approval process may include all of
the risks associated with obtaining FDA approval.  We may not obtain
foreign regulatory approvals on a timely basis, if at all. Approval by the FDA
does not ensure approval by regulatory authorities in other countries, and
approval by one foreign regulatory authority does not ensure approval by
regulatory authorities in other foreign countries or by the FDA.  We
may not be able to file for regulatory approvals and may not receive necessary
approvals to commercialize our products in any market.  16
  We
are subject to uncertainty relating to health care reform measures and
reimbursement policies which, if not favorable to our product candidates, could
hinder or prevent our product candidates’ commercial success.
  The
continuing efforts of the government, insurance companies, managed care
organizations and other payors of health care costs to contain or reduce costs
of health care may adversely affect:  (1) our ability to generate
revenues and achieve profitability; (2) the future revenues and profitability of
our potential customers, suppliers and collaborators; and (3) the availability
of capital.
  In
certain foreign markets, the pricing of prescription pharmaceuticals is subject
to government control.  In the United States, given recent federal and
state government initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely continue to focus on health
care reform, the cost of prescription pharmaceuticals and on the reform of the
Medicare and Medicaid systems.  While we cannot predict the full
effects of the implementation of this new legislation or whether any legislative
or regulatory proposals affecting our business will be adopted, the
implementation of this legislation or announcement or adoption of these
proposals could have a material and adverse effect on our business, financial
condition and results of operations.
  The
Medicare Prescription Drug, Improvement and Modernization Act of 2003
established a voluntary outpatient prescription drug benefit under Part D of the
Social Security Act.   The program, which went into effect
January 1, 2006, is administered by the Centers for Medicare &
Medicaid Services within the Department of Health and Human Services and is
implemented and operated by private sector Part D plan sponsors.  The
federal government can be expected to continue to issue guidance and regulations
regarding the obligations of Part D sponsors and their
subcontractors.
  Each
participating drug plan is permitted by regulation to develop and establish its
own unique drug formulary that may exclude certain drugs from coverage, impose
prior authorization and other coverage restrictions, and negotiate payment
levels for drugs which may be lower than reimbursement levels available through
private health plans or other payers. Moreover, beneficiary co-insurance
requirements could influence which products are recommended by physicians and
selected by patients. There is no assurance that any drug that we develop
or sell will be covered by drug plans participating under the Medicare Part D
program or, if covered, what the terms of any such coverage will be, or that the
drugs will be reimbursed at amounts sufficient to make the drug cost effective.
 To the extent that private insurers or managed care programs follow
Medicare coverage and payment developments, the adverse effects of lower
Medicare payment may be magnified by private insurers adopting similar lower
payment.  New federal or state drug payment changes or healthcare reforms
in the United States and in foreign countries may be enacted or adopted in the
future that could further lower payment for our products.
  Our
ability to commercialize our product candidates successfully will depend in part
on the extent to which governmental authorities, private health insurers and
other organizations establish appropriate reimbursement levels for the cost of
our products and related treatments Third-party payors are increasingly
challenging the prices charged for medical products and
services.  Also, the trend toward managed health care in the United
States, which could significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for our product
candidates or exclusion of our product candidates from reimbursement
programs.  The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could
materially and adversely affect our results of operations.
 Another
development that may affect the pricing of drugs is regulatory action regarding
drug reimportation into the United States.  The Medicare Prescription
Drug, Improvement and Modernization Act of 2003, which became law in December
2003, requires the Secretary of the U.S. Department of Health and Human Services
(the “Secretary”) to promulgate regulations allowing drug reimportation from
Canada into the United States under certain circumstances.  These
provisions will become effective only if the Secretary certifies that such
imports will pose no additional risk to the public’s health and safety and will
result in significant cost savings to consumers.  To date, the
Secretary has made no such finding, but he could do so in the
future.  Proponents of drug reimportation may also attempt to pass
legislation that would remove the requirement for the Secretary’s certification
or allow reimportation under circumstances beyond those anticipated under
current law.  If legislation is enacted, or regulations issued,
allowing the reimportation of drugs, it could decrease the reimbursement we
would receive for any products that we may commercialize, negatively affecting
our anticipated revenues and prospects for profitability.
 If
physicians and patients do not accept the products that we may develop, our
ability to generate product revenue in the future will be adversely
affected.
  The
product candidates that we may develop may not gain market acceptance among
physicians, healthcare payors, patients and the medical
community.  This will adversely affect our ability to generate
revenue.  Market acceptance of and demand for any product that we may
develop will depend on many factors, including: our ability to provide
acceptable evidence of safety and efficacy; convenience and ease of
administration; prevalence and severity of adverse side effects; cost
effectiveness; effectiveness of our marketing strategy and the pricing of any
product that we may develop; our competitors’ sales and
marketing activities; publicity concerning our products or competitive products;
and our ability to obtain third-party coverage or reimbursement.
 17
 The
cost of defending against product liability claims brought against us can be
costly and time consuming, and may harm our business.
  Product
liability claims brought against the Company could prevent or interfere with our
product commercialization efforts.  Interference can be filed by other
inventors/licensees if they believe they have intellectual property covering any
part of the discovery and development of our therapeutic
product.  Such interference can delay the product
development.  We currently have no obvious interference and do not
anticipate any, but unforeseen events can occur, leading to delays, or even
block of developing a product.  Defending a suit, regardless of merit,
could be costly, could divert management attention and might result in adverse
publicity or reduced acceptance of our products in the market.
  If
we are not able to protect and control our unpatented trade secrets, know-how
and other technological innovation, we may suffer competitive harm.
  We also
rely on proprietary trade secrets and unpatented know-how to protect our
research and development activities, particularly when we do not believe that
patent protection is appropriate or available.  However, trade secrets
are difficult to protect.  We will attempt to protect our trade
secrets and unpatented know-how by requiring our employees, consultants and
advisors to execute a confidentiality and nonuse agreement.  We cannot
guarantee that these agreements will provide meaningful protection, that these
agreements will not be breached, that we will have an adequate remedy for any
such breach, or that our trade secrets will not otherwise become known or
independently developed by a third party.  Our trade secrets, and
those of our present or future collaborators that we utilize by agreement, may
become known or may be independently discovered by others, which could adversely
affect the competitive position of our product candidates.
  We
may incur substantial costs as a result of litigation or other proceedings to
enforce our patents, defend against third-party patents, invalidate third-party
patents or license third-party intellectual property.
  We may
not have rights under some patents or patent applications that may cover
technologies that we use in our research, drug targets that we select, or
product candidates that we seek to develop and commercialize.  Third
parties may own or control these patents and patent applications in the United
States and abroad.  These third parties could bring claims against us
or our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial
damages.  Further, if a patent infringement suit were brought against
us or our collaborators, we or they could be forced to stop or delay research,
development, manufacturing or sales of the product or product candidate that is
the subject of the suit.  We or our collaborators therefore may choose
to seek, or be required to seek, a license from the third-party and would most
likely be required to pay license fees or royalties or both.  These
licenses may not be available on acceptable terms, or at all.  Even if
we or our collaborators were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual
property.  Ultimately, we could be prevented from commercializing a
product or forced to cease some aspect of our business operations as a result of
patent infringement claims, which could harm our business.
  There has
been substantial litigation and other proceedings regarding patent and other
intellectual property rights in the pharmaceutical and biotechnology
industries.  Although we are not currently a party to any patent
litigation or any other adversarial proceeding, including any interference
proceeding declared before the United States Patent and Trademark Office,
regarding intellectual property rights with respect to our products and
technology, we may become so in the future.  We are not currently
aware of any actual or potential third party infringement claim involving our
products.  The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.  The
outcome of patent litigation is subject to uncertainties that cannot be
adequately quantified in advance, including the demeanor and credibility of
witnesses and the identity of the adverse party, especially in biotechnology
related patent cases that may turn on the testimony of experts as to technical
facts upon which experts may reasonably disagree.  Some of our
competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their substantially greater financial
resources.  If a patent or other proceeding is resolved against us, we
may be enjoined from researching, developing, manufacturing or commercializing
our products without a license from the other party and we may be held liable
for significant damages.  We may not be able to obtain any required
license on commercially acceptable terms or at all.
  Uncertainties
resulting from the initiation and continuation of patent litigation or other
proceedings could harm our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant time from
management.
  If
we are unable to protect our intellectual property rights, our competitors may
develop and market products with similar features that may reduce demand for our
potential products.
  The
following factors are important to our success: receiving patent protection for
our product candidates; preventing others from infringing on our intellectual
property rights; and maintaining our patent rights and trade
secrets.
  We will
be able to protect our intellectual property rights in patents and trade secrets
from unauthorized use by third parties only to the extent that such intellectual
property rights are covered by valid and enforceable patents or are effectively
maintained as trade secrets.
  18
  The
initial clinical development candidates that we are considering for development
are covered by issued U.S. New Chemical Entity patents.  We anticipate
that we will apply for further patents based on our ongoing
research.  Because issues of patentability involve complex legal and
factual questions, the issuance, scope and enforceability of patents cannot be
predicted with certainty.  Patents, if issued, may be challenged,
invalidated or circumvented. U.S. patents and patent applications may also be
subject to interference or reexamination proceedings in the U.S. Patent and
Trademark Office.  Foreign patents may be subject to opposition or
comparable proceedings in corresponding foreign patent offices, and such
proceedings could result in either loss of the patent or denial of the patent
application, or loss or reduction in the scope of one or more of the claims of
the patent or patent application.  In addition, such interference,
reexamination and opposition proceedings may be costly.  Thus, any
patents that we own or license from others may not provide any protection
against competitors. Furthermore, an adverse decision in an interference
proceeding can result in a third-party receiving the patent rights sought by us,
which in turn could affect our ability to market a potential product to which
that patent filing was directed.  Our pending patent applications,
those that we may file in the future, or those that we may license from third
parties may not result in patents being issued.  If issued, they may
not provide us with proprietary protection or competitive advantages against
competitors with similar technology.  Furthermore, others may
independently develop similar technologies or duplicate any technology that we
have developed.  Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties.  For example, compulsory
licenses may be required in cases where the patent owner has failed to “work”
the invention in that country, or the third-party has patented
improvements.  In addition, many countries limit the enforceability of
patents against government agencies or government contractors.  In
these countries, the patent owner may have limited remedies, which could
materially diminish the value of the patent.  Moreover, the legal
systems of certain countries, particularly certain developing countries, do not
favor the aggressive enforcement of patent and other intellectual property
protection, which makes it difficult to stop infringement.
  In
addition, our ability to enforce our patent rights depends on our ability to
detect infringement. It is difficult to detect infringers who do not advertise
the compounds that are used in their products. Any litigation to enforce or
defend our patent rights, even if we prevail, could be costly and time-consuming
and would divert the attention of management and key personnel from business
operations.
  We will
also rely on trade secrets, know-how and technology, which are not protected by
patents, to maintain our competitive position.  We will seek to
protect this information by entering into confidentiality agreements with
parties that have access to it, such as strategic partners, collaborators,
employees and consultants.  Any of these parties may breach these
agreements and disclose our confidential information or our competitors might
learn of the information in some other way.  If any trade secret,
know-how or other technology not protected by a patent were disclosed to or
independently developed by a competitor, our business, financial condition and
results of operations could be materially adversely affected.
  The
patent process is exceedingly time consuming and the loss of patent protection
may cause a reduction or loss of future revenue stream.
  The
patent process is exceedingly time consuming.  The time consumed by
development, regulatory review, and creation of a market for a drug may
significantly intrude into the finite patent life of the particular drug. Loss
of patent protection ultimately enables generic versions of the drug to enter
the market, which will significantly adversely impact future revenue streams of
the Company.  An initially profitable drug may thus become
significantly less profitable.
  If
we are unable to contract with third parties for the synthesis of active
pharmaceutical ingredients required for preclinical testing or for the
manufacture of drug products for clinical trials, we may be unable to develop or
commercialize our drug products.
  The
manufacturing of sufficient quantities of new product candidates is a
time-consuming and complex process.  We have no experience or
capabilities to conduct the manufacture of any of our product
candidates.  In order to successfully develop our product candidates,
we need to contract or otherwise arrange for the necessary
manufacturing.  There are a limited number of manufacturers that
operate under the FDA’s good manufacturing practices capable of manufacturing
for us. We depend upon third parties for the manufacture of both drug substance
and finished drug products and this dependence may adversely affect our ability
to develop and deliver such products on a timely and competitive
basis.  If we are unable to engage or retain third-party manufacturers
on a long-term basis or on commercially acceptable terms, our product candidates
may not be developed as planned, and the development of our product candidates
could be delayed.  Our reliance on contract manufacturers also exposes
us to the following risks:
  ·
                contract
      manufacturers may encounter difficulties in achieving volume production,
      quality control and quality assurance, and also may experience shortages
      in qualified personnel.  As a result, our contract manufacturers
      might not be able to meet our clinical schedules or adequately manufacture
      our products in commercial quantities when
  required;
  ·
                switching
      manufacturers may be difficult because the number of potential
      manufacturers is limited.  It may be difficult or impossible for
      us to find a replacement manufacturer quickly on acceptable terms, or at
      all;
  ·
                our
      contract manufacturers may not perform as agreed or may not remain in the
      contract manufacturing business for the time required to successfully
      produce, store or distribute our
  products; and
  ·
                drug
      manufacturers are subject to ongoing periodic unannounced inspection by
      the FDA and corresponding state agencies to ensure strict compliance with
      good manufacturing practices and other government regulations and
      corresponding foreign standards.  We do not have control over
      third-party manufacturers’ compliance with these regulations and
      standards.
  Our
current dependence upon third parties for the manufacture of our products may
harm our profit margin, if any, on the sale of our future products and our
ability to develop and deliver products on a timely and competitive
basis.
  The
manufacturing processes for our product candidates have not been validated at
the scale required for commercial sales.  Delays in scale-up to
commercial quantities and any change at the site of manufacture could delay
clinical trials, regulatory submissions and ultimately the commercialization of
our products.
 19
  If
our third-party manufacturers’ facilities do not follow current good
manufacturing practices, our product development and commercialization efforts
may be harmed.
  There are
a limited number of manufacturers that operate under the FDA’s and European
Union’s good manufacturing practices regulations and are capable of
manufacturing products. Third-party manufacturers may encounter difficulties in
achieving quality control and quality assurance and may experience shortages of
qualified personnel.  A failure of third-party manufacturers to follow
current good manufacturing practices or other regulatory requirements, or to
document their adherence to such practices, may lead to significant delays in
the availability of products for commercial use or clinical study, the
termination of, or hold on, a clinical study, or the delay or prevention of
filing or approval of marketing applications for our products.  In
addition, we could be subject to sanctions, including fines, injunctions and
civil penalties.  Changing manufacturers may require FDA approval or
additional clinical trials and the revalidation of the manufacturing process and
procedures in accordance with FDA mandated current good manufacturing
practices.  This revalidation may be costly and time
consuming.  If we are unable to arrange for third-party manufacturing
of our products on commercially reasonable terms, we may not be able to complete
development or marketing of our products.
  RISKS
RELATED TO CAPITAL STRUCTURE
  There
is no established public trading market for our common stock, and the failure to
establish one will adversely affect the ability of our investors to sell their
securities in the public market.
  At
present, there is no active trading market for our securities, and there
can be no assurance that a trading market will develop. Our common stock,
however, is traded on the OTC Bulletin Board.  The National
Association of Securities Dealers (the “NASD”) has enacted changes that limit
quotations on the OTC Bulletin Board to securities of issuers that are current
in their reports filed with the SEC. The OTC Bulletin Board is an inter−dealer,
over-the-counter market that provides significantly less liquidity than the
NASD’s automated quotation system (the “NASDAQ Stock Market”).  Unlike
quotes for the NASDAQ Stock Market, quotes for stocks included on the OTC
Bulletin Board are not listed in the financial sections of
newspapers.  Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and holders of common stock may be
unable to resell their securities at or near their original offering price, or
at all.
  Factors
which may adversely affect market prices of our common stock.
  Market
prices for our common stock will be influenced by a number of factors,
including:
  ·
                the
      issuance of new equity securities pursuant to a future offering or
      acquisition;·
                data
      from clinical trials;·
                developments
      related to the FDA approval process;·
                sales
      of our stock by our current stockholders;·
                developments
      in our patent rights;·
                departures
      of key personnel;·
                the
      addition or termination of research or development
    programs;·
                the
      entry into collaborative
agreements;
  ·
              changes
      in interest rates;
  ·
              competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;
  ·
              variations
      in quarterly operating results;
  ·
              changes
      in financial estimates by securities
analysts;
  ·
              the
      depth and liquidity of the market for our common
  stock;
  ·
              investor
      perceptions of our company and the medical device industry generally;
      and
  ·
              general
      economic and other national
conditions.
  20
  Shares
eligible for future sale may adversely affect the market price of our common
stock.
  During
the fiscal year ended September 30, 2007, we issued 104,000,000 shares of our
common stock and 12,300,000 warrants to purchase our common stock (or 26,000,000
shares and 3,075,000 warrants on a post-split basis) to investors through
private placement transactions exempt from registration under the Securities Act
of 1933, as amended (the “Securities Act”).  The sale, or availability
for sale, of substantial amounts of this stock could adversely affect the future
market price of our common stock and could impair our ability to raise
additional capital through the sale of our equity securities or debt financing.
Additionally,
such sales may make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that our management
deems acceptable, or at all.
  Our
common stock is considered a “penny stock” and may be difficult to
sell.
  Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rules 15g−2 through 15g−6 promulgated under Section 15(g) of
the Securities Exchange Act of 1934. The characteristics that define a “penny
stock” include but are not limited to the following:  (i) the stock
trades at a price less than $5.00 per share; (ii) the stock is NOT traded on a
“recognized” national exchange; (iii) the stock is NOT quoted on the NASDAQ
Stock Market, or even if so, has a price less than $5.00 per share; or (iv) the
stock is issued by a company with net tangible assets less than $2.0 million, if
in business more than a continuous three years, or with average revenues of less
than $6.0 million for the past three years.  The principal result or
effect of being designated a “penny stock” is that securities broker-dealers
cannot recommend the stock but must trade in it on an unsolicited
basis.
  Additionally,
Section 15(g) of the Exchange Act and Rule 15g−2 promulgated thereunder by the
SEC require broker-dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain a
manually signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor’s account.
  Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny
stock.”  Moreover, Rule 15g−9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor.  This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment
objectives.  Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to
third-parties or to otherwise dispose of them in the market or
otherwise.
  If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
  We are
required and have established and maintain appropriate internal controls over
financial reporting which management has assed to be effective as of our fiscal
year ended September 30, 2008. Any failure of those controls once established,
could adversely impact our public disclosures regarding our business, financial
condition or results of operations.
  Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
  Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal controls over financial reporting, and
attestation of our assessment by our independent registered public
accountants.  On December 15, 2006, the SEC extended the compliance
date for non-accelerated filers, as defined by the SEC, to provide management’s
report on internal controls until the company files an annual report for its
fiscal year ending on or after December 15, 2007.  On December 17,
2007, the SEC announced that it intended to further extend the compliance date
for non-accelerated filers to file the auditor’s attestation report on internal
control over financial reporting until it files an annual report for its first
fiscal year ending on or after December 15, 2009.  Accordingly,
management has made the required review and assessed the system of internal
control over financial reporting to be effective as of our fiscal year end.
We
may not be able to conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with
Section 404.  Failure to achieve and maintain an effective
internal control environment could harm our operating results and could cause us
to fail to meet our reporting obligations.  Inferior internal controls
could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
stock. Our auditor’s review of our system and subsequent attestation
report will not be performed until the fiscal year ending September 30, 2010.
The attestation process by our independent registered public accountants is new
and we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants.  If our independent
registered public accountants are unable to provide an unqualified attestation
report on such assessment, investor confidence and share value may be negatively
impacted.
  21




We
do not foresee paying cash dividends in the foreseeable future.




We have
not paid cash dividends on our stock and do not plan to pay cash dividends on
our common stock in the foreseeable future.





ITEM1B.
              UNRESOLVED
      STAFF COMMENTS




Not applicable.




ITEM
      2.
            PROPERTIES




We
currently maintain our corporate office in 18 Technology, Suite 130, Irvine, CA
92618, under a lease through July 31, 2010 at a base monthly rental rate of
$4,243, escalating to $4,389 at August 1, 2009.  We do not own or
lease any other property and we do not have a real estate investment
policy.




ITEM
      3.
            LEGAL
      PROCEEDINGS




We are
not a party to any material legal proceedings.




We may
occasionally become subject to legal proceedings and claims that arise in the
ordinary course of our business.  It is impossible for us to predict
with any certainty the outcome of any disputes that may arise, and we cannot
predict whether any liability arising from claims and litigation will be
material in relation to our financial position or results of
operations.




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




No matters were submitted to a vote of
security holders during the fourth quarter of the fiscal year ended September
30, 2008.




PART
II




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




Market
Information




Our
common stock has been traded on the OTC Bulletin Board over-the-counter market
since November 10, 2006. Effective October 30, 2007, the Company changed its
symbol from “QSTG” to “NURX” in connection with the Company’s change in name to
NuRx Pharmaceuticals, Inc.  Effective on or about May 9, 2008, the
Company changed its symbol from “NURX” to “NUXP” in connection with the
one-for-four reverse stock split.


22


There is
little or no trading in our common stock. The following price information
reflects inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions:




Quarter
      Ending
                            
                            High
                            
                            
                            LowNov.
      10, 2006 - Dec. 31, 2006(1)(3)
                            
                            $
                            2.40
                            
                            
                            $
                            0.48Jan.
      1, 2006 – March 31, 2007
                            
                            $
                            2.80
                            
                            
                            $
                            1.24
                            (2)April
      1, 2007 - June 30, 2007
                            
                            $
                            5.60
                            
                            
                            $
                            2.32July
      1, 2007 – September 30, 2007
                            
                            $
                            7.00
                            
                            
                            $
                            3.00October
      1, 2007 – December 31, 2007
                            
                            $
                            4.04
                            
                            
                            $
                            2.00January
      1, 2008 – March 31, 2008
                            
                            $
                            4.04
                            
                            
                            $
                            2.20April
      1, 2008 – June 30, 2008
                            
                            $
                            4.05
                            
                            
                            $
                            2.10July
      1, 2008 – September 30, 2008
                            
                            $
                            2.50
                            
                            
                            $
                            0.30





1)           
To our knowledge, trading activity first commenced during the calendar quarter
ended December 31, 2006.




(2)Price
as of the first trading day after March 31, 2007.





(3)           All
per share information is adjusted to reflect the one-for-four reverse stock
split which occurred on May 9, 2008.




Holders




As of
December 17, 2008, there were approximately 35 holders of record of our
common stock.




Dividends




We have
not paid any dividends on our common stock to date and do not anticipate that we
will be paying dividends in the foreseeable future.




Any
payment of cash dividends on our common stock in the future will be dependent
upon the amount of funds legally available, our earnings, if any, our financial
condition, our anticipated capital requirements and other factors that the Board
of Directors may think are relevant.  However, we currently intend for
the foreseeable future to follow a policy of retaining all of our earnings, if
any, to finance the development and expansion of our business and, therefore, do
not expect to pay any dividends on our common stock in the foreseeable
future.




Equity
Compensation Plan Information




The only
equity compensation plan approved by our security holders is the 2007 Stock
Compensation Plan (the “2007 Plan”).  The Company has also issued
equity compensation outside of the 2007 Plan in connection with the services
provided by Hunter World Markets for the Company’s private placement of its
common stock.




Recent
Sales of Unregistered Securities




On
October 31, 2007, we issued to Vitae Pharmaceuticals, Inc. 1,756,732 shares of
our common stock (on a post-split basis) as a milestone payment in connection
with the license agreement that we executed on May 11, 2007, under which we
acquired an exclusive, worldwide sublicense to certain compounds and technology
for human and veterinary use.


ITEM
      6.
            SELECTED
      FINANCIAL DATA.




Not
applicable.




23




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





Management’s
Discussion and Analysis or Plan of Operation.




You
should read the information in this Item 7 together with our financial
statements and notes thereto that appear elsewhere in this Report. This Report
contains forward-looking statements that involve risks, uncertainties, and
assumptions. Actual results may differ materially from those anticipated in
these forward-looking statements.




Overview




From our
inception in 2001 to May 2007, we were in the business of selling nutritional
products. In May 2007, we spun off this nutritional products business and began
to pursue a new business plan in the pharmaceuticals
industry.   On May 11, 2007, we entered into a license agreement
with Vitae Pharmaceuticals, Inc. (“Vitae”), pursuant to which we acquired an
exclusive, worldwide sublicense, with the right to grant further sublicenses, to
certain compounds and technology for all human and veterinary
use.  The indications for the lead compounds are acute promyelocytic
leukemia, solid cancers (lung and breast) and chemotherapy-induced neutropenia
(low white cell count). The Company paid Vitae an upfront licensing fee of
$2,100,000 and $50,000 for its inventory of the licensed
compounds.  The Company also agreed to issue Vitae 7,026,927 shares of
common stock (or 1,756,732 shares of common stock on a post-split basis),
representing 5.66% of our outstanding common stock (after the issuance of these
shares) as of the effective date of the license, upon reaching a certain
milestone.  These shares were issued to Vitae on October 31, 2007,
when the Company met this milestone by receiving approval from the Food and Drug
Administration (the “FDA”) to begin Phase I clinical trials for one of the lead
compounds.




We
currently are in active research and clinical development of therapeutic
compounds relating to our nuclear receptor target technologies.





Private
Placements




In May
through June 2007, the Company raised approximately $20,500,000 from a small
group of accredited investors from the sale of 41,000,000 shares of common stock
at a price of $.50 per share in a private placement offering.  As
adjusted for the 1-for-4 reverse stock split that took place in May 2008, this
represents the sale of 10,250,000 shares of common stock at a price of $2.00 per
share.  Pursuant to the terms of the private placement, these
investors had certain anti-dilutive price protections until July 18,
2008.




Hunter
World Markets, Inc. acted as the exclusive placement agent in the private
placement offering, and received a fee of $2,012,500 (approximately 10% of the
gross proceeds) and two six-year warrants to purchase an aggregate of 12,300,000
shares of the Company’s common stock at an exercise price of $1.00 per share (or
3,075,000 shares of the Company’s common stock at an exercise price of $4.00 per
share on a post-split basis). These warrants expire in 2013. Hunter World
Markets, Inc. also loaned us $125,000 at an interest rate of 6% per annum. This
loan together with accrued interest and a loan fee of $12,500 was repaid from
the proceeds of the private placement.




In
connection with the private offering, stockholders who had acquired our common
stock prior to April 27, 2007 canceled an aggregate of 7,759,000 shares of
common stock (or 1,939,750 shares of common stock on a post-split basis) in
consideration for an aggregate amount of $750,000.





During
the period between May 30, 2007 and June 27, 2007, we sold an aggregate of
1,000,000 shares of our common stock at $0.50 per share (or 250,000 shares of
our common stock at a price of $2.00 per share on a post-split basis) and
received aggregate proceeds of $500,000. In connection with the aforementioned
sales, Hunter World Markets received a commission of 5% on half the gross
proceeds and received a six-year warrant to purchase common stock equal to
300,000 shares, or 30% of the number of shares sold, exercisable at $1.00 per
share (or 75,000 shares at an exercise price of $4.00 per share on a post-split
basis).





24


Operating
Expenses





Fiscal year ended September
30, 2008





General
and Administrative





Our general and administrative
(G&A) expenses for the fiscal year ended September 30, 2008, totaling $1.9
million, consisted primarily of costs involved in building and establishing our
system of internal control over financial reporting, budgeting, quarterly and
annual regulatory filings and related review, audit and legal costs, including
the implementation of the one-for-four reverse stock split in May
2008.  G&A costs also include payroll costs of general and
administrative employees, benefits costs for all employees, costs related to
Board meetings and share-based compensation expense related to option issuances
to Board members and general and administrative employees and
consultants.





During 2008, we also added three new
independent directors to our Board of Directors.





Research
& Development





Research and development (“R&D”)
expenses for the year ended September 30, 2008, totaling $5.8 million, consisted
primarily of costs involved in the following activities:




·
            Identifying,
      negotiating and consummating relationships for the manufacture of the
      clinical grade drug product for the Company’s two lead compounds for use
      in clinical trials;





·
            Regulatory
      affairs activities including:


o
            grant
      by the FDA of the IND and initiation of a Phase I clinical trial for NRX
      194204,


o
            re-activation
      by the FDA for the IND and initiation of Phase II clinical trial for NRX
      195183,


o
            regulatory
      filings including protocol submissions with governmental bodies in India
      and Mexico with respect to clinical
trials,


o
            regulatory
      filings including protocol submissions with governing ethics committees
      for proposed clinical trial sites in India and Mexico, including
      negotiation of related contracts;





·
            Patient
      and data management activities for clinical trials;
  and





·
            Added
      new members to the Scientific Advisory
Board.





25


R&D costs also included payroll
costs of R&D employees, costs of third party consultants, legal costs
related to maintenance of the patent portfolio, including patent annuity
payments, in-process R&D costs related to the share based milestone payment
under the Vitae license and share-based compensation costs related to stock and
option grants to R&D employees and consultants.





A comparative analysis of fiscal 2008
with fiscal 2007 is not presented here since the 2007 year included seven months
where we had no operations and five months of primarily organizational
activities.





Fiscal year ended September
30, 2007





There were no substantial operations
business during our fiscal year ended September 30, 2007, as activities
consisted primarily of disposition of the previous nutritional products business
and completion of a plan of reorganization in May 2007, including a series of
private placements, a change in directors and management and redemption of
common shares of controlling shareholders prior to May 2007.





Our pharmaceutical products development
activities for the fiscal year ended September 30, 2007 consisted primarily of
consummating the license agreement with Vitae and completing the acquisition and
transfer of the patents, patent applications, compounds and related materials,
securing leased premises in which to conduct our research and development
activities, and submission of an application for an IND with the FDA for our
compound for the treatment of solid cancers (NRX194204), which was granted on
October 31, 2007.  The initial Scientific Advisory Board was also
established.





A comparative analysis of the
development stage pharmaceutical activities conducted in fiscal 2007 with the
disposed nutritional products business conducted in fiscal 2006 is not presented
here since it would not be useful in analyzing our current business and
operations.




Revenues




We have
had no revenues related to our new pharmaceuticals business and we do not
anticipate that we will derive any revenues from either product sales or
licensing during the foreseeable future.  We have no research and
development co-development or other agreements, which provide for future revenue
or obligations to transfer rights to any of our intellectual property to third
parties.  We have agreed to pay Allergan (and any cross licensors),
the company that originally licensed the compounds to Vitae, and Vitae up to an
aggregate of 12% of future net sales of products based on the licensed
technology, such specific percentage to be determined according to the specific
compound generating the revenue, the geographic region of exploitation, and
certain other factors.




Liquidity




We
have cash and cash equivalents of approximately $11.4 million at September 30,
2008. We believe that our existing cash balances will be sufficient to fund
completion of our planned clinical trials and to fund our currently planned
level of operations through October, 2010. The
Company will require substantial additional funding for continuing research and
development, obtaining regulatory approval and the commercialization of its
products. There is no assurance that the Company will be able to obtain
sufficient additional funds when needed, or that such funds will be obtainable
on terms satisfactory to the Company. 
 The
decrease in cash and cash equivalents for the year ended September 30, 2008 of
approximately $3.6 million was primarily caused by a cash loss from operations
of $3.5 million. There were no significant cash flows from financing or
investing activities for the year.
 
 The
Company does not believe the current economic environment will have any
significant effect on the anticipated operating activities for the fiscal year
ending September 30, 2009.
 
 Capital
Resources
 
 The
Company has no significant planned capital expenditures for the fiscal year
ending September 30, 2009.
  Off-Balance
Sheet Arrangements
  We are
not a party to any off-balance sheet arrangements, and we do not engage in
trading activities involving non-exchange traded contracts. In addition, we have
no financial guarantees, debt or lease agreements or other arrangements that
could trigger a requirement for an early payment or that could change the value
of our assets.
  26
 Critical
Accounting Policies
  Management’s
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, management evaluates its estimates, including those related to
impairment of long-lived assets, including finite lived intangible assets,
accrued liabilities and certain expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
these estimates under different assumptions or conditions.
  Development
Stage Enterprise
  We are a
development stage enterprise as defined by the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 7,
“Accounting and Reporting by Development Stage Enterprises.” We are devoting
substantially all of our present efforts to research and development. All losses
accumulated will be considered as part of our development stage
activities.
  Research
and Development Costs
  Although
we believe that our research and development activities and underlying
technologies have continuing value, the amount of future benefits to be derived
from them is uncertain. Furthermore, our development activities are principally
in the early clinical stage. Research and development costs will therefore be
expensed as incurred.
  Stock-Based
Compensation
  In
December 2004, the FASB issued SFAS 123R, Share Based Payment (SFAS 123R). This
statement requires that the cost resulting from all share-based payment
transactions be recognized in our financial statements. In addition, in March
2005 the SEC (the “SEC”) released SEC Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB 107). SAB 107 provides the SEC staff’s position
regarding the application of SFAS 123R and certain SEC rules and regulations,
and also provides the SEC staff’s views regarding the valuation of share-based
payment arrangements for public companies. However, SFAS 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair
values.  Fair values are determined at the date of each option grant
using the Black-Scholes method.  The stock price used for purposes of
these computations is based upon a value of $0.50 per share (or $2.00 per share
on a post-split basis), the share price paid by the purchasers in the April and
May 2007 private placements.  Since the common shares of the Company
trade so infrequently, the quoted share price of the shares is not indicative of
their fair value.  It is the policy of the Board of Directors to grant
stock options at not less than their fair value.
  In-Process
Research and Development
  Stock-based
milestone payments made pursuant to the license Agreement with Vitae
Pharmaceuticals, Inc. during the fiscal year ended September 30, 2008 have been
expensed in the Statement of Operations as in-process research and development
costs consistent with the treatment of the of the cash payments to Vitae upon
initiation of the license during the fiscal year ended September 30, 2007. The
fair value of the stock-based payments was based upon a value of $0.50 per share
(or $2.00 per share on a post-split basis), the share price paid by the
purchasers in the April and May 2007 private placements.  Since the
common shares of the Company trade so infrequently, the quoted share price of
the shares is not indicative of their fair value.


ITEM7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
applicable.




27




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




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




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




None.




ITEM
      9A.
            CONTROLS
      AND PROCEDURES




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and
communicated to the Company’s management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Limitations are inherent in all control systems, so no
evaluation of controls can provide absolute assurance that all control issues
and any fraud within the company have been detected.




As
required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the year covered by this Report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were effective as of that
date.




As
required by Securities and Exchange Commission Rule 13a-15(c), we carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our system of internal
control over financial reporting as of the end of the year covered by this
Report.  The Company utilizes the framework established by the
Committee on Sponsoring Organizations (COSO) as the framework for its system of
internal controls.  Management has assessed the system of internal
control over financial reporting to be effective.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.




ITEM
      9B.
            OTHER
      INFORMATION




Not applicable.




PART
III




ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.




The
information required by this item is incorporated by reference to the material
responsive to this item contained in our Proxy Statement to be filed in
connection with our 2008 Annual Meeting of Stockholders.


28




ITEM
      11.
              EXECUTIVE
      COMPENSATION




The
information required by this item is incorporated by reference to the material
responsive to this item contained in our Proxy Statement to be filed in
connection with our 2008 Annual Meeting of Stockholders.




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




The
information required by this item is incorporated by reference to the material
responsive to this item contained in our Proxy Statement to be filed in
connection with our 2008 Annual Meeting of Stockholders.




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




The
information required by this item is incorporated by reference to the material
responsive to this item contained in our Proxy Statement to be filed in
connection with our 2008 Annual Meeting of Stockholders.




ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES




The
information required by this item is incorporated by reference to the material
responsive to this item contained in our Proxy Statement to be filed in
connection with our 2008 Annual Meeting of Stockholders.




PART
IV




ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES




(a) The
following documents are included as part of this Annual Report on Form
10-K:




1.
Financial Statements:





PageReport
      of Independent Registered Public Accounting Firm
                  F-2Balance
      Sheets
                  F-3Statements
      of Operations
                  F-4Statement
      of Stockholders' Equity
                  F-5Statements
      of Cash Flows
                  F-6Notes
      to Financial Statements
                  F-7


Exhibit
      Number
                Description3.1
                Amended
      and Restated Articles of Incorporation.(1)3.2
                Certificate
      of Designation.(1)3.3
                Certificate
      of Amendment to the Certificate of Designation.(1)3.4
                Certificate
      of Amendment to the Amended and Restated Articles of Incorporation, dated
      April 27, 2007.(2)3.5
                Certificate
      of Amendment to the Amended and Restated Articles of Incorporation, dated
      October 23, 2007.(3)3.6
                Bylaws.(1)4.1
                Registration
      Rights Agreement as of May 16, 2007 between the Company and the Purchasers
      named therein.(4)
  29
  4.2
                    Placement
      Agent Warrant issued to Hunter World Markets, Inc. on May 16,
      2007.(4)4.3
                    Lock-up
      Agreement dated as of May 16, 2007, by and among the Company and the
      shareholders, Santa Monica Capital Partners II, LLC, Dr. Parkash Gill, Dr.
      Parkash Gill, custodian for Dhillon Gill, Dr. Parkash Gill, custodian for
      Noorean Gill, Harin Padma−Nathan, Marc Ezralow, David Ficksman, Roshantha
      Chandraratna.(5)4.4
                    Warrant
      issued to Investor Media Group, Inc., dated July 20, 2007.
    (6)4.5
                    Placement
      Agent Warrant issued to Hunter World Markets, Inc. on June 29, 2007.
      (7)10.1
                    Asset
      Purchase Agreement, dated May 31, 2007, by and between Quest Group
      International, Inc. and Quest Group, LLC. (8)10.2
                    Form
      of Subscription Agreement, dated April 27, 2007, by and between the
      Company and the Purchasers named therein.(2)10.3
                    Form
      of Subscription Agreement dated as of May 16, 2007, by and among the
      Company and the Purchasers named therein.(4)10.4
                    Form
      of Subscription Agreement dated as of May 30, 2007, by and among the
      Company and the Baradaran Revocable Trust.(5)10.5
                    Securities
      Purchase Agreement dated as of June 25, 2007, by and among the Company and
      City National Bank, Trustee FBO Harin Padma−Nathan IRA.
  (7)10.5
                    License
      Agreement between the Company and Vitae Pharmaceuticals, Inc., dated May
      11, 2007.(5) Portions of this exhibit have been deleted and filed
      separately with the Securities and Exchange Commission pursuant to a
      request for a confidential treatment.10.6
                    Employment
      Agreement between the Company and Rosh Chandraratna, dated May 25,
      2007.(5)10.7
                    Employment
      Agreement between the Company and Harin Padma−Nathan, dated May 31,
      2007.(5)10.8
                    Employment
      Agreement between the Company and Steven Gershick, dated September 21,
      2007.(9)10.9
                    Consulting
      Agreement between the Company and Parkash Gill, dated May 31,
      2007.(10)10.10
                    2007
      Stock Compensation Plan of Company.(5)10.11
                    Termination
      Agreement dated July 20, 2007, by and between Quest Group International,
      Inc. and Bateman Dynasty, LC.(6)14.1
                    Code
      of Ethics. (11)31.1
                    Certification
      of the Chief Executive Officer pursuant to Section 302 of the Sarbanes
      Oxley Act31.2
                    Certification
      of the Chief Financial Officer pursuant to Section 302 of the Sarbanes
      Oxley Act.32.1
                    Certification
      of the Chief Executive Officer Pursuant to Section 906, Sarbanes-Oxley Act
      of 200232.2
                    Certification
      of the Chief Financial Officer Pursuant to Section 906, Sarbanes-Oxley Act
      of 2002




30


(1)           
Incorporated by reference to the Company’s Registration Statement on Form SB-2
filed June 3, 2002, File No. 333−89628.




(2)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
April 30, 2007.




(3)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
October 29, 2007.




(4)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated May
22, 2007.




(5)           
Incorporated by reference to the Company’s Registration Statement on Form SB-2,
dated July 3, 2007.




(6)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
July 26, 2007.




(7)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
June 29, 2007.




(8)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
June 8, 2007.




(9)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
September 21, 2007.




(10)           
Incorporated by reference to the Company’s Current Report on Form 8−K, dated
November 9, 2007.




(11)           
Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed
December 28, 2007.


31


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.




NURX
      PHARMACEUTICALS, INC.Date:
      December 24, 2008By:
      /s/ Harin Padma−NathanHarin
      Padma−NathanPresident
      and Chief Executive Officer




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




Signature
                                                                                    
                                                                                    Title
                                                                                    
                                                                                    Date/s/
      Harin Padma−Nathan
                                                                                    
                                                                                    Director,
      President and Chief Executive Officer
                                                                                    
                                                                                    December
      24, 2008Harin
      Padma−Nathan
                                                                                    
                                                                                    (Principal
      Executive Officer)/s/
      Steven Gershick
                                                                                    
                                                                                    Chief
      Financial Officer (Principal Financial
                                                                                    
                                                                                    December
      24, 2008Steven
      Gershick
                                                                                    
                                                                                    and Accounting Officer)/s/
      Kurt Brendlinger
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Kurt
      Brendlinger/s/
      Pakash Gill
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Pakash
      Gill/s/
      Sharyar Baradaran
                                                                                    
                                                                                    Director
      and Secretary
                                                                                    
                                                                                    December
      24, 2008Sharyar
      Baradaran/s/
      Matt Borenzweig
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Matt
      Borenzweig/s/
      Rosh Chandraratna
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Rosh
      Chandraratna/s/
      Marvin Rosenthale
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Marvin
      Rosenthale/s/
      Carl Lebel
                                                                                    
                                                                                    Director
                                                                                    
                                                                                    December
      24, 2008Carl
      Lebel


32




FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
                  F-2Balance
      Sheets
                  F-3Statements
      of Operations
                  F-4Statement
      of Stockholders' Equity
                  F-5Statements
      of Cash Flows
                  F-6Notes
      to Financial Statements
                  F-7





F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To The
Board of Directors and Stockholders


NuRx
Pharmaceuticals, Inc.




We have
audited the accompanying balance sheets of NuRx Pharmaceuticals, Inc. (a
corporation in the development stage) (the “Company”) as of September 30, 2008
and 2007, and the related statements of operations, stockholders' equity and
cash flows for the years ended September 30, 2008 and 2007, and for the period
from May 1, 2007 (inception) through September 30, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.




We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.We believe
that our audits provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of September 30,
2008 and 2007, and the results of its operations and its cash flows for the
years ended September 30, 2008 and 2007, and the period from May 1, 2007
(inception) through September 30, 2008, in conformity with accounting principles
generally accepted in the United States of America.






/s/ GUMBINER SAVETT
INC.




GUMBINER SAVETT INC.







December
18, 2008


F-2


NuRx
Pharmaceuticals, Inc.
 (a
corporation in the development stage)
 Balance
Sheets
 September
30, 2008 and 2007
 
 2008
                                              
                                              
                                              2007ASSETSCash
      and cash equivalents
                                              
                                              $
                                              11,365,646
                                              
                                              
                                              $
                                              14,941,723Prepaid
      expenses and other current assets
                                              
                                              
                                              169,882
                                              
                                              
                                              
                                              55,832Total
      current assets
                                              
                                              
                                              11,535,528
                                              
                                              
                                              
                                              14,997,555Property
      & equipment, net of accumulated depreciation and amortization of
      $11,336 and $1,382
                                              
                                              
                                              45,098
                                              
                                              
                                              
                                              27,825Deposits
                                              
                                              
                                              42,093
                                              
                                              
                                              
                                              27,093Total
      assets
                                              
                                              $
                                              11,622,719
                                              
                                              
                                              $
                                              15,052,473LIABILITIES AND STOCKHOLDERS'
      EQUITYAccounts
      payable and accrued expenses
                                              
                                              $
                                              181,497
                                              
                                              
                                              $
                                              103,441Due
      to related parties
                                              
                                              
                                              30,000
                                              
                                              
                                              
                                              36,090Total
      current liabilities
                                              
                                              
                                              211,497
                                              
                                              
                                              
                                              139,531Commitments
      and contingenciesStockholders'
      EquitySeries
      A preferred stock, $.001 par value, 1,000,000 shares designated, no shares
      issued and outstanding
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Series
      B preferred stock, $.001 par value, 500,000 shares designated, no shares
      issued and outstanding
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      stock, $.001 par value,  150,000,000 shares authorized,
      respectively, 28,394,234 and 28,577,252 shares issued respectively, and
      28,394,234 and 26,637,502 shares outstanding respectively
                                              
                                              
                                              28,394
                                              
                                              
                                              
                                              28,577Additional
      paid-in capital
                                              
                                              
                                              21,640,176
                                              
                                              
                                              
                                              18,552,888Treasury
      stock
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (750,000
                                              )Accumulated
      deficit during development stage
                                              
                                              
                                              (10,293,548
                                              )
                                              
                                              
                                              (2,954,723
                                              )Retained
      earnings
                                              
                                              
                                              36,200
                                              
                                              
                                              
                                              36,200Total
      stockholders' equity
                                              
                                              
                                              11,411,222
                                              
                                              
                                              
                                              14,912,942Total
      liabilities and stockholders' equity
                                              
                                              $
                                              11,622,719
                                              
                                              
                                              $
                                              15,052,473
 See Notes
to Financial Statements
  F-3
  NuRx Pharmaceuticals, Inc.
 (a
corporation in the development stage)
 Statements
of Operations
 For the
years ended September 30, 2008, and 2007, and the development stage from
inception (May 1, 2007) through September 30, 2008
 
 2008
                                      
                                      
                                      2007
                                      
                                      
                                      Inception
      (May 1,
                                        2007)
      through
                                        September
      30,
                                        2008Operating
      Expenses:General
      & administrative (includes stock based compensation of $258,242,
      $65,829, and $324,071,  and related party consulting fees of
      $377,500, $164,700,  and $542,200 respectively)
                                      
                                      $
                                      1,934,001
                                      
                                      
                                      $
                                      634,296
                                      
                                      
                                      $
                                      2,568,297Research
      & clinical development (includes stock based compensation of $65,863,
      $0,  and $65,863, related party consulting fees and salary of
      $260,064, $63,302, and $323,366 respectively, and fair value of shares
      issued in connection with milestone payment under technology license of
      $3,513,000, $0, and $3,513,000 respectively)
                                      
                                      
                                      5,816,259
                                      
                                      
                                      
                                      2,571,449
                                      
                                      
                                      
                                      8,387,708Total
      operating expenses
                                      
                                      
                                      7,750,260
                                      
                                      
                                      
                                      3,205,745
                                      
                                      
                                      
                                      10,956,005Other
      income and (expense)Interest
      income
                                      
                                      
                                      411,435
                                      
                                      
                                      
                                      263,647
                                      
                                      
                                      
                                      675,082Interest
      expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (12,625
                                      )
                                      
                                      
                                      (12,625
                                      )Total
      other income
                                      
                                      
                                      411,435
                                      
                                      
                                      
                                      251,022
                                      
                                      
                                      
                                      662,457Loss
      from continuing operations
                                      
                                      
                                      (7,338,825
                                      )
                                      
                                      
                                      (2,954,723
                                      )
                                      
                                      
                                      (10,293,548
                                      )Income
      from discontinued operations, net of income tax of $0, $0, and $0,
      respectively
                                      
                                      
                                      -
                                      
                                      
                                      
                                      62,337
                                      
                                      
                                      
                                      -Loss
      on disposition of discontinued operations, net of income tax of $0, $0,
      and $0, respectively
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (192,991
                                      )
                                      
                                      
                                      -Net
      Loss
                                      
                                      $
                                      (7,338,825
                                      )
                                      
                                      $
                                      (3,085,377
                                      )
                                      
                                      $
                                      (10,293,548
                                      )Loss
      per common share - basic and dilutedFrom
      continuing operations
                                      
                                      $
                                      (0.26
                                      )
                                      
                                      $
                                      (0.24
                                      )
                                      
                                      $
                                      (0.37
                                      )From
      discontinued operations
                                      
                                      $
                                      0.00
                                      
                                      
                                      $
                                      (0.01
                                      )
                                      
                                      $
                                      0.00Weighted
      average common shares - basic and diluted
                                      
                                      
                                      28,250,237
                                      
                                      
                                      
                                      12,465,372
                                      
                                      
                                      
                                      27,519,693
  See Notes
to Financial Statements
 F-4
  NuRx
Pharmaceuticals, Inc.
 (a
corporation in the development stage)
 Statement
of Stockholders' Equity
 For the
years ended September 30, 2008 and 2007 and development stage from inception
(May 1, 2007) to September 30, 2008
  Additional
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        DeficitAccumulated
                                          During
      theSeries
      A Preferred Stock
                                        
                                        
                                        Series
      B Preferred Stock
                                        
                                        
                                        Common
      Stock
                                        
                                        
                                        Paid-in
                                        
                                        
                                        Treasury
      Stock
                                        
                                        
                                        Retained
                                        
                                        
                                        DevelopmentShares
                                        
                                        
                                        Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Capital
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Earnings
                                        
                                        
                                        Stage
                                        
                                        
                                        TotalBalance October
      1, 2006
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        2,564,752
                                        
                                        
                                        $
                                        2,565
                                        
                                        
                                        $
                                        160,485
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        166,854
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        329,904Private
      placement April 27,  2007, 15,750,000 common shares at $0.001
      per share
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        15,750,000
                                        
                                        
                                        
                                        15,750
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        15,750Private
      placement May 16, 2007, 10,000,000 common shares at $2.00 per
      share
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        10,000,000
                                        
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        19,990,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,000,000Private
      placement June 25, 2007, 250,000 common shares at $2.00 per
      share
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        250,000
                                        
                                        
                                        
                                        250
                                        
                                        
                                        
                                        499,750
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        500,000Private
      placement fees, reorganization costs and related registration costs,
      including fair market value of warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,151,228
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,151,228
                                        )Share-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        12,500
                                        
                                        
                                        
                                        12
                                        
                                        
                                        
                                        65,817
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        65,829Fair
      value of warrants issued in connection with private
    placement
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,988,064
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,988,064Repurchase
      of 1,939,750 common shares, May 2007
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,939,750
                                        )
                                        
                                        
                                        (750,000
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (750,000
                                        )Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (130,654
                                        )
                                        
                                        
                                        (2,954,723
                                        )
                                        
                                        
                                        (3,085,377
                                        )Balance
      September 30, 2007
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28,577,252
                                        
                                        
                                        
                                        28,577
                                        
                                        
                                        
                                        18,552,888
                                        
                                        
                                        
                                        (1,939,750
                                        )
                                        
                                        
                                        (750,000
                                        )
                                        
                                        
                                        36,200
                                        
                                        
                                        
                                        (2,954,723
                                        )
                                        
                                        
                                        14,912,942Share
      based compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        324,105
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        324,105Fair
      value of shares issued in connection with milestone payments under
      technology license (shares valued at  $2.00 per
      share)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,756,732
                                        
                                        
                                        
                                        1,757
                                        
                                        
                                        
                                        3,511,243
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,513,000Cancellation
      of treasury stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,939,750
                                        )
                                        
                                        
                                        (1,940
                                        )
                                        
                                        
                                        (748,060
                                        )
                                        
                                        
                                        1,939,750
                                        
                                        
                                        
                                        750,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7,338,825
                                        )
                                        
                                        
                                        (7,338,825
                                        )Balance
      September 30, 2008
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        
                                        28,394,234
                                        
                                        
                                        $
                                        28,394
                                        
                                        
                                        $
                                        21,640,176
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        36,200
                                        
                                        
                                        $
                                        (10,293,548
                                        )
                                        
                                        $
                                        11,411,222
  See Notes
to  Financial Statements
  F-5
 
 NuRx Pharmaceuticals, Inc.
 (a
corporation in the development stage)
 Statements
of Cash Flows
 For the
years ended September 30, 2008 and  2007, and development stage from
inception (May 1, 2007) through September 30, 2008
 
 2008
                              
                              
                              2007
                              
                              
                              Inception
      (May 1,
                                2007)through
                                September
      30,
                                2008Cash flows from operating
      activities:Net
      loss
                              
                              $
                              (7,338,825
                              )
                              
                              $
                              (3,085,377
                              )
                              
                              $
                              (10,293,548
                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Loss
      from and loss on sale of discontinued operations - net of
      taxes
                              
                              
                              -
                              
                              
                              
                              130,654
                              
                              
                              
                              -Depreciation
      and amortization
                              
                              
                              9,954
                              
                              
                              
                              1,382
                              
                              
                              
                              11,336Share-based
      compensation
                              
                              
                              324,105
                              
                              
                              
                              65,829
                              
                              
                              
                              389,934Fair
      value of shares issued in connection with milestone payments under
      technology license
                              
                              
                              3,513,000
                              
                              
                              
                              -
                              
                              
                              
                              3,513,000Changes
      in operating assets and liabilities:Deposits
                              
                              
                              (15,000
                              )
                              
                              
                              -
                              
                              
                              
                              (42,093
                              )Prepaid
      expenses
                              
                              
                              (114,050
                              )
                              
                              
                              (55,832
                              )
                              
                              
                              (169,882
                              )Accounts
      payable and accrued expenses
                              
                              
                              78,056
                              
                              
                              
                              139,531
                              
                              
                              
                              217,587Due
      to related parties
                              
                              
                              (6,090
                              )
                              
                              
                              -
                              
                              
                              
                              (6,090
                              )Net
      cash used in continuing operating activities
                              
                              
                              (3,548,850
                              )
                              
                              
                              (2,803,813
                              )
                              
                              
                              (6,379,756
                              )Net
      cash provided by discontinued operating activities
                              
                              
                              -
                              
                              
                              
                              91,405
                              
                              
                              
                              41,146Net
      cash used in operating activities
                              
                              
                              (3,548,850
                              )
                              
                              
                              (2,712,408
                              )
                              
                              
                              (6,338,610
                              )Cash flow from investing
      activities:Purchase
      of property and equipment
                              
                              
                              (27,227
                              )
                              
                              
                              (29,207
                              )
                              
                              
                              (56,434
                              )Lease
      deposit
                              
                              
                              -
                              
                              
                              
                              (27,093
                              )
                              
                              
                              -Net
      cash used in continuing investing activities
                              
                              
                              (27,227
                              )
                              
                              
                              (56,300
                              )
                              
                              
                              (56,434
                              )Net
      cash used in discontinued investing activities
                              
                              
                              -
                              
                              
                              
                              (1,500
                              )
                              
                              
                              -Net
      cash used in investing activities
                              
                              
                              (27,227
                              )
                              
                              
                              (57,800
                              )
                              
                              
                              (56,434
                              )Cash flows from financing
      activities:Private
      placements of common shares
                              
                              
                              -
                              
                              
                              
                              20,563,000
                              
                              
                              
                              20,563,000Private
      placement offering costs
                              
                              
                              -
                              
                              
                              
                              (2,163,164
                              )
                              
                              
                              (2,163,164
                              )Proceeds
      of note receivable
                              
                              
                              -
                              
                              
                              
                              125,000
                              
                              
                              
                              125,000Repayment
      of note receivable
                              
                              
                              -
                              
                              
                              
                              (125,000
                              )
                              
                              
                              (125,000
                              )Redemption
      of treasury stock
                              
                              
                              -
                              
                              
                              
                              (750,000
                              )
                              
                              
                              (750,000
                              )Net
      cash provided by financing activities
                              
                              
                              -
                              
                              
                              
                              17,649,836
                              
                              
                              
                              17,649,836Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              (3,576,077
                              )
                              
                              
                              14,879,628
                              
                              
                              
                              11,254,792Cash
      transferred to discontinued operations
                              
                              
                              -
                              
                              
                              
                              (166,463
                              )
                              
                              
                              (166,463
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              14,941,723
                              
                              
                              
                              228,558
                              
                              
                              
                              277,317Cash
      and cash equivalents, end of period
                              
                              $
                              11,365,646
                              
                              
                              $
                              14,941,723
                              
                              
                              $
                              11,365,646Supplemental
      disclosure of cash flow informationCash
      paid for -Income
      taxes
                              
                              $
                              800
                              
                              
                              $
                              -
                              
                              
                              $
                              800Interest
                              
                              $
                              -
                              
                              
                              $
                              12,625
                              
                              
                              $
                              12,625
  In 2007,
the Company incurred $5,151,228 in private placement fees, reorganization costs
and related registration costs, which included the issuance of warrants with a
fair value of $2,988,064
 
 See Notes
to Financial Statements
  F-6




NuRx
Pharmaceuticals, Inc.


(a
corporation in the development stage)


Notes to
Financial Statements


September 30,
2008




Note 1 - The Company and its
Significant Account Policies




General:




Since
NuRx Pharmaceuticals, Inc.’s (the “Company”) inception on August 14, 2001, it
has been primarily engaged in the sale of nutritional products. Beginning in May
2007, the Company entered into a plan of reorganization including a series of
private placements, a change in directors and management, redemption of common
shares of controlling shareholders prior to May 2007, sale of its nutritional
products business, and began to pursue a new business plan as a
development-stage company in the biotechnology and pharmaceuticals industry with
a focus on nuclear receptor target therapeutics for cancer. On October 24, 2007,
in recognition of its new business focus, the Company changed its name to NuRx
Pharmaceuticals, Inc.




Development
Stage Enterprise:




The
Company is a development stage company as defined in Statement of Financial
Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by
Development Stage Enterprises. The Company is devoting substantially all
of its present efforts to establish a new pharmaceutical business, and its
planned principal operations have not yet commenced. The Company has not
generated any revenues from operations and has no assurance of any future
revenues. All losses accumulated since May 1, 2007 have been considered as part
of the Company's development stage activities. Although the approximately $11.4
million in cash and cash equivalents at September 30, 2008 provides the Company
with sufficient funds for planned clinical trials and to fund the currently
planned level of operations development through October, 2010, the Company will
require substantial additional funding for continuing research and development,
obtaining regulatory approval and the commercialization of its products. There
is no assurance that the Company will be able to obtain sufficient additional
funds when needed, or that such funds will be obtainable on terms satisfactory
to the Company. The Company’s products will be governed in the United States by
the Federal Food, Drug and Cosmetics Act and by the regulations of state
agencies and potentially various foreign government agencies. There can be no
assurance that the Company will obtain or maintain the regulatory approvals
required to market its products.




Research
and Development Costs:




The
Company expenses all research and development costs as
incurred.  Research and development expenses consist of salaries,
stock based compensation, preclinical activities, pharmacology, stability
testing and other drug development costs, clinical trial expenses including
patient and data management, outside manufacturing, and consulting costs for
regulatory affairs and other activities.  Also included in these costs
are in process research and development costs incurred from a licensing
agreement as more fully described in Note 6.




Use
of Estimates:




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates.




Reclassifications:





Certain
balances in the prior fiscal year statement of operations have been reclassified
to conform with the presentation in the current fiscal year.




Cash
and Cash Equivalents:




Cash
equivalents are highly liquid investments with original maturities of three
months or less when purchased. Cash equivalents consist of investments in United
States Treasury Bills.




Property
and Equipment:




Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the related
assets, which range from 3 to 5 years. Leasehold improvements are amortized over
the shorter of the life of the lease or their useful lives.


F-7





Income
Taxes:




Deferred
income taxes are provided in amounts sufficient to give effect to temporary
differences between financial and tax reporting, principally related to
accruals, in-process research & development costs, and share-based
consideration for license milestones.




Deferred
income taxes arise from temporary differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or noncurrent depending on the periods in
which the temporary differences are expected to reverse. A valuation allowance
is established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




Net
Income (Loss) Per Common Share:





The Company utilizes SFAS No. 128,
“Earnings per Share.” Basic earnings per share are computed by dividing earnings
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings  per share is computed similarly to
basic earnings  per share except that the denominator is increased to
include additional common shares available upon exercise of stock options and
warrants using the treasury stock method, except for periods of operating loss
for which no common share equivalents are included because their effect would be
anti-dilutive.  These potentially dilutive securities were not
included in the calculation of loss per share for the years ended September 30,
2008 and 2007, and the period inception (May 1, 2007) through September 30,
2008, because the Company incurred a loss during such periods and thus their
effect would have been anti-dilutive. Accordingly, basic and diluted loss per
share is the same for these periods. At September 30, 2008 and 2007, potentially
dilutive securities consisted of outstanding warrants and stock options to
acquire an aggregate of 4,393,500 and 4,031,000 shares, respectively.





Fair
Value of Financial Instruments:




The
Company’s financial instruments consist of cash, investment in U.S. Treasury
Bills, and accounts payable. The carrying amount of cash equivalents and
payables approximates fair value because of the short-term nature of these
items.




Concentrations
of Credit Risk:




Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents. The Company maintains its
cash and cash equivalents in interest and non-interest bearing transaction
accounts at a Standard & Poor’s AAA rated domestic bank, and in United
States Treasury Bills.   Under the current Temporary Liquidity
Guarantee Program of the Federal Deposit Insurance Corporation (“FDIC”),
interest bearing transaction accounts are insured up to $250,000 and
non-interest bearing transaction accounts are insured without
limit.  As of September 30, 2008 and 2007, the Company had
approximately $3,009,000 and $14,700,000 respectively of cash in excess of these
limits. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash and cash
equivalents.




Impairment
of Long-Lived Assets:




In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, long-lived assets, such as property and
equipment and amortizable intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company’s management assesses the recoverability of
long-lived assets by determining whether the depreciation and amortization of
long-lived assets over their remaining lives can be recovered through projected
undiscounted future cash flows. The amount of long-lived asset impairment, if
any, is measured based on fair value and is charged to operations in the period
in which long-lived asset impairment is determined by management. At September
30, 2008 and 2007, the Company’s management believes there is no impairment of
its long-lived assets. There can be no assurance, however, that market
conditions will not change which could result in impairment of long-lived assets
in the future.




Adoption
of New Accounting Policies:




Effective
October 1, 2007, the Company adopted Financial Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN
48 requires the recognition in the financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The adoption of the standard had
no effect on the Company’s financial position or results of
operations.





Recent
Accounting Pronouncements:




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in GAAP
and expands disclosures about fair value measurements. Specifically, SFAS No.
157 sets forth a definition of fair value, and establishes a hierarchy
prioritizing the inputs to valuation techniques, giving the highest priority to
quoted prices in active markets for identical assets and liabilities and the
lowest priority to unobservable inputs. The provisions of SFAS No. 157 are
generally required to be applied on a prospective basis, except to certain
financial instruments accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, for which the provisions of SFAS
No. 157 should be applied retrospectively. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company does not expect that
the adoption of SFAS No. 157 will have an adverse effect on its financial
statements for its fiscal year ending September 30, 2009.


F-8





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement, which is consistent with
the Company’s Board of Directors long-term measurement objectives for accounting
for financial instruments. This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company does
not believe that this recent accounting pronouncement will have a material
impact on its financial position or results of operations.




In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No.
141R”) to replace SFAS No. 141 Business Combinations.  The objective
of this statement is to improve the relevance, representation and comparability
of financial information provided about a business combination and its effects
and establishes principles and requirements for (1) recognizing and measuring
the assets and liabilities assumed, (2) recognizing and measuring the goodwill
or bargain purchase, and (3) determining the information required to be
disclosed in the financial reports.  This statement applies to
business combinations where the acquisition date is on or after December 15,
2008.  The Company will adopt SFAS 141R for any business combinations
completed on or after December 15, 2008.




In
December 2007, the FSAB issued SFAS No. 160, Non-controlling Interests in
Consolidated Statements-an Amendment of ARB No. 51 (“SFAS No.
160”).  The objective of SFAS No. 160 is to improve financial
information related to entities that have an outstanding non-controlling
interest in one or more subsidiaries.  The non-controlling interest in
the subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements and consolidated
net income should include (and separately disclose) the amounts of the parent
and the non-controlling interest on the income statement.  This
statement requires additional financial statement disclosure related to the
parent and the non-controlling owners of the subsidiary.  Earnings per
share amounts will be based on the amounts attributable to the
parent.  The Company is required to adopt SFAS No. 160 beginning in
July 2009.  The Company is evaluating the effect of SFAS No. 160, but
does not believe that there will be any material effect on the Company’s
financial statements.




Management
does not believe that any other recently issues, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.




Note 2 - Property and
Equipment




Property
and equipment consisted of the following at September 30, 2008 and
2007:




2008
                          
                          
                          2007Office
      equipment
                          
                          $
                          24,541
                          
                          
                          $
                          18,976Computer
      equipment
                          
                          
                          11,564
                          
                          
                          
                          9,031Lab
      equipment
                          
                          
                          19,129
                          
                          
                          
                          —Leasehold
      Improvements
                          
                          
                          1,200
                          
                          
                          
                          1,20056,434
                          
                          
                          
                          29,207Accumulated
      depreciation and amortization
                          
                          
                          (11,336
                          )
                          
                          
                          (1,382
                          )$
                          45,098
                          
                          
                          $
                          27,825





Depreciation
expense for the years ended September 30, 2008 and 2007 amounted to $9,954 and
$1,382.





Note 3 – Reverse Stock
Split




On May 9,
2008, the Company completed a one-for-four reverse stock split for common
shareholders of record on that same date. As a result of the reverse stock
split, the number of common shares outstanding was reduced to 28,394,234 from
113,576,927 shares outstanding immediately prior to the effective date. Common
shares authorized were unchanged, resulting in an increase in the number of
authorized but unissued shares of Common Stock to 121,605,766 from 36,423,073.
The per unit exercise price of all outstanding options and warrants were
increased accordingly.




The
reverse stock split did not affect the par value of the Company’s common stock.
As a result, the stated capital on the Company’s balance sheet attributable to
the outstanding common stock was reduced by $91,002 to $30,334 (one-fourth of
its amount immediately preceding the reverse stock split), and the additional
paid-in capital account was increased by $91,002. The per share net income or
loss and net book value of the outstanding common stock increased because there
are fewer shares of the Company’s common stock outstanding.




The
Company’s financial statements and footnotes give retroactive effect to this
stock split.


F-9





Note 4 - Private Placements
of Common Stock and Warrants




On April
27, 2007, the Company entered into subscription agreements with nine accredited
investors to sell 15,750,000 shares of common stock for $63,000, or $.004 per
share, which closed on May 16, 2007.




On May
11, 2007, the Company issued a Confidential Private Offering Memorandum to raise
between $20 million and $23 million from the issuance of common stock to
accredited investors, at a per share price of $2.00 (the
“Offering”).




The
Company engaged Hunter World Markets, Inc. (“Hunter”) as placement agent for the
Offering and agreed to pay Hunter a commission of up to 10% of the amount raised
and to issue to Hunter a warrant to purchase up to 30% of the number of shares
of common stock sold through the offering, at an exercise price of $4.00 per
share, for a term of six years. Pursuant to the Subscription Agreement with the
investor, if the Company issued additional shares of common stock or rights to
acquire common stock (with certain exceptions) for less than $2.00 per share
within one year from the effective date of the registration statement (subject
to adjustment for splits, recapitalizations, reorganization), then the investors
would have the right to purchase, at a price equal to the common stock par
value, such number of shares so that the effective purchase price per share
payable by the subscriber would be the same per share purchase price of the
dilutive shares. Pursuant to a Registration Rights Agreement, the Company agreed
to file a registration statement with the Securities and Exchange Commission
(“SEC”) covering the issued shares no later than 45 days after the initial
closing. Hunter also received the same aforementioned registration rights and
price protection.  The Company filed its registration statement within the
required period, and such registration statement became effective July 18,
2007.




In
connection with the Offering, Hunter loaned the Company $125,000 at an interest
rate of 6% per annum. This loan, the accrued interest and a loan fee of $12,500
was paid from the proceeds of the private placement that occurred on May 16,
2007.




On May
16, 2007, and under the terms of the Offering, the Company entered into
subscription agreements with four accredited investors (the
“Purchasers”) in which the Company issued and sold 10,000,000 shares of
common stock for $2.00 per share, for an aggregate purchase price of $20 million
(the “Private Placement”). The Offering closed on June 25, 2007. Hunter
received a fee of $2 million and a warrant to purchase 3,000,000 shares of the
Company’s common stock, at an exercise price of $4.00 per share. This warrant is
exercisable commencing February 18, 2008 and expires on May 17, 2013 and was
valued at $2,914,739, based on a Black-Scholes model valuation using the
following assumptions: expected volatility of 75%, expected dividends of 0%,
expected term of 4.75 years, and risk free interest rate of 4.64%. The value of
the warrant was recorded as additional paid-in capital.




On May
30, 2007, and under the terms of the Offering, the Company entered into a
subscription agreement with an affiliate of one of its executive officers to
sell 125,000 shares of common stock for $2.00 per share, for an aggregate
purchase price of $250,000. This subscription agreement does not provide share
registration rights. In a separate agreement, the officer has agreed to restrict
the sale of all 125,000 of his shares for 18 months.




On June
25, 2007, and under the terms of the Offering, the Company entered into a
subscription agreement with an affiliate of another one of its executive
officers to sell 125,000 shares of common stock for $2.00 per share, for an
aggregate purchase price of $250,000. This subscription agreement does not
provide share registration rights. The same officer acquired 500,000 shares in
the April 27, 2007 private placement as described above. In a separate
agreement, the executive officer and his affiliate have agreed to restrict the
sale of all 625,000 of his shares for 18 months.




In
connection with the sale of securities on May 30, 2007 and June 25, 2007, Hunter
received a fee of $12,500 and a 6-year warrant to purchase 75,000 shares of
common stock exercisable at $4.00 per share, valued at $73,325, based on a
Black-Scholes model valuation using the following assumptions: expected
volatility of 75%, expected dividends of 0%, expected term of 4.75 years, and
risk free interest rate of 5.01%. The value of the warrant was recorded in
additional paid-in capital.




At
September 30, 2008 and 2007, there were warrants to purchase 3,087,500 and
3,100,000, respectively, shares of common stock outstanding.




Note 5 - Company Shares
Repurchased




In
connection with the Offering, certain Company shareholders (prior to April 27,
2007) canceled a total of 1,939,750 shares of common stock in consideration of
$750,000. The transaction has been accounted for as the acquisition of treasury
stock by the Company.  During year ended September 30, 2008 these
shares were cancelled.




Note 6 - License
Agreement




On May
11, 2007, the Company entered into a license agreement with Vitae
Pharmaceuticals, Inc. (“Vitae”), pursuant to which the Company acquired an
exclusive, worldwide sublicense (with the right to grant further sublicenses) to
certain compounds and technology for all human and veterinary use, in order to
research, develop and commercialize the compounds. The indications for the lead
compounds are acute myeloid, solid cancers (lung and breast) and
chemotherapy-induced nuetropenia. The Company paid Vitae out of the net proceeds
from the Private Placement $2.15 million, comprised of an upfront license fee of
$2.1 million and $50,000 for its inventory of the licensed compounds. The
Company also agreed to issue 1,756,732 shares of common stock, or such number
representing 5.66% of the Company’s fully diluted shares, upon reaching the
first to occur of a) the first acceptance of an Investigational New Drug
Application by the United States Food and Drug Administration for a licensed
product containing any licensed compound other than one defined compound (the
“Excluded Compound”), or b) the date that the first patient is dosed in a
clinical trial a licensed product containing the Excluded Compound. The Company
will also be required to pay, on Vitae’s behalf, the existing licensors
additional milestone payments if it reaches FDA marketing approval for a product
containing a licensed compound. See Note 10.


F-10





In
addition to the aforementioned fees and milestone payments, the Company agreed
to pay the original licensor of the compounds and Vitae specified revenue
percentages of the Company’s net sales of products based on the licensed
technology. The percentages vary from product to product, but when combined may
total as much as 12% of the Company’s net sales. The Company must meet certain
development milestones under the original license agreements with the existing
licensors in order to maintain the rights to the licensed products.




The
acquired assets at the date of acquisition were determined to be in the research
and development stage (the pre-clinical discovery stage). The primary compounds
underlying the patents and licenses are to be used in ongoing research and
development activities and are not determined to have any alternative future
uses. Accordingly, pursuant to the provisions of Statement of Financial
Accounting Standards No. 2, Accounting for Research and
Development Costs, and FASB Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, the
Company has charged the costs of the acquired assets to expense.




Note 7 - Disposition of
Discontinued Operations




On June
7, 2007, the Company executed an asset purchase agreement with Quest Group, LLC
(the “Buyer”), a Utah limited liability company. The asset purchase agreement is
dated as of May 31, 2007. Craig Davis, the former Chief Executive Officer and
director of the Company, is the President of the Buyer.




Pursuant
to the asset purchase agreement, the Company agreed to dispose and sell all of
its assets which relate to the business line of selling nutritional products to
independent distributors and customers (the “Nutritional Business”). Under the
asset purchase agreement, the Company agreed to sell all assets related to the
Nutritional Business “AS IS”, in their present condition as of May 31, 2007
without making any warranty of any kind.




The Buyer
also assumed and agreed to pay or perform all outstanding liabilities and
obligations of the Company as of May 31, 2007 and all other liabilities and
obligations that relate directly to the Nutritional Business.




Subject
to the foregoing, the Company used its outstanding cash balance as of May 15,
2007 and all proceeds related to the Nutritional Business received through May
31, 2007 to pay and reduce all assumed liabilities.




As a
result of the sale of the Nutritional Business, the balance sheet as of May 31,
2007 and the statements of income and cash flows for the eight months ended May
31, 2007 have been restated to record the necessary adjustments required to
reflect the assets, liabilities, and operations of the Nutritional Business as
discontinued operations. The Company recognized a loss of $192,991 on the sale
of these discontinued operations. Assets and liabilities of the Nutritional
Business included as assets or liabilities related to discontinued operations as
of May 31, 2007 consisted of the following:




May
      31,2007(Unaudited)Current
      assets:Cash
                                        
                                        $
                                        166,463Accounts
      receivable
                                        
                                        
                                        41,938Inventories
                                        
                                        
                                        142,177Other
      Prepaids
                                        
                                        
                                        1,100Prepaid
      income taxes
                                        
                                        
                                        2,877Total
      current assets
                                        
                                        
                                        354,555Property
      and equipment, net
                                        
                                        
                                        14,747Deposits
                                        
                                        
                                        1,150Total
      assets related to discontinued operations
                                        
                                        $
                                        370,452Current
      liabilities:Accounts
      payable
                                        
                                        $
                                        94,308Accrued
      expenses
                                        
                                        
                                        81,118Deferred
      revenue
                                        
                                        
                                        1,035Total
      current liabilities
                                        
                                        
                                        176,461Deferred
      tax liability
                                        
                                        
                                        1,000Total
      liabilities related to discontinued operations
                                        
                                        $
                                        177,461


F-11





Summarized
results of operations for the Nutritional Business included as income from
discontinued operations, net of tax, for the eight months ended May 31, 2007
were as follows:




2007Sales,
      net
                                
                                $
                                1,588,734Cost
      of goods sold
                                
                                
                                505,291Gross
      profit
                                
                                
                                1,083,443Selling,
      general and administrative expenses
                                
                                
                                1,058,103Income
      from operations
                                
                                
                                25,340Other
      income:Interest
      income
                                
                                
                                6,973Other
      income
                                
                                
                                40,024Net
      other income
                                
                                
                                46,997Income
      before income taxes
                                
                                
                                72,337Provision
      for income taxes
                                
                                
                                10,000Net
      income
                                
                                $
                                62,337





Note 8 - Related Party
Transactions




On May 1,
2007, the Company entered into a consulting agreement with a stockholder to
provide consulting services relating to strategic planning, investor relations
and corporate governance for a monthly fee of $30,000, plus reimbursement of
expenses, for a six-month period ending on October 31, 2007. The consulting
agreement provided for automatic extensions at the end of each six-month term,
unless terminated by either party at least 30 days prior to the end of such
term. The agreement was extended to October 30, 2008, and was not
renewed.  For the years ended September 30, 2008 and 2007, the Company
incurred $360,000 and $150,000, respectively, pursuant to this consulting
agreement, $30,000 of which was payable each at September 30, 2008 and
2007, respectively.




On
November 5, 2007, the Company entered into a consulting agreement effective May
31, 2007 with a company 100% owned by a stockholder, to provide the technical
services of that stockholder along with other employees and resources of the
consulting company. The consulting agreement superseded an existing employment
agreement with that stockholder.  For the years ended September 30,
2008 and 2007, the Company incurred $21,154 and $57,212, respectively, in salary
to the stockholder under the previous employment agreement, and $238,910 and
$6,090, respectively, under the consulting agreement.  At September
30, 2007, an amount of $6,090 was payable under the consulting
agreement.




For the
years ended September 30, 2008 and 2007 the Company paid and incurred an
aggregate of $17,500 and $14,700, respectively, for advisory and corporate board
meeting management, website and graphics design services provided by a company
100% owned by the spouse of a stockholder.


F-12





Note 9 - Stock Options and
Warrants




Options




In 2007,
the Company adopted a stock compensation plan, the 2007 Stock Compensation Plan
(the “Plan”), pursuant to which it is authorized to grant options, restricted
stock and stock appreciation rights to purchase up to 3,750,000 shares of common
stock to the Company’s employees, officers, directors, consultants and
advisors.




The 2007
Stock Plan is administered by the Company’s Board of Directors or a committee
appointed by the Board, which determines the persons to whom awards will be
granted, the type of award to be granted, the number of awards to be granted and
the specific terms of each grant, including the vesting thereof, subject to the
provisions of the Plan.




All
options issued pursuant to the Plan have an exercise price that is greater than
or equal to the fair market value of the Company’s common stock on the date of
grant.




Restricted
shares of 12,500 have been issued under the Plan.




A summary
of option activity under the Plan for the years ended September 30, 2008 and
2007 is as follows:




Shares
                                
                                
                                Weighted Average
                                  Exercise PriceStock
      options outstanding, October 1, 2006
                                
                                
                                —
                                
                                
                                
                                —Granted
                                
                                
                                931,000
                                
                                
                                $
                                4.00Exercised
                                
                                
                                —
                                
                                
                                
                                —Forfeited
                                
                                
                                —
                                
                                
                                
                                —Total
      options outstanding, September 30, 2007
                                
                                
                                931,000
                                
                                
                                $
                                4.00Granted
                                
                                
                                375,000
                                
                                
                                $
                                4.00Exercised
                                
                                
                                —
                                
                                
                                
                                —Forfeited
                                
                                
                                —
                                
                                
                                
                                —Total
      options outstanding, September 30, 2008
                                
                                
                                1,306,000
                                
                                
                                $
                                4.00Options
      exercisable at September 30, 2008
                                
                                
                                422,102
                                
                                
                                $
                                4.00Shares
      available for future grant under Plan
                                
                                
                                2,431,500





The
weighted average remaining life of outstanding options at September 30, 2008 was
46 months. The intrinsic value is not greater than the grant price.




Warrants




A summary
of warrant issuances during the years ended September 30, 2008 and 2007 is as
follows:




Shares
                      
                      
                      Weighted Average
                        Exercise PriceWarrants
      outstanding, October 1, 2006
                      
                      
                      —
                      
                      
                      
                      —Granted
                      
                      
                      3,100,000
                      
                      
                      $
                      4.02Exercised
                      
                      
                      —
                      
                      
                      
                      —Forfeited
                      
                      
                      —
                      
                      
                      
                      —Warrants
      outstanding, September 30, 2007
                      
                      
                      3,100,000
                      
                      
                      $
                      4.02Granted
                      
                      
                      —
                      
                      
                      
                      —Exercised
                      
                      
                      —
                      
                      
                      
                      —Forfeited
                      
                      
                      (12,500
                      )
                      
                      
                      8.00Warrants
      outstanding, September 30, 2008
                      
                      
                      3,087,500
                      
                      
                      $
                      4.01Warrants
      exercisable at September 30, 2008
                      
                      
                      3,087,500
                      
                      
                      $
                      4.01





The
weighted average remaining life at September 30, 2008 was 56 months. The
intrinsic value is not greater than the grant price.




Note 10 - Share Based
Payments




Pursuant
to the provisions of Statement of Financial Accounting Standards No. 123R Share
Based Payment, and SEC Staff Accounting Bulletin No. 107, Share-Based Payment
the cost resulting from all share-based payment transactions (including, but not
limited to grants of employee options, and warrants to purchase the Company’s
common stock) shall be recognized in the statement of operations based on their
fair values, unless related to capital financing.


F-13


The fair
value of each option award and warrant grant for the years ended September 30,
2008 and 2007 is estimated on the date of grant using the Black-Scholes option
pricing model using the following assumptions:




Options
                    
                    WarrantsExpected
      Volatility
                    
                    
                    75
                    %
                    75
                    %Expected
      Dividends
                    
                    
                    0.0
                    %
                    0.0
                    %Expected
      term, in years
                    
                    
                    3.5-4.0
                    
                    4.75-6.0Risk-free
      rate
                    
                    
                    2.80-4.90
                    %
                    4.64-5.01
                    %





On May 31, 2007, in connection with the
employment agreement of Dr. Harin Padma-Nathan as Chief Executive Officer, the
Company issued options to purchase 868,500 common shares of the Company for an
exercise price of $4.00 per share. The option shares vest in equal installments
every 90 days from the date of the agreement for each year during the term of
five years until they have been fully vested. The option shares expire in five
years from the date of grant.  The fair value of the 868,500 share
option grant to the employee on May 31, 2007 is $750,000 using the Black-Scholes
option pricing model.





The fair
value of the warrant grants to the private placement agent on May 16, 2007 and
June 25, 2007 was $2,988,064 using the Black-Scholes option pricing model which
was reflected as an addition to paid-in capital upon the issuance of the
warrants, and a corresponding reduction of paid-in capital as costs incurred in
connection with the private placements of common stock.





On July
20, 2007, the Board of Directors of the Company authorized the issuance of a
warrant to Investor Media Group (“IMG”) to purchase up to 25,000 shares of the
Company’s common stock, pursuant to a consulting agreement, as amended, dated
July 12, 2007 between the Company and IMG. The agreement provides that IMG shall
provide investor relations services to the Company for a period of six months
beginning July 9, 2007 and ending January 8, 2008 for a monthly fee of $5,000.
The warrant was divided into 4 tranches as follows:




Tranche
                              
                              
                              Number of Shares
                              
                              Vesting Date
                              
                              Strike Price1
                              
                              
                              
                              6,250
                              
                              July
      20, 2007
                              
                              $
                              6.002
                              
                              
                              
                              6,250
                              
                              October
      9, 2007
                              
                              $
                              6.003
                              
                              
                              
                              6.250
                              
                              January
      10, 2008
                              
                              $
                              8.004
                              
                              
                              
                              6,250
                              
                              April
      10, 2008
                              
                              $
                              8.00




The
shares of common stock in the third and fourth tranches will not vest in the
event either party gives the other party a thirty-day written notice of
termination of the consulting agreement prior to January 8, 2008. The estimated
fair value of the warrant grant was $11,400 on the date of grant using the
Black-Scholes option pricing model.  On November 5, 2007, the Company
notified IMG of its intent not to renew the agreement beyond its scheduled
termination date on January 8, 2008 and the balance of 12,500 warrants were
forfeited.





On July
20, 2007, the Company’s Board of Directors authorized the issuance of options to
purchase 50,000 shares of common stock at $4.00 per share to Sharyar Baradaran,
for his services as a non-employee director. The fair value of the option grant
was $43,200, estimated on the date of grant, using the Black-Scholes option
pricing model.





On July
20, 2007, the Company’s Board of Directors authorized the issuance of 12,500
shares of common stock (the “Consulting Shares”) to Paul Ketteridge, in
consideration for his consulting services. The shares have a fair value of $2.00
per share, or $25,000 and resulted in a charge to expense of $12,500 and $3,125
for the years ended September 30, 2008 and 2007, respectively.. The consulting
services will include advising the Company regarding compliance with Food and
Drug Administration and other agency regulations, assisting the Company in
obtaining regulatory approval for Company products, and advising the Company
regarding new government regulations.  To the extent that Mr. Ketteridge
provides less than 330 hours of service during the two-year term of the
consulting arrangement, the Consulting Shares will be subject to forfeiture on a
pro-rata basis. The Company also issued to Mr. Ketteridge an option to purchase
12,500 shares of common stock at an exercise price of $4.00 per share, 6,250
shares of which will vest upon the earlier of receipt by the Company of a second
marketing approval from the U.S. Food and Drug Administration or July 1, 2010,
and the remaining 6,250 shares of which will vest on the second year anniversary
of the consulting agreement with Mr. Ketteridge. The fair value of the option
award was $10,800 on the date of grant using the Black-Scholes option pricing
model.





On
October 31, 2007, the Company received approval for an Investigational New Drug
(“IND”) with respect to one of its drug candidates. This approval triggered a
milestone payment under the Company’s license agreement with Vitae
Pharmaceuticals, Inc. (“Vitae”) of 1,756,732 common shares, representing 5.66%
of the Company’s fully diluted common stock on the effective date of the license
agreement. The fair market value of these shares at October 31, 2007 was $2.00
per share, which resulted in a charge of $3,513,000 to in-process research and
development expenses on that date and an increase in stockholders’
equity.




On
November 28, 2007, the Company awarded options to purchase 50,000 shares of
common stock to a new director at an exercise price of $4.00 per share. The
options vest 100% upon grant, and have a five year term. The fair value of the
option award, estimated on the date of grant using the Black-Scholes option
pricing model was $41,800.  The option value of $41,800 is amortized
to expense over the director’s initial 12 month board term.




F-14


On May
15, 2008, the Company awarded options to purchase 250,000 shares of common stock
to four employees at an exercise price of $4.00 per share. The options vest
one-third upon grant, the balance ratably over a period of 36 months so long as
the employees continue in the employment of the Company. The options have a five
year term which shall be extended to six months following termination if the
employee continues to be employed on the fifth anniversary of the grant, but not
beyond ten years from the date of grant. The fair value of these option awards,
estimated on the date of grant using the Black-Scholes option pricing model was
$187,000.  The option value is amortized to expense over three years
from the date of grant consistent with the vesting terms.





On August
1, 2008, the Company awarded options to purchase 75,000 shares of common stock
to an employee at an exercise price of $4.00 per share. The options vest ratably
over a period of four years so long as the employee continues in the employment
of the Company.  The option has a five year term which shall be
extended to six months following termination if the employee continues to be
employed on the fifth anniversary of the grant, but not beyond ten years from
the date of grant. The fair value of these option awards, estimated on the date
of grant using the Black-Scholes option pricing model, was $56,000.





Note 11 - Lease
Commitments




The
Company entered into a three year lease of approximately 2,960 sq. ft. for
premises located in Irvine, California in which it conducts operations
commencing July 15, 2007 and ending July 31, 2010.  The base rent is
$4,096 per month through July 31, 2008, $4,243 per month through July 31, 2009,
and $4,389 per month thereafter.  In addition, the Company entered
into a three year photocopier equipment lease for $203 per month in September,
2007.  Minimum payments under operating leases are approximately as
follows:




Years ended September 30,
                
                Total2009
                
                $
                54,0002010
                
                
                46,000Total
                
                $
                100,000





Note 11 - Income
Taxes




Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. The Company recorded a deferred income tax asset
for the tax effect of net operating loss carryforwards, in-process research and
development, share-based milestone payments and other temporary differences,
aggregating approximately $4,153,000 at September 30, 2008. In recognition of
the uncertainty regarding the ultimate amount of income tax benefits to be
realized, the Company has recorded a full valuation allowance at September 30,
2008.




The
Company has net Federal and California losses for tax purposes totaling
approximately $4,646,000 and $4,549,000, respectively, which may be applied
against future taxable income and will expire in 2027 and 2017. Accordingly,
there is no tax expense for years ended September 30, 2008 and 2007, and the
period inception (May 1, 2007) through September 30, 2008. The potential tax
benefits arising from these losses have not been recorded in the financial
statements. The Company evaluates its valuation allowance requirements on an
annual basis based on projected future operations. When circumstances change and
this causes a change in management’s judgment about the realizability of
deferred tax assets, the impact of the change on the valuation allowance is
reflected in current operations.




Significant
components of the Company’s net deferred tax assets at September 30, 2008 and
2007 are as follows:




Year ended
                                        September 30,
                                        2008
                                      
                                      
                                      Year ended
                                        September 30,
                                        2007Tax
      loss carryforwards
                                      
                                      $
                                      1,717,000
                                      
                                      
                                      $
                                      293,000Share
      based compensation
                                      
                                      
                                      167,000
                                      
                                      
                                      
                                      28,000In-process
      R&D share based milestone payments
                                      
                                      
                                      2,251,000
                                      
                                      
                                      
                                      900,000Depreciation/gain/loss
                                      
                                      
                                      (1,000
                                      )
                                      
                                      
                                      —Vacation
      accrual
                                      
                                      
                                      19,000
                                      
                                      
                                      
                                      8,000Valuation
      allowance
                                      
                                      
                                      (4,153,000
                                      )
                                      
                                      
                                      (1,229,000
                                      )$
                                      —
                                      
                                      
                                      $
                                      —





The
provision for income taxes differs from the amount computed at federal statutory
rates as follows:





Year ended
                            September 30,
                            2008
                          
                          
                          Year ended
                            September 30,
                            2007
                          
                          
                          May 1, 2007
                            (inception)
                            through
                            September 30,
                            2008Provision
      for income taxes at 34% statutory rate
                          
                          $
                          (2,495,000
                          )
                          
                          $
                          (1,049,000
                          )
                          
                          
                          (3,544,000
                          )State
      taxes, net of federal benefit
                          
                          
                          (429,000
                          )
                          
                          
                          (180,000
                          )
                          
                          
                          (609,000
                          )Change
      in valuation allowance
                          
                          
                          2,924,000
                          
                          
                          
                          1,229,000
                          
                          
                          
                          4,153,000$
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —




F-15




On July
13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), which
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, Accounting for
Income Taxes, and prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. FIN 48 is effective for fiscal
years beginning after December 15, 2006.




The
Company adopted FIN 48, Accounting for Uncertainty in Income Taxes on October 1,
2007. The Company recognized no cumulative effect adjustment as a result of
adopting FIN 48. At September 30, 2008 and 2007, the Company has no unrecognized
tax benefits.




The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense. As of September 30, 2008, the
Company has no accrued interest and penalties related to uncertain tax
positions.




The
Company is subject to taxation in the U.S. and California. The tax years 2005 to
2007 remain open to examination by the major taxing jurisdictions to which the
Company is subject. The Company currently is not under examination by any tax
authority.





Note 12 - Subsequent
Events




On
October 28, 2008, the Company awarded options to purchase an aggregate of
100,000 shares of common stock to two new directors at an exercise price of
$4.00 per share. The options vest 100% upon grant, and have a five year term.
The fair value of the option award estimated on the date of grant using the
Black-Scholes option pricing model was $82,000 using the following
assumptions:




AssumptionsExpected
      Volatility
                
                
                75
                %Expected
      Dividends
                
                
                0.0
                %Expected
      term, in years
                
                
                4.0Risk-free
      rate
                
                
                2.3
                %





The
option value will be amortized to expense over the directors’ initial 12 month
board term.




F-16