UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




x           Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2009





 ̈           Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ___to___


Commission File
Number  1-32639




MANHATTAN
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)




Delaware
                (State
      or other jurisdiction of incorporation or organization)
              36-3898269
                (I.R.S.
      Employer Identification No.)48
      Wall Street, 11thFloor,
      New York, New York
                (Address
      of Principal Executive Offices)
              10005
                (Zip
      Code)





(212)
582-3950


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class
              Name
      of each exchange on which registeredCommon
      Stock, $0.001 par value
              OTC
      Bulletin Board





Securities registered pursuant to
Section 12(g) of the Exchange Act:None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   ̈
Yes     x
No


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.   ̈
Yes  x
No


Indicate
by check mark whether the registrant (1) 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.       x
Yes    ̈
No


Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding twelve months (or for such shorter period of time
that the registrant was required to submit and post such
files)       o
Yes    ̈
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 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.         ̈


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.


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





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





The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates of the registrant on June 30, 2009 based on
the closing price of the common stock as reported on the  OTC Bulletin
Board on such date was $5,833,629.





As of
March 23, 2010 there were 114,079,527 outstanding shares of common stock,
par value $.001 per share.





TABLE OF
CONTENTS




PagePART
      IItem
      1
                  Business
                  3Item
      1A
                  Risk
      Factors
                  17Item
      2
                  Properties
                  30Item
      3
                  Legal
      Proceedings
                  30Item
      4
                  Reserved
                  30PART
      IIItem
      5
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  31Item
      7
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  37Item
      8
                  Financial
      Statements and Supplementary Data
                  56Item
      9
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  56Item
      9A(T)
                  Controls
      and Procedures
                  56Item
      9B
                  Other
      Information
                  58PART
      IIIItem
      10
                  Directors,
      Executive Officers and Corporate Governance
                  59Item
      11
                  Executive
      Compensation
                  65Item
      12
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  69Item
      13
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  71Item
      14
                  Principal
      Accounting Fees and Services
                  74PART
      IVItem
      15
                  Exhibits
      and Financial Statement Schedules
                  75Index
      to Financial Statements
                  F-1


1


References
to the “Company,” the “Registrant,” “we,” “us,” or “our” or in this Annual
Report on Form 10-K refer to Manhattan Pharmaceuticals, Inc., a Delaware
corporation, and our consolidated subsidiaries, together taken as a whole,
unless the context indicates otherwise.




Forward-Looking
Statements




This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Exchange Act. Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as “anticipate,”
“estimate,” “plan,” “project,” “expect,” “may,” “intend” and similar words or
phrases. Accordingly, these statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially from those
expressed in them. These statements are therefore subject to risks and
uncertainties, known and unknown, which could cause actual results and
developments to differ materially from those expressed or implied in such
statements. Such risks and uncertainties relate to, among other
factors:





·      our
ability to obtain adequate financing to continue our operations;


·      the
development of our pharmaceutical product candidates;


·      the
regulatory approval of our pharmaceutical product candidates;


·      our
use of clinical research centers and other contractors;


·      our
ability to find collaborative partners for research, development and
commercialization of potential products;


·      acceptance
of our products by doctors, patients or payors;


·      our
ability to market any of our products;


·      our
history of operating losses;


·      our
ability to compete against other companies and research
institutions;


·      our
ability to secure adequate protection for our intellectual
property;


·      our
ability to attract and retain key personnel;


·      availability
of reimbursement for our products;


·      the
effect of potential strategic transactions on our business; and


·      the
volatility of our stock price.





Further,
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict which
factors will arise. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.


2





PART I




ITEM
1.  BUSINESS




Overview




We are a
specialty healthcare product company focused on developing and commercializing
innovative treatments for underserved patient populations.  We aim to
acquire rights to these technologies by licensing or otherwise acquiring an
ownership interest, funding their research and development and eventually either
bringing the technologies to market or out-licensing.  Our current
portfolio of product candidates includes:


· 
    HedrinTM, a
novel, non-insecticide treatment for pediculosis (head lice)


·      AST-726,
a nasally delivered  form of hydroxocobalamin for the treatment of
vitamin B12
deficiency


·      AST-915,
an oral treatment for essential tremor


·      A
topical GEL for the treatment of mild psoriasis





In the
short term, we are focusing our efforts on the commercialization of Hedrin and
AST-726.  We have not received regulatory approval for, or generated
commercial revenue from, marketing or selling any products.





Our
executive offices are located at 48 Wall Street, 11th floor,
New York, NY 10005 USA.  Our telephone number is (212) 582-3950 and our
internet website address is www.manhattanpharma.com.




Recent
Developments





On March
8, 2010, Manhattan Pharmaceuticals, Inc. (the “Company” or "Manhattan") entered
into an Agreement and Plan of Merger (the "Merger Agreement") by and among the
Company, Ariston Pharmaceuticals, Inc., a Delaware corporation ("Ariston") and
Ariston Merger Corp., a Delaware corporation and wholly-owned subsidiary of the
Company (the "Merger Sub").  Pursuant to the terms and conditions set forth
in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into
Ariston (the "Merger"), with Ariston being the surviving corporation of the
Merger.  As a result of the Merger, Ariston became a wholly-owned
subsidiary of the Company.





The
Company merged with Ariston principally to add new products to our portfolio.
Ariston Pharmaceuticals, Inc. (“Ariston”) is a private, clinical stage specialty
biopharmaceutical company based in Shrewsbury, Massachusetts that in-licenses,
develops and plans to commercialize innovative treatments for underserved
patient populations.





For more
details about the Merger please see History.





Business
Strategy





Our goal
is to locate, develop, and commercialize specialty healthcare products.  In
order to achieve this, we look for innovative, or next generation, products with
one or more of the following characteristics:


· 
    Low clinical, regulatory, and/or marketing
risk


·      Quick
to market (such as medical devices, 505(b)(2), or over-the-counter)


·      Low
cost to develop


·      Low
cost and/or simple to manufacture


3





·      Serves
a niche or underserved patient population





All of
our current products meet some or all of these criteria.





Products





Hedrin





Hedrin is
a novel, non-insecticide, one hour treatment for pediculosis (head lice) and is
currently being developed in the United States as a prescription medical
device.  Hedrin is the top selling head lice product in Europe.  It is
currently marketed in over 27 countries and, according to Thornton & Ross
Ltd. (“T&R”), achieved 2008 annual sales through its licensees of
approximately $48 million (USD) at in-market public prices, garnering
approximately 23% market share across Europe.





In June
2007, Manhattan Pharmaceuticals entered into an exclusive license agreement with
Thornton & Ross Ltd (“T&R”) and Kerris, S.A. (“Kerris”) for Hedrin (the
“Hedrin License Agreement”). We acquired an exclusive North American license to
certain patent rights and other intellectual property relating to the
product.  In addition, and at the same time, we also entered into a Supply
Agreement with T&R pursuant to which T&R will be the Company’s exclusive
supplier of Hedrin product (the “Hedrin Supply Agreement”).





In
February 2008, Manhattan Pharmaceuticals entered into a joint venture agreement
with Nordic Biotech Advisors ApS (“Nordic”) to develop and commercialize Hedrin
for the North American market.  The joint venture entity, H Pharmaceuticals
(“H Pharmaceuticals” or the “Hedrin JV”), now owns, is developing, and is
working to secure commercialization partners for Hedrin in both the United
States and Canada.  Manhattan Pharmaceuticals manages the day-to-day
operations of the Hedrin JV under a management contract with the Hedrin
JV.  H Pharmaceuticals is independently funded and is responsible for all
costs associated with the Hedrin project, including any necessary United States
(“U.S.”) clinical trials, patent costs, and future milestones owed to the
original licensor, T&R.





Manhattan
Pharmaceuticals, through the Hedrin JV, is currently working to secure
commercialization and marketing partners for the U.S. and Canada.





Pediculosis
(Head lice)





Head lice
(Pediculus humanus
capitis) are small parasitic insects that live mainly on the human scalp
and neck hair.  Head lice are not known to transmit disease, but they are
highly contagious and are acquired by direct head-to-head contact with an
infested person’s hair, and may also be transferred with shared combs, hats, and
other hair accessories.  They can also live on bedding or upholstered
furniture for a brief period.  Head lice are seen across the socioeconomic
spectrum and are unrelated to personal cleanliness or hygiene.  Children
are more frequently infested than are adults, and Caucasians more frequently
than other ethnic groups.  Lice are most commonly found on the scalp,
behind the ears, and near the neckline at the back of the neck.  Common
symptoms include a tickling feeling of something moving in the hair, itching,
irritability caused by poor sleep, and sores on the head caused by
scratching.


4


Mechanism
of Action





Hedrin is
a novel, non-insecticide combination of silicones (dimethicone and
cyclomethicone) that acts as a pediculicidal (lice killing) agent by disrupting
the insect’s mechanism for managing fluid and breathing.  In contrast with
most currently available lice treatments, Hedrin contains no chemical
insecticides.  Because Hedrin kills lice by preventing the louse from
excreting waste fluid, rather than by acting on the central nervous system, the
insects cannot build up resistance to the treatment.  Recent studies have
indicated that resistance to chemical insecticides may be increasing and
therefore contributing to insecticide treatment failure.  Manhattan
Pharmaceuticals believes there is significant market potential for a convenient,
non-insecticide treatment alternative.  Both silicones in this proprietary
formulation of Hedrin are used extensively in cosmetics and
toiletries.





Product
Development





To date,
Hedrin has been clinically studied in over 400 subjects.  In a randomized,
controlled, equivalence, clinical study (conducted in Europe by T&R), Hedrin
was administered to 253 adult and child subjects with head lice
infestation.  The study results, published in the British Medical Journal
in June 2005, demonstrated Hedrin’s equivalence when compared to the insecticide
treatment, phenothrin, the most widely used pediculicide in the U.K.  In
addition, according to the same study, the Hedrin treated subjects experienced
significantly less irritation (2%) than those treated with phenothrin
(9%).





A
clinical study published in the November 2007 issue of PLoS One, an
international, peer-reviewed journal published by the Public Library of Science
(PLoS), demonstrated Hedrin’s superior efficacy compared to a U.K. formulation
of malathion, a widely used insecticide treatment in both Europe and North
America.  In this randomized, controlled, assessor blinded, parallel group
clinical trial, 73 adult and child subjects with head lice infestations were
treated with Hedrin or malathion liquid.  Using intent-to-treat analysis,
Hedrin achieved a statistically significant cure rate of 70% compared to 33%
with malathion liquid.  Using the per-protocol analysis Hedrin achieved a
highly statistically significant cure rate of 77% compared to 35% with
malathion.  In Europe, it has been widely documented that head lice has
become resistant to malathion, and we believe this resistance may have
influenced the study results.  To date, there have been no reports of
malathion resistance in the U.S.  Additionally, Hedrin treated subjects
experienced no irritant reactions, and Hedrin showed clinical equivalence to
malathion in its ability to inhibit egg hatching.  Overall, investigators
and study subjects rated Hedrin as less odorous, easier to apply, and easier to
wash out.  In addition 97% of Hedrin treated subjects stated they were
significantly more inclined to use the product again versus 31% of those using
malathion.





Two
unpublished Hedrin studies were completed by T&R in 2008.  In the
first, Hedrin achieved a 100% kill rate in vitro, including malathion resistant
head lice.  In the other, a clinical field study conducted in Manisa
province, a rural area of Western Turkey, Hedrin was administered to 36 adult
and child subjects with confirmed head lice infestations.  Using per
protocol analysis, Hedrin achieved a 97% cure rate.  Using intent-to-treat
analysis, Hedrin achieved a 92% cure rate since 2 subjects were eliminated due
to protocol violations.  No subjects reported any adverse
events.





In April
2009, T&R published a new clinical field study where 40 adult and child
subjects with head lice infestations were treated with Hedrin using a 1 hour
application time.  Treatment was given twice with 7 days between
applications.  In this study, Hedrin achieved a cure rate of
90%.





In the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a prescription medical device.  In January 2009,
the U.S. Food and Drug Administration (“FDA”) Center for Devices and
Radiological Health (“CDRH”) notified H Pharmaceuticals that Hedrin had been
classified as a Class III medical device.  A Class III designation means
that a Premarket Approval (“PMA”) Application will need to be obtained before
Hedrin can be marketed in the U.S.  In July 2009, the CDRH division of the
FDA confirmed that two pivotal studies, which can occur simultaneously, using
the same protocol consisting of approximately 60 subjects each, or 120 patients
in total, are required for the completion of the PMA Application. 
Manhattan Pharmaceuticals and the Hedrin JV are currently working to commence
the pivotal study.


5





Market
and Competition





According
to the American Academy of Pediatrics an estimated 6-12 million Americans are
infested with head lice each year, with pre-school and elementary children and
their families affected most often.  The total U.S. head lice market is
estimated to be over $200 million with prescription and over-the-counter (OTC)
therapies comprising approximately 50% of that market.  The remaining 50%
of the market is comprised of alternative therapies such as tea tree oils,
mineral oils, and “nit picking”, or physical combing to remove lice.  In
addition, the head lice market is experiencing an increasing trend toward
healthier, more environmentally friendly consumer products and a growing
activism against pesticide products.  We believe there is significant
market potential for a convenient, non-insecticide treatment for head
lice.





The
prescription and OTC segment of the market is dominated by 4-5 name brand
products and numerous, low cost generics and store brand equivalents.  The
active ingredients in these pharmacological therapies are chemical
insecticides.  The most frequently prescribed insecticide treatments are
Ovide (malathion) and Kwell (lindane), and the most frequently purchased OTC
brands are Rid (piperonyl butoxide), Nix (permethrin), and Pronto (piperonyl
butoxide).  Lindane has been banned in 52 countries worldwide and has now
been banned in the state of California due to its toxicity.  In addition,
New York, Michigan, and Minnesota have initiated legislation to ban the use of
lindane.  European formulations of malathion have experienced widespread
resistance.  Resistance to U.S. formulations of malathion have not been
widely reported to date, but experts believe it is likely develop with continued
use.  Head lice resistance to piperonyl butoxide and permethrin has been
reported in the U.S. and treatment failures are common.





See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources- Research and Development Projects-
Hedrin.”





AST-726





AST-726
is a nasally delivered form of hydroxocobalamin for the treatment of Vitamin
B12
deficiency.  Manhattan Pharmaceuticals acquired global rights to AST-726 as
part of the Ariston acquisition.  AST-726 has demonstrated pharmacokinetic
equivalence to a marketed intramuscular injection product for Vitamin B12
remediation.  Manhattan Pharmaceuticals believes that AST-726 may enable
both a single, once-monthly treatment for maintenance of normal Vitamin B12 levels in
deficient patients, and more frequent administration to restore normal levels in
newly diagnosed B12
deficiency.  Further, Manhattan Pharmaceuticals believes that AST-726 could
offer a convenient, painless, safe and cost-effective treatment for Vitamin
B12
deficiency, without the need for intramuscular injections.





Vitamin
B12
Deficiency - Background of the Disease





Untreated
Vitamin B12
deficiency can result in serious clinical problems including hematological
disorders, such as life-threatening anemias, and a range of central and
peripheral neurological abnormalities such as fatigue, confusion, cognition
impairment, dementia, depression, peripheral neuropathies and gait
disturbances.  Neuronal damage may involve peripheral nerves, the spinal
cord and the brain and if the condition is left untreated may become
permanent.  Furthermore, clinically asymptomatic patients with low normal
or below normal Vitamin B12 levels
may have changes in blood chemistries, including elevated levels of
methylmalonic acid or homocysteine, known risk factors for other medical
conditions associated with an increased risk of circulatory problems, blood
clots and cardiovascular disease.


6





The
primary diagnosis of Vitamin B12
deficiency is made when measurement of its blood concentration falls below the
expected normal range of 200 to 900 picograms/ml. Vitamin B12
deficiency is most often caused by pathological conditions that limit the body’s
ability to absorb the vitamin.  Such disorders include pernicious anemia,
atrophic gastritis, problems caused by gastric surgical procedures to treat
stomach cancer and obesity, Crohn’s disease and simple age-related
changes.  Some studies show the inability to properly absorb Vitamin B12 as a side
effect from chronic use of certain widely prescribed antacid medications such as
Prilosec® and
diabetes treatments such as Glucophage®.





Product
Development





AST-726,
a commercial nasal spray formulation of hydroxocobalamin, has satisfactorily
completed preclinical toxicology, and an Investigational New Drug (“IND”)
Application  has been filed with the FDA.  This product candidate is
being developed utilizing the 505(b)(2) regulatory pathway.  AST-726 has
also successfully completed a safety and pharmacokinetic study in healthy
volunteers and an end of Phase II meeting with FDA has been completed. 
Manhattan Pharmaceuticals is planning a Phase III Vitamin B12
replacement study in the United States.  The study is designed to enroll
approximately 40 Vitamin B12 deficient
patients currently treated with injection therapy.  Patients will first be
evaluated on injection therapy and then will receive AST-726 by nasal spray on a
monthly basis for 12 weeks.  The primary purpose of this study is to
determine that levels of Vitamin B12 in the
patients’ bloodstream remain within the normal range following monthly
administration of AST-726.  We anticipate that the data from this study and
additional manufacturing information will support the planned 505(b)(2) new drug
application (“NDA”) filing for AST-726.





A
CMC/manufacturing process has been developed for AST-726 that we believe
provides a commercially viable stability profile.  Manhattan
Pharmaceuticals has two issued patents in the United States with respect to
AST-726, one of which relates to its application in Vitamin B12
remediation.





Market
and Competition





More than
9 million people in the US are deficient in Vitamin B12 ,
indicating substantial market potential for a facile, convenient, safe and
effective treatment that can replace the need for painful and frequent
intramuscular injections or other less than fully effective delivery
forms.





Approximately
15% of the elderly and up to 40% of nursing home residents in the U.S. have
Vitamin B12
deficiency. A study of over 11,000 U.S. civilians ages four and older found a 3%
prevalence of Vitamin B12
deficiency in the general population using the 200 picograms/ml deficiency
standard, indicating that approximately 9 million people in the U.S. are in need
of B12
replacement therapy. Some experts advocate a higher deficiency standard of
300-350 picograms/ml on the basis that levels below this coincide with elevated
methylmalonic acid and homocysteine, risk factors for cardiovascular disease as
found in the Framingham Heart Study. On this basis the prevalence of Vitamin
B12
deficiency increases substantially.





Manhattan
Pharmaceuticals believes that substantial market opportunity also exists
internationally.





Current
Treatments for Vitamin B12
Deficiency





Once
Vitamin B12
deficiency is diagnosed by a simple blood test, the goal of treatment is
generally to:


·      Restore
circulating blood levels to normal as rapidly as possible;


·      Replenish
and normalize the substantial stores of the vitamin in the body;
and


·      Institute
a lifelong therapeutic regimen that will maintain normal levels of the
vitamin.


7





Manhattan
Pharmaceuticals believes that parenteral (intramuscular injection) treatment is
often considered the treatment of choice for Vitamin B12
deficiency.  Cyanocobalamin is predominantly used for this purpose in the
United States, but hydroxocobalamin, the active ingredient in AST-726, is also
available for pediatrics and for adults for whom injection of cyanocobalamin is
poorly tolerated.  Hydroxocobalamin injection is the predominant treatment
for Vitamin B12
deficiency in Europe.





In the
United States, intramuscular injections are generally given by a physician or
nurse, necessitating an office/medical center visit by the patient or a visiting
nurse home call for each treatment. Following a diagnosis of B12
deficiency, injections are required quite frequently in order to restore normal
vitamin levels. Once normalization is achieved, the frequency can be reduced to
once or twice per month. While the treatment is usually highly effective, the
inconvenience and cost of frequent office visits and the pain and side effects
associated with intramuscular injections are problematic for many
patients.





Intranasal
treatment for Vitamin B12
deficiency seeks to alleviate these problems, but the two intranasal products
currently available in the United States, Nascobal® and
Calomist®, have to
be administered on a daily or weekly basis and are not usually recommended for
the treatment of newly diagnosed patients.  Both products are based on
cyanocobalamin.





Oral or
sublingual administration of high doses of Vitamin B12 can
restore deficient patients to normal in certain cases.  Such high dose
supplements are generally available in pharmacies and nutrition/health food
stores.  Adequate results can almost certainly be obtained when nutritional
insufficiency (e.g., strict vegan diet) is the primary cause of the problem.
However, the normal gastrointestinal tract has a very limited capability to
absorb Vitamin B12 and if
this is compromised, as is the case in many deficient patients, oral or
sublingual supplementation may not be ideal for rapidly restoring circulating
levels and storage depots of the vitamin to normal. In such cases of
pathological Vitamin B12
deficiency, intramuscular injection still often remains the current treatment of
choice.





An
unapproved Vitamin B12 patch is
available in the United States, but we believe that its effectiveness in
moderate to severe Vitamin B12 deficient
patients is substantially untested.





Potential
Advantages of AST-726 Treatment





We
believe that AST-726 treatment has the potential to directly substitute for and
replace the need for injection treatment by applying the current injection
frequency paradigms for both newly diagnosed and normalized Vitamin B12 deficient
patients.  AST-726 is proposed to be self-administered at home by the
patient, without costly, time consuming, and inconvenient visits to a doctor’s
office or medical facility needed for each of the many intramuscular injections
required for life.  Because it is delivered through a nasal spray,
additional advantages include freedom from injection pain and reduced anxiety in
individuals, including children and the elderly, who may have fear of
injections.  Manhattan Pharmaceuticals believes that the delivery profile
of AST-726 is comparable to that of the marketed intramuscular injection, and
that therefore newly diagnosed patients will be able to self-administer the
nasal spray on a daily basis or several times a week to restore their Vitamin
B12
status to normal and will then be self-maintained on a single monthly nasal
spray treatment.





AST-915





AST-915
is an orally delivered treatment for essential tremor.  Manhattan
Pharmaceuticals acquired global rights to AST-915 as part of the Ariston
acquisition.  This product candidate is being studied under a Cooperative
Research and Development Agreement (CRADA) with the National Institutes of
Health (NIH) and a Phase 1 clinical study is currently underway in essential
tremor patients.  AST-915 was formerly referred to as “AST-914
metabolite”.


8





Essential
Tremor





Essential
tremor is a neurological disorder that is characterized by involuntary shaking
of the hands, arms, head, voice, and upper body. The most disabling tremors
occur during voluntary movement, affecting common skills such as writing, eating
and drinking.  Essential tremor is often misdiagnosed as Parkinson’s
disease, yet according to the National Institutes of Neurological Disorders and
Stroke, approximately 8 times as many people have essential tremor as have
Parkinson’s.  Essential tremor is not confined to the elderly. 
Children, newborns, and middle-aged people can also have the
condition.





Market
opportunity





Essential
tremor is the most common involuntary movement disorder, with increasing
incidence as people age.  According to the National Institute of Health
(NIH), essential tremor affects 14% of people 65 years and older, which equates
to approximately 5.4 million Americans.  There is no cure for essential
tremor and the currently available drug therapies do not work in certain
patients, produce at best a 50% response in others and have significant side
effects.  Manhattan Pharmaceuticals believes AST-915 may provide a new
treatment option for this serious and prevalent disorder. Manhattan
Pharmaceuticals believes that substantial market opportunity also exists
internationally.





Topical
GEL for Psoriasis





This
topical GEL was used as the vehicle (placebo) in a prior clinical study versus a
discontinued product candidate, topical PTH (1-34), and showed evidence of
psoriasis improving properties.  In that Phase 2a study 15% of study
subjects achieved a clear or almost clear state at the end of week 2.  At
the end of week 4, 20% of subjects treated with the GEL had achieved a clear or
almost clear state, and at the end of week 8, 25% of subjects treated with the
GEL had achieved a clear or almost clear state.  The Company owns global
rights to this topical GEL and is exploring the possibility of developing it as
an OTC product for mild psoriasis.





Psoriasis





Psoriasis
is a common, chronic, immune-mediated disease that results in the
over-production of skin cells. In healthy skin, immature skin cells migrate from
the lowest layer of the epidermis to the skin’s surface over a period of 28-30
days. In psoriasis, these cells reproduce at an extremely accelerated rate and
advance to the surface in only 7 days.   This results in a build up of
excess, poorly differentiated skin cells that accumulate in dry, thick patches
known as plaques. These plaques can appear anywhere on the body resulting in
itching, skin irritation, and disability.





Market
and Competition





According
to the National Psoriasis Foundation approximately 125 million people worldwide,
including approximately 6 million Americans, suffers from psoriasis.  Of
these, approximately 65% (4.4 million) have mild psoriasis and are the most
likely of psoriasis sufferers to be treated with an OTC product.  According
to Datamonitor, only an estimated 55% of psoriasis sufferers have been formally
diagnosed by a physician, so the OTC market could potentially be much
larger.





There are
a number of treatments available today for psoriasis, including numerous OTC
creams and ointments that help to reduce inflammation, stop itching, and soothe
skin.  Products such as Psoriasin, CortAid, Dermarest, and Cortizone 10 are
the most common, but none are viewed as particularly effective for
psoriasis.


9





See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Research and Development Projects
– Topical Psoriasis Product.”




Discontinued
Research and Development Programs




AltodermTM




In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altoderm in North
America. Altodermis a novel, proprietary
formulation of topical cromolyn sodium and is designed to enhance the absorption
of cromolyn sodium into the skin in order to treat pruritus (itch) associated
with dermatologic conditions including atopic dermatitis (eczema).




In a
Phase 3, randomized, double-blind, vehicle-controlled clinical study (conducted
in Europe by T&R) Altoderm was safe and well tolerated, and showed a trend
toward improvement in pruritus, but the efficacy results were
inconclusive.  Altoderm treated subjects and vehicle only treated subjects
experienced a similar improvement (each greater than 30%), and therefore, the
study did not achieve statistical significance.




As a
result of the inconclusive European study data and a lack of sufficient funds to
develop Altoderm, in March 2009 the Company discontinued development and
returned the project to T&R under the terms of the license
agreement.




AltolynTM




In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altolyn in North America.
Altolynis a novel,
proprietary oral tablet formulation of cromolyn sodium designed to treat
mastocytosis and possibly other gastrointestinal disorders such as food allergy
and symptoms of irritable bowel syndrome.




Due to
small market opportunity and lack of sufficient funds to develop Altolyn, in
March 2009 the Company discontinued development and returned the project to
T&R under the terms of the license agreement.




Oleoyl-estrone




On July
9, 2007 the Company announced the results of its two Phase 2a clinical trials of
oral Oleoyl-estrone (“OE”).  The results of both randomized, double-blind,
placebo controlled studies, one in common obesity and the other in morbid
obesity, demonstrated no statistically or clinically meaningful placebo adjusted
weight loss for any of the treatment arms evaluated.  Based on these
results, the Company discontinued its OE programs in both common obesity and
morbid obesity.




Propofol
Lingual Spray




On July
9, 2007 the Company announced that it discontinued development of Propofol
Lingual Spray for pre-procedural sedation.


10





Commercialization,
Marketing, and Sales





In order
to maximize the commercial value of our product candidates, it is likely that we
will partner with, and/or out-license the marketing rights to, a marketing
organization with expertise in the therapeutic areas we operate in.  We are
currently working to secure a marketing partner for Hedrin in both the United
States and Canada.  Longer term, we may explore the possibility of securing
commercialization partners for AST-726, AST-915, and the topical GEL in the
United States and global territories.





Intellectual
Property and License Agreements





Our goal
is to obtain, maintain and enforce patent protection for our products,
formulations, processes, methods and other proprietary technologies, preserve
our trade secrets, and operate without infringing on the proprietary rights of
other parties, both in the United States and in other countries.  Our
policy is to actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our product candidates,
proprietary information and proprietary technology through a combination of
contractual arrangements and patents, both in the U.S. and elsewhere in the
world.





We also
depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as that of our advisors, consultants and other contractors.
This knowledge and experience we call “know-how”.  To help protect our
proprietary know-how which is not patentable, and for inventions for which
patents may be difficult to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests.  To this end, we
require all employees, consultants, advisors and other contractors to enter into
confidentiality agreements which prohibit the disclosure of confidential
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions important to our
business.





Hedrin





On June
26, 2007, the Company entered into an exclusive license agreement for Hedrin
(“the Hedrin Agreement’) with T&R and Kerris. Pursuant to the Hedrin
Agreement, the Company has acquired an exclusive North American license to
certain patent rights and other intellectual property relating to HedrinTM, a
non-insecticide product candidate for the treatment of pediculosis (“head
lice”):





U.S.
Patent Application No. 2007/0142330, entitled, “Method and composition for the
control of arthropods.”  Jayne Ansell, Inventor.   Application
filed February 12, 2007.  This application is a divisional of U.S.
application Ser. No. 10/097,615, filed Mar. 15, 2002, which is a continuation of
International Application No. PCT/GB00/03540, which designated the United States
and was filed on Sep. 14, 2000.    This application has not yet issued
as a patent.  Any patent that issues will expire on September 14,
2020.





This
patent application has numerous, detailed and specific claims related to the use
of Hedrin (novel formulation of silicon derivatives) in controlling and
repelling arthropods such as insects and arachnids, and in particular control
and eradication of head lice and their ova.





On
February 25, 2008 the Company assigned and transferred its rights in Hedrin to
the Hedrin JV.  The Hedrin JV is now responsible for all of the Company’s
obligations under the Hedrin License Agreement and the Hedrin Supply
Agreement.





AST-726





Pursuant
to the Merger Agreement with Ariston, the Company has acquired patent rights and
other intellectual property relating to AST-726:


11





1.
            U.S.
      Patent No. 5,801,161 entitled, “Pharmaceutical composition for the
      intranasal administration of hydroxocobalamin.” Franciscus W.H.M. Merkus,
      Inventor. Application filed June 17, 1996. Patent issued September 1,
      1998. This patent is scheduled to expire on May, 13,
  2014.





2.
            U.S.
      Patent No. 5,925,625 entitled, “Pharmaceutical composition for the
      intranasal administration of hydroxocobalamin.” Franciscus W.H.M. Merkus,
      Inventor. Application filed December 30, 1997. Patent issued July 20,
      1999. This patent is scheduled to expire on May, 13,
  2014.





3.
            European
      Patent No. EP0735859B1 (granted July 30, 1997, national phase of PCT
      Publication No. WO9517164) entitled, “Pharmaceutical composition for the
      intranasal administration of hydroxocobalamin.” Franciscus W.H.M. Merkus,
      Inventor. Application filed May 13, 1994.  Patents validated in Great
      Britain, Austria, Belgium, Denmark, France, Ireland, Italy, the
      Netherlands, Switzerland, Germany, Spain, and Sweden are scheduled to
      expire on May, 13, 2014.





AST-915





Pursuant
to the Merger Agreement with Ariston, the Company has acquired patent rights and
other intellectual property relating to AST-915:





U.S.
Patent Application No. PCT/US2009/000876 entitled “Octanoic acid formulations
and methods of treatment using the same.” McLane, Nahab, and Hallet, Inventors.
Application filed February 12, 2009. This applications has not yet issued as a
patent.





Manufacturing





We do not
have any manufacturing capabilities.  T&R will supply any Hedrin
product required to conduct human clinical studies, and we are in contact with
several contract cGMP manufacturers for the supply of AST-726, AST-915, and the
topical GEL for psoriasis.





Government
Regulations





The
research, development, testing, manufacture, labeling, promotion, advertising,
distribution, and marketing, among other things, of our products are extensively
regulated by governmental authorities in the United States and other countries.
In the United States, the FDA regulates drugs under the Federal Food, Drug, and
Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply
with the applicable U.S. requirements may subject us to administrative or
judicial sanctions, such as FDA refusal to approve pending NDAs, warning
letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, and/or criminal
prosecution.





Drug Approval
Process.None of our drugs may be marketed in the U.S. until the
drug has received FDA approval. The steps required before a drug may be marketed
in the U.S. include:


·
            nonclinical
      laboratory tests, animal studies, and formulation
  studies,


·
            submission
      to the FDA of an Investigational New Drug application (IND) or, in the
      case of medical devices, an Investigational Device Exemption (IDE), for
      human clinical testing, which must become effective before human clinical
      trials may begin,


·
            adequate
      and well-controlled human clinical trials to establish the safety and
      efficacy of the drug for each
indication,


·
            submission
      to the FDA of a New Drug Application (NDA) or, in the case of medical
      devices a Premarket Approval
(PMA),


12





·
            satisfactory
      completion of an FDA inspection of the manufacturing facility or
      facilities at which the drug is produced to assess compliance with current
      good manufacturing practices, or cGMPs,
and


·
            FDA
      review and approval of the NDA or
PMA.





Nonclinical
tests include laboratory evaluation of product chemistry, toxicity, and
formulation, as well as animal studies. The conduct of the nonclinical tests and
formulation of the compounds for testing must comply with federal regulations
and requirements. The results of the nonclinical tests, together with
manufacturing information and analytical data, are submitted to the FDA as part
of an IND or IDE, which must become effective before human clinical trials may
begin. An IND/IDE will automatically become effective 30 days after receipt by
the FDA, unless before that time the FDA raises concerns or questions about
issues such as the conduct of the trials as outlined in the IND/IDE. In such a
case, the IND/IDE sponsor and the FDA must resolve any outstanding FDA concerns
or questions before clinical trials can proceed. We cannot be sure that
submission of an IND/IDE will result in the FDA allowing clinical trials to
begin.





Clinical
trials involve the administration of the investigational drug or medical device
to human subjects under the supervision of qualified investigators. Clinical
trials are conducted under protocols detailing the objectives of the study, the
parameters to be used in monitoring safety, and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the
IND/IDE.





Clinical
trials typically are conducted in three sequential phases, but the phases may
overlap. The study protocol and informed consent information for study subjects
in clinical trials must also be approved by an Institutional Review Board for
each institution where the trials will be conducted. Study subjects must sign an
informed consent form before participating in a clinical trial. Phase 1 usually
involves the initial introduction of the investigational drug into people to
evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics
and pharmacologic actions, and, if possible, to gain an early indication of its
effectiveness. Phase 2 usually involves trials in a limited patient population
to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible
adverse effects and safety risks; and (iii) preliminarily evaluate the efficacy
of the drug for specific indications. Phase 3 trials usually further evaluate
clinical efficacy and test further for safety by using the drug in its final
form in an expanded patient population. There can be no assurance that Phase 1,
Phase 2, or Phase 3 testing will be completed successfully within any specified
period of time, if at all. Furthermore, we or the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.





The FDCA
permits FDA and the IND/IDE sponsor to agree in writing on the design and size
of clinical studies intended to form the primary basis of an effectiveness claim
in an NDA or PMA application. This process is known as Special Protocol
Assessment, or SPA. These agreements may not be changed after the clinical
studies begin, except in limited circumstances.





Assuming
successful completion of the required clinical testing, the results of the
nonclinical and clinical studies, together with other detailed information,
including information on the manufacture and composition of the drug, are
submitted to the FDA in the form of a NDA or PMA requesting approval to market
the product for one or more indications. The testing and approval process
requires substantial time, effort, and financial resources. The agencies review
the application and may deem it to be inadequate to support the registration and
we cannot be sure that any approval will be granted on a timely basis, if at
all. The FDA may also refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is not
bound by the recommendations of the advisory committee.


13





The FDA
has various programs, including fast track, priority review, and accelerated
approval, that are intended to expedite or simplify the process for reviewing
drugs, and/or provide for approval on the basis surrogate endpoints. Generally,
drugs that may be eligible for one or more of these programs are those for
serious or life-threatening conditions, those with the potential to address
unmet medical needs, and those that provide meaningful benefit over existing
treatments. We cannot be sure that any of our drugs will qualify for any of
these programs, or that, if a drug does qualify, that the review time will be
reduced.





Section
505(b)(2) of the FDCA allows the FDA to approve a follow-on drug on the basis of
data in the scientific literature or data used by FDA in the approval of other
drugs. This procedure potentially makes it easier for generic drug manufacturers
to obtain rapid approval of new forms of drugs based on proprietary data of the
original drug manufacturer.  We intend to rely on Section 505(b)(2) to
obtain approval for AST-726.





Before
approving an NDA or a PMA, the FDA usually will inspect the facility or the
facilities at which the drug is manufactured, and will not approve the product
unless cGMP compliance is satisfactory. If the FDA evaluates the NDA/PMA and the
manufacturing facilities as acceptable, the FDA may issue an approval letter, or
in some cases, an approvable letter followed by an approval letter. Both letters
usually contain a number of conditions that must be met in order to secure final
approval of the NDA/PMA. When and if those conditions have been met to the FDA’s
satisfaction, the FDA will issue an approval letter. The approval letter
authorizes commercial marketing of the drug for specific indications. As a
condition of NDA/PMA approval, the FDA may require post marketing testing and
surveillance to monitor the drug’s safety or efficacy, or impose other
conditions.





After
approval, certain changes to the approved product, such as adding new
indications, making certain manufacturing changes, or making certain additional
labeling claims, are subject to further FDA review and approval. Before we can
market our product candidates for additional indications, we must obtain
additional approvals from FDA. Obtaining approval for a new indication generally
requires that additional clinical studies be conducted. We cannot be sure that
any additional approval for new indications for any product candidate will be
approved on a timely basis, or at all.





Post-Approval
Requirements.  Often times, even
after a drug has been approved by the FDA for sale, the FDA may require that
certain post-approval requirements be satisfied, including the conduct of
additional clinical studies. If such post-approval conditions are not satisfied,
the FDA may withdraw its approval of the drug. In addition, holders of an
approved NDA or PMA are required to: (i) report certain adverse reactions to the
FDA, (ii) comply with certain requirements concerning advertising and
promotional labeling for their products, and (iii) continue to have quality
control and manufacturing procedures conform to cGMP after approval. The FDA
periodically inspects the sponsor’s records related to safety reporting and/or
manufacturing facilities; this latter effort includes assessment of compliance
with cGMP. Accordingly, manufacturers must continue to expend time, money, and
effort in the area of production and quality control to maintain cGMP
compliance. We intend to use third party manufacturers to produce our products
in clinical and commercial quantities, and future FDA inspections may identify
compliance issues at the facilities of our contract manufacturers that may
disrupt production or distribution, or require substantial resources to correct.
In addition, discovery of problems with a product after approval may result in
restrictions on a product, manufacturer, or holder of an approved NDA/PMA,
including withdrawal of the product from the market.





Non-United States
Regulation.Before our products can be marketed outside of the United States, they
are subject to regulatory approval similar to that required in the United
States, although the requirements governing the conduct of clinical trials,
including additional clinical trials that may be required, product licensing,
pricing and reimbursement vary widely from country to country. No action can be
taken to market any product in a country until an appropriate application has
been approved by the regulatory authorities in that country. The current
approval process varies from country to country, and the time spent in gaining
approval varies from that required for FDA approval. In certain countries, the
sales price of a product must also be approved. The pricing review period often
begins after market approval is granted. Even if a product is approved by a
regulatory authority, satisfactory prices may not be approved for such
product.


14





In
Europe, marketing authorizations may be submitted at a centralized, a
decentralized or national level. The centralized procedure is mandatory for the
approval of biotechnology products and provides for the grant of a single
marketing authorization that is valid in all European Union (“EU”) member
states. As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products that are not subject to the
centralized procedure. There can be no assurance that the chosen regulatory
strategy will secure regulatory approvals on a timely basis or at
all.





History





We were
incorporated in Delaware in 1993 under the name “Atlantic Pharmaceuticals, Inc.”
and, in March 2000, we changed our name to “Atlantic Technology Ventures,
Inc.”  In 2003, we completed a “reverse acquisition” of privately held
“Manhattan Research Development, Inc.”  In connection with this
transaction, we also changed our name to “Manhattan Pharmaceuticals, Inc.” 
From an accounting perspective, the accounting acquirer is considered to be
Manhattan Research Development, Inc. and accordingly, the historical financial
statements are those of Manhattan Research Development, Inc.





On March
8, 2010, Manhattan Pharmaceuticals, Inc. entered into an Agreement and Plan of
Merger by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware
corporation and Ariston Merger Corp., a Delaware corporation and wholly-owned
subsidiary of the Company.  Pursuant to the terms and conditions set forth
in the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into
Ariston (the "Merger"), with Ariston being the surviving corporation of the
Merger.  As a result of the Merger, Ariston became a wholly-owned
subsidiary of the Company.





Under the
terms of the Merger Agreement, the consideration payable by the Company to the
stockholders and note holders of Ariston consists of the issuance of 7,062,423
shares of the Company's common stock, par value $0.001 per share, ("Common
Stock") at Closing (as defined in the Merger Agreement) plusthe right to receive up
to an additional 24,718,481 shares of Common Stock (the “Milestone Shares”) upon
the achievement of certain product-related milestones described below.  In
addition, the Company has reserved 38,630,723 shares of its Common Stock for
possible future issuance in connection with the conversion of $15.45 million of
outstanding Ariston convertible promissory notes.  The note holders will
not have any recourse to the Company for repayment of the notes (their sole
recourse being to Ariston), but the note holders will have the right to convert
the notes into shares of the Company's Common Stock at the rate of $0.40 per
share.  Further, the Company has reserved 5,000,000 shares of its Common
Stock for possible future issuance in connection with the conversion of $1.0
million of outstanding Ariston convertible promissory note issued in
satisfaction of a trade payable.  The note holder will not have any
recourse to the Company for repayment of the note (their sole recourse being to
Ariston), but the note holder will have the right to convert the note into
shares of the Company's Common Stock at the rate of $0.20 per
share.





Upon the
achievement of the milestones described below, the Company would be obligated to
issue portions of the Milestone Shares to the former Ariston stockholders and
noteholders:


·
            Upon
      the affirmative decision of the Company’ Board of Directors, provided that
      such decision is made prior to March 8, 2011, to further develop the
      AST-914 metabolite product candidate, either internally or through a
      corporate partnership, the Company would issue 8,828,029 of the Milestone
      Shares.


15





·
            Upon
      the acceptance by the FDA of the Company's filing of the first New Drug
      Application for the AST-726 product candidate, the Company would issue
      7,062,423 of the Milestone Shares.


·
            Upon
      the Company receiving FDA approval to market the AST-726 product candidate
      in the United States of America, the Company would issue 8,828,029 of the
      Milestone Shares.




During
2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was a
privately held New York based biopharmaceutical company developing
dermatological therapeutics. This transaction was accounted for as a purchase of
Tarpan by the Company.





Employees





We
currently have 2 full time and 2 part time employees, including: our Chief
Operating and Financial Officer, the Chief Executive Officer of Ariston and 2
persons in business development, clinical management, administration and
finance.  None of our employees is covered by a collective bargaining
unit.  We believe our relations with our employees are
satisfactory.





Additional
Public Information





We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and in accordance with such laws we file annual,
quarterly and current reports and other information with the Securities and
Exchange Commission (the “SEC”). The SEC maintains a website that contains
annual, quarterly and current reports, proxy and information statements and
other information filed with the SEC. The SEC’s website address is www.sec.gov. 
You may also read and copy any document we file with the SEC at the SEC’s public
reference room, 100 F Street, N.E., Washington, D.C. 20549.  Please call
the SEC at 1-800-SEC-0330 for further information on the operation of its public
reference room.  The information we file with the SEC and other information
about us is also available on our website at www.manhattanpharma.com. 
However, the information on our website is not a part of, nor is such
information to be deemed incorporated by reference into, this
report.


16


ITEM
1A.  RISK FACTORS




An
investment in our securities is speculative in nature, involves a high degree of
risk, and should not be made by an investor who cannot bear the economic risk of
its investment for an indefinite period of time and who cannot afford the loss
of its entire investment.  You should carefully consider the following risk
factors and the other information contained elsewhere in this Annual Report
before making an investment in our securities.




Risks Related to Our
Business




We
currently have no product revenues and will need to raise substantial additional
funds in the future.  If we are unable to obtain the funds necessary to
continue our operations, we will be required to delay, scale back or eliminate
one or more of our remaining drug development programs and may not continue as a
going concern.




We have
generated no product revenues to date and will not until, and if, we receive
approval from the FDA and other regulatory authorities for any of our four
product candidates.  We have already spent substantial funds developing our
potential products and business, however, and we expect to continue to have
negative cash flow from our operations for at least the next several years. As
of December 31, 2009, we had $17,996 of cash and cash equivalents.We received additional
funding of approximately $2.2 million from a financing transaction in March
2010.  We expect that such financing shall be sufficient to fund our
operations through the end of 2010. We will still have to raise substantial
additional funds to complete the development of our product candidates and to
bring them to market. Beyond the capital requirements mentioned above, our
future capital requirements will depend on numerous factors,
including:


·   
  the results of any clinical trials;


·      the
scope and results of our research and development programs;


·      the
time required to obtain regulatory approvals;


·      our
ability to establish and maintain marketing alliances and collaborative
agreements; and


·      the
cost of our internal marketing activities.





Our
history of operating losses and lack of product revenues may make it difficult
to raise capital on acceptable terms or at all. If adequate funds are not
available, we will be required to delay, scale back or eliminate one or more of
our drug development programs or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies or products that we would not otherwise
relinquish.  Our Independent Registered Public Accounting Firm has
concluded that our net losses, negative cash flow, accumulated deficit and
negative working capital as of December 31, 2009, raise substantial doubt about
our ability to continue as a going concern. The inclusion of a going concern
explanatory paragraph in the report of our Independent Registered Public
Accounting Firm will make it more difficult for us to secure additional
financing or enter into strategic relationships with distributors on terms
acceptable to us, if at all, and likely will materially and adversely affect the
terms of any financing that we may obtain.




We
have incurred substantial losses and negative cash flow from
operations.




We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future, and we may never achieve or maintain
profitability.  We have incurred losses in every period since our inception
on August 6, 2001.  For the year ended December 31, 2009 and for the period
from August 6, 2001 (inception) through December 31, 2009, we incurred net
losses applicable to common shares of $2,793,285,  and $61,933,435
respectively.  Even if we succeed in developing and commercializing one or
more of our product candidates, we expect to incur substantial losses for the
foreseeable future and may never become profitable.  We also expect to
continue to incur significant operating and capital expenditures and anticipate
that our expenses will increase substantially in the foreseeable future as
we:


17





· 
    continue to undertake nonclinical development and
clinical trials for our product candidates;


·      seek
regulatory approvals for our product candidates;


·      implement
additional internal systems and infrastructure;


·      lease
additional or alternative office facilities; and


·      hire
additional personnel.





We also
expect to experience negative cash flow for the foreseeable future as we fund
our operating losses and capital expenditures. As a result, we will need to
generate significant revenues in order to achieve and maintain
profitability.  We may not be able to generate these revenues or achieve
profitability in the future. Our failure to achieve or maintain profitability
could negatively impact the value of our Common Stock.




As a
result of our continued losses, our Independent Registered Public Accounting
Firmhas included an
explanatory paragraph in our financial statements for the fiscal years ended
December 31, 2009 and 2008, expressing doubt as to our ability to continue as a
going concern. The inclusion of a going concern explanatory paragraph in the
report of our Independent Registered Public Accounting Firmwill make it more
difficult for us to secure additional financing or enter into strategic
relationships with distributors on terms acceptable to us, if at all, and likely
will materially and adversely affect the terms of any financing that we may
obtain.  If we fail to generate revenues, or if operating expenses exceed
our expectations or cannot be adjusted accordingly, we may not achieve
profitability and the value of your investment could decline
significantly.




We
have a limited operating history upon which to base an investment
decision.




We are a
development-stage company and have not yet demonstrated any ability to perform
the functions necessary for the successful commercialization of any product
candidates.   The successful commercialization of our product
candidates will require us to perform a variety of functions,
including:


· 
    continuing to undertake nonclinical development and
clinical trials;


·      participating
in regulatory approval processes;


·      formulating
and manufacturing products; and


·      conducting
sales and marketing activities.





Since
inception as Manhattan Research Development, Inc., our operations have been
limited to organizing and staffing, and acquiring, developing and securing our
proprietary technology and undertaking nonclinical and clinical trials of
principal product candidates. These operations provide a limited basis for you
to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.




We
have not engaged financial advisors to evaluate the fairness of the
consideration being paid to the stockholders and noteholders of Ariston in
connection with the Ariston Merger.  We can provide no assurance that the
fair value of the securities being paid to the stockholders and noteholders of
Ariston in the Ariston Merger will not exceed the fair value of the assets
acquired.




Ariston
has approximately $16.5 million indebtedness prior to the Ariston
Merger.


18




In
connection with the Ariston Merger, the merger subsidiary of the combined
company will assume Ariston's indebtedness of approximately $16.5 million. 
Such indebtedness may negatively impact our ability to raise sufficient
additional capital to fund our operations.




Ariston
may have liabilities that were unknown at the time of the consummation of the
Ariston Merger that became liabilities of the Company’s upon consummation of the
Ariston Merger.




There may
be liabilities of Ariston and/or its affiliates that were unknown at the time of
the consummation of the Ariston Merger. As a result of the Ariston Merger, any
such unknown liabilities may become liabilities of the combined company. In the
event any such liabilities become known following the Ariston Merger, they may
lead to claims against a subsidiary of the combined company, including but not
limited to lawsuits, administrative proceedings, and other claims. Any such
liabilities may subject the combined company to increased expenses for
attorneys’ fees, fines, litigation expenses, and expenses associated with any
subsequent settlements or judgments. There can be no assurances that such
unknown liabilities do not exist. To the extent that such liabilities become
known following the Ariston Merger, any such liability-related expenses may
materially impact the combined company’s financial condition and results of
operations.




We
depend greatly on the intellectual capabilities and experience of our key
executives, and the loss of any of them could affect our ability to develop our
remaining products.




We had
only two full-time and two part-time employees as of March 30, 2010.  The
loss of either Michael G. McGuinness, our Chief Operating and Financial Officer,
or Malcolm Morville, Chief Executive Officer of Ariston, could harm us. 
Mr. McGuinness’ employment agreement with the Company expired in July
2009.  Mr. Morville’s employment agreement with Ariston expired upon
consummation of the Ariston Merger. Messrs. McGuinness and Morville have been
working for the Company and Ariston, respectively, on the same terms and
conditions that were set forth in the employment agreements that expired. 
We cannot predict our success in hiring or retaining the personnel we require
for continued operations.




We
may not obtain the necessary U.S. or worldwide regulatory approvals to
commercialize our product candidates.





We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from the FDA equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In
order to obtain FDA approval of any of our product candidates, we must first
submit to the FDA an IND, which will set forth our plans for clinical testing of
our product candidates. In September 2007, the FDA accepted our IND for Topical
PTH(1-34).  Our remaining two products, Hedrin and the Topical GEL for
psoriasis are currently considered pre-clinical.  We are unable to estimate
the size and timing of the clinical and non clinical trials required to bring
our two product candidates to market and, accordingly, cannot estimate the time
when development of these product candidates will be completed.




When the
clinical testing for our product candidates is complete, we will submit to the
FDA a NDA demonstrating that the product candidate is safe for humans and
effective for its intended use.  This demonstration requires significant
research and animal tests, which are referred to as nonclinical studies, as well
as human tests, which are referred to as clinical trials.  Satisfaction of
the FDA’s regulatory requirements typically takes many years, depends upon the
type, complexity and novelty of the product candidate and requires substantial
resources for research, development and testing.  We cannot predict whether
our research and clinical approaches will result in drugs that the FDA considers
safe for humans and effective for indicated uses. The FDA has substantial
discretion in the drug approval process and may require us to conduct additional
nonclinical and clinical testing or to perform post-marketing studies.  The
approval process may also be delayed by changes in government regulation, future
legislation or administrative action or changes in FDA policy that occur prior
to or during our regulatory review.   Delays in obtaining regulatory
approvals may:


19





· 
    delay commercialization of, and our ability to derive
product revenues from, our product candidates;


·      impose
costly procedures on us; and


·      diminish
any competitive advantages that we may otherwise enjoy.





Even if
we comply with all FDA requests, the FDA may ultimately reject any or all of our
future NDAs. We cannot be sure that we will ever obtain regulatory clearance for
any of our product candidates. Failure to obtain FDA approval of any of our
product candidates will severely undermine our business by reducing our number
of salable products and, therefore, corresponding product revenues.




In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs.  Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above.  We have not yet made any
determination as to which foreign jurisdictions we may seek approval and have
not undertaken any steps to obtain approvals in any foreign
jurisdiction.




Clinical
trials are very expensive, time consuming and difficult to design and
implement.




Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. We estimate that clinical trials of our
product candidates will take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials.  The commencement and
completion of clinical trials may be delayed by several factors,
including:


· 
    unforeseen safety issues;


·      determination
of dosing issues;


·      lack
of effectiveness during clinical trials;


·      slower
than expected rates of patient recruitment;


·      inability
to monitor patients adequately during or after treatment; and


·      inability
or unwillingness of medical investigators to follow our clinical
protocols.





In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our IND submissions or the conduct of these
trials.




The
results of our clinical trials may not support our product candidate
claims.




Even if
our clinical trials are completed as planned, we cannot be certain that their
results will support our product candidate claims.  Success in nonclinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be sure that the results of later clinical
trials will replicate the results of prior clinical trials and nonclinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans or effective for indicated uses.  This
failure would cause us to abandon a product candidate and may delay development
of other product candidates. Any delay in, or termination of, our clinical
trials will delay the filing of our NDAs with the FDA and, ultimately, our
ability to commercialize our product candidates and generate product
revenues.  In addition, we anticipate that our clinical trials will involve
only a small patient population.  Accordingly, the results of such trials
may not be indicative of future results over a larger patient
population.


20




Physicians
and patients may not accept and use our products.




Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our product will depend upon a number of
factors including:


·
            perceptions
      by members of the health care community, including physicians, about the
      safety and effectiveness of our
drugs;


·
            cost-effectiveness
      of our product relative to competing
products;


·
            availability
      of reimbursement for our products from government or other healthcare
      payers; and


·
            effectiveness
      of marketing and distribution efforts by us and our licensees and
      distributors, if any.





Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.




Our
product-development program depends upon third-party researchers who are outside
our control.




We
currently are collaborating with several third-party researchers, for the
development of our product candidates.  Accordingly, the successful
development of our product candidates will depend on the performance of these
third parties. These collaborators will not be our employees, however, and we
cannot control the amount or timing of resources that they will devote to our
programs. Our collaborators may not assign as great a priority to our programs
or pursue them as diligently as we would if we were undertaking such programs
ourselves. If outside collaborators fail to devote sufficient time and resources
to our drug-development programs, or if their performance is substandard, the
approval of our FDA applications, if any, and our introduction of new drugs, if
any, will be delayed. These collaborators may also have relationships with other
commercial entities, some of whom may compete with us. If our collaborators
assist our competitors at our expense, our competitive position would be
harmed.




We
rely exclusively on third parties to formulate and manufacture our product
candidates.




We have
no experience in drug formulation or manufacturing and do not intend to
establish our own manufacturing facilities. We lack the resources and expertise
to formulate or manufacture our own product candidates. We intend to contract
with one or more manufacturers to manufacture, supply, store and distribute drug
supplies for our clinical trials. If any of our product
candidates receive FDA approval, we will rely on one or more third-party
contractors to manufacture our drugs.  Our anticipated future reliance on a
limited number of third-party manufacturers, exposes us to the following
risks:


·
            We
      may be unable to identify manufacturers on acceptable terms or at all
      because the number of potential manufacturers is limited and the FDA must
      approve any replacement contractor.  This approval would require new
      testing and compliance inspections. In addition, a new manufacturer would
      have to be educated in, or develop substantially equivalent processes for,
      production of our products after receipt of FDA approval, if
      any.


·
            Our
      third-party manufacturers might be unable to formulate and manufacture our
      drugs in the volume and of the quality required to meet our clinical needs
      and commercial needs, if any.


·
            Our
      future contract manufacturers may not perform as agreed or may not remain
      in the contract manufacturing business for the time required to supply our
      clinical trials or to successfully produce, store and distribute our
      products.


21


·
            Drug
      manufacturers are subject to ongoing periodic unannounced inspection by
      the FDA, the  Drug Enforcement Agency, and corresponding state
      agencies to ensure strict compliance with good manufacturing practice and
      other government regulations and corresponding foreign standards. We do
      not have control over third-party manufacturers’ compliance with these
      regulations and standards.


·
            If
      any third-party manufacturer makes improvements in the manufacturing
      process for our products, we may not own, or may have to share, the
      intellectual property rights to the
innovation.





We
have no experience selling, marketing or distributing products and no internal
capability to do so.




We
currently have no sales, marketing or distribution capabilities.  We do not
anticipate having the resources in the foreseeable future to allocate to the
sales and marketing of our proposed products.  Our future success depends,
in part, on our ability to enter into and maintain such collaborative
relationships, the collaborator’s strategic interest in the products under
development and such collaborator’s ability to successfully market and sell any
such products.  We intend to pursue collaborative arrangements regarding
the sales and marketing of our products, however, there can be no assurance that
we will be able to establish or maintain such collaborative arrangements, or if
able to do so, that they will have effective sales forces.  To the extent
that we decide not to, or are unable to, enter into collaborative arrangements
with respect to the sales and marketing of our proposed products, significant
capital expenditures, management resources and time will be required to
establish and develop an in-house marketing and sales force with technical
expertise.  There can also be no assurance that we will be able to
establish or maintain relationships with third party collaborators or develop
in-house sales and distribution capabilities.  To the extent that we depend
on third parties for marketing and distribution, any revenues we receive will
depend upon the efforts of such third parties, and there can be no assurance
that such efforts will be successful.  In addition, there can also be no
assurance that we will be able to market and sell our product in the United
States or overseas.




If
we cannot compete successfully for market share against other drug companies, we
may not achieve sufficient product revenues and our business will
suffer.




The
market for our product candidates is characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with a number of existing and future drugs and therapies
developed, manufactured and marketed by others. Existing or future competing
products may provide greater therapeutic convenience or clinical or other
benefits for a specific indication than our products, or may offer comparable
performance at a lower cost. If our products fail to capture and maintain market
share, we may not achieve sufficient product revenues and our business will
suffer.




We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have product candidates that will
compete with ours already approved or in development. In addition, many of these
competitors, either alone or together with their collaborative partners, operate
larger research and development programs and have substantially greater
financial resources than we do, as well as significantly greater experience
in:


·   
  developing drugs;


·      undertaking
nonclinical testing and human clinical trials;


·      obtaining
FDA and other regulatory approvals of drugs;


·      formulating
and manufacturing drugs; and


22


·      launching,
marketing and selling drugs.





Developments
by competitors may render our products or technologies obsolete or
non-competitive.




Many of
the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, longer drug
development history in obtaining regulatory approvals and greater manufacturing
and marketing capabilities than we do. These organizations also compete with us
to attract qualified personnel, parties for acquisitions, joint ventures or
other collaborations.




If
we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish.




Our
success, competitive position and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights of
third parties.




See
“Business – Intellectual Property and License Agreements.”.




However,
with regard to the patents covered by our license agreements and any future
patents issued to which we will have rights, we cannot predict:


·
            the
      degree and range of protection any patents will afford us against
      competitors including whether third parties will find ways to invalidate
      or otherwise circumvent our
patents;


·
            if
      and when patents will issue;


·
            whether
      or not others will obtain patents claiming aspects similar to those
      covered by our patents and patent applications;
  or


·
            whether
      we will need to initiate litigation or administrative proceedings which
      may be costly whether we win or
lose.





Our
success also depends upon the skills, knowledge and experience of our scientific
and technical personnel, our consultants and advisors as well as our licensors
and contractors.  To help protect our proprietary know-how and our
inventions for which patents may be unobtainable or difficult to obtain, we rely
on trade secret protection and confidentiality agreements.  To this end, we
require all of our employees, consultants, advisors and contractors to enter
into agreements which prohibit the disclosure of confidential information and,
where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our business.  These
agreements may not provide adequate protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure or the lawful development by others of such information.  If any
of our trade secrets, know-how or other proprietary information is disclosed,
the value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would
suffer.


23




If
we infringe the rights of third parties we could be prevented from selling
products, forced to pay damages, and defend against litigation, which could
adversely affect our ability to execute our business plan..




Our
business is substantially dependent on the intellectual property on which our
product candidates are based.  To date, we have not received any threats or
claims that we may be infringing on another’s patents or other intellectual
property rights.  If our products, methods, processes and other
technologies infringe the proprietary rights of other parties, we could incur
substantial costs and we may have to:


·
            obtain
      licenses, which may not be available on commercially reasonable terms, if
      at all;


·
            redesign
      our products or processes to avoid
infringement;


·
            stop
      using the subject matter claimed in the patents held by
      others;


·
            pay
      damages; or


·
            defend
      litigation or administrative proceedings which may be costly whether we
      win or lose, and which could result in a substantial diversion of our
      valuable management resources.





Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.




Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement will be available from:


·     
government and health administration authorities;


·     
private health maintenance organizations and health insurers; and


·     
other healthcare payers.





Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. Healthcare payers, including Medicare, are challenging the prices
charged for medical products and services. Government and other healthcare
payers increasingly attempt to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs.  Even if our product
candidates are approved by the FDA, insurance coverage may not be available, and
reimbursement levels may be inadequate, to cover our drugs.  If government
and other healthcare payers do not provide adequate coverage and reimbursement
levels for any of our products, once approved, market acceptance of our products
could be reduced.




Health
care reform and restrictions on reimbursement may limit our returns on potential
products.





Because
our strategy ultimately depends on the commercial success of our products, we
assume, among other things, that end users of our products will be able to pay
for them. In the United States and other countries, in most cases, the volume of
sales of products like those we are developing depends on the availability of
reimbursement from third-party payors, including national health care agencies,
private health insurance plans and health maintenance organizations. Third-party
payors increasingly challenge the prices charged for medical products and
services. Accordingly, if we succeed in bringing products to market, and
reimbursement is not available or is insufficient, we could be prevented from
successfully commercializing our potential products.





The
health care industry in the United States and in Europe is undergoing
fundamental changes as a result of political, economic and regulatory
influences. Reforms proposed from time to time include mandated basic health
care benefits, controls on health care spending, the establishment of
governmental controls over the cost of therapies, creation of large medical
services and products purchasing groups and fundamental changes to the health
care delivery system. We anticipate ongoing review and assessment of health care
delivery systems and methods of payment in the United States and other
countries. We cannot predict whether any particular reform initiatives will
result or, if adopted, what their impact on us will be. However, we expect that
adoption of any reform proposed will impair our ability to market products at
acceptable prices.


24





Changes
in laws affecting the health care industry could adversely affect our
business.





In the
U.S., there have been numerous proposals considered at the federal and state
levels for comprehensive reforms of health care and its cost, and it is likely
that federal and state legislatures and health agencies will continue to focus
on health care reform in the future. Congress has considered legislation to
reform the U.S. health care system by expanding health insurance coverage,
reducing health care costs and making other changes. While health care reform
may increase the number of patients who have insurance coverage for our
products, it may also include cost containment measures that adversely affect
reimbursement for our products. Congress has also considered legislation to
change the Medicare reimbursement system for outpatient drugs, increase the
amount of rebates that manufacturers pay for coverage of their drugs by Medicaid
programs and facilitate the importation of lower-cost prescription drugs that
are marketed outside the U.S. Some states are also considering legislation that
would control the prices of drugs, and state Medicaid programs are increasingly
requesting manufacturers to pay supplemental rebates and requiring prior
authorization by the state program for use of any drug for which supplemental
rebates are not being paid. Managed care organizations continue to seek price
discounts and, in some cases, to impose restrictions on the coverage of
particular drugs. Government efforts to reduce Medicaid expenses may lead to
increased use of managed care organizations by Medicaid programs. This may
result in managed care organizations influencing prescription decisions for a
larger segment of the population and a corresponding constraint on prices and
reimbursement for our products.





We
operate in a highly regulated industry. As a result, governmental actions may
adversely affect our business, operations or financial condition,
including:


·
            new
      laws, regulations or judicial decisions, or new interpretations of
      existing laws, regulations or decisions, related to health care
      availability, method of delivery and payment for health care products and
      services;


·
            changes
      in the FDA and foreign regulatory approval processes that may delay or
      prevent the approval of new products and result in lost market
      opportunity;


·
            changes
      in FDA and foreign regulations that may require additional safety
      monitoring, labeling changes, restrictions on product distribution or use,
      or other measures after the introduction of our products to market, which
      could increase our costs of doing business, adversely affect the future
      permitted uses of approved products, or otherwise adversely affect the
      market for our products;


·
            new
      laws, regulations and judicial decisions affecting pricing or marketing
      practices; and


·
            changes
      in the tax laws relating to our
operations.





The
enactment in the U.S. of health care reform, possible legislation which could
ease the entry of competing follow-on biologics in the marketplace, new
legislation or implementation of existing statutory provisions on importation of
lower-cost competing drugs from other jurisdictions, and legislation on
comparative effectiveness research are examples of previously enacted and
possible future changes in laws that could adversely affect our business. In
addition, the Food and Drug Administration Amendments Act of 2007 included new
authorization for the FDA to require post-market safety monitoring, along with
an expanded clinical trials registry and clinical trials results database, and
expanded authority for the FDA to impose civil monetary penalties on companies
that fail to meet certain commitments.





We
may not successfully manage our growth.




Our
success will depend upon the expansion of our operations and the effective
management of our growth, which will place a significant strain on our
management and on our administrative, operational and financial resources. 
To manage this growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel.  If we are unable to manage our growth effectively, our business
may suffer.


25


If
we are unable to hire additional qualified personnel, our ability to grow our
business may be harmed.




We will
need to hire additional qualified personnel with expertise in nonclinical
testing, clinical research and testing, government regulation, formulation and
manufacturing and sales and marketing. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals is intense, and we cannot be
certain that our search for such personnel will be successful. Attracting and
retaining qualified personnel will be critical to our success.




If
we are not successful in integrating Ariston's product development programs, we
may not be able to operate efficiently after the Ariston Merger, which may have
a material adverse effect on our results of operations and financial
condition.




Achieving
the benefits of the Ariston Merger will depend in part on the successful
integration of Ariston's drug development programs and personnel in a timely and
efficient manner. The integration process requires coordination of different
development, regulatory, and manufacturing teams, and involves the integration
of systems, applications, policies, procedures, business processes and
operations. If we cannot successfully integrate Ariston's programs, we may not
realize the expected benefits of the Ariston Merger.





We
may incur substantial liabilities and may be required to limit commercialization
of our products in response to product liability lawsuits.




The
testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our products.  We currently carry clinical trial
insurance in an amount up to $5,000,000, which may be inadequate to protect
against potential product liability claims or may inhibit the commercialization
of pharmaceutical products we develop, alone or with corporate
collaborators.  Although we intend to maintain clinical trial insurance
during any clinical trials, this may be inadequate to protect us against any
potential claims.  Even if our agreements with any future corporate
collaborators entitle us to indemnification against losses, such indemnification
may not be available or adequate should any claim arise.




We
are controlled by current officers, directors and principal
stockholders.




Our
directors, executive officers and principal stockholders beneficially own
approximately 20 percent of our outstanding voting stock and, including shares
underlying outstanding options and warrants.   In addition, Nordic
Biotech Venture Fund has the right to acquire up to 85,714,285 shares of our
common stock which would result in Nordic owning approximately 43% of our common
stock as of March 23, 2010 (although, as described in Note 18 to our financial
statements at and for the Years ended December 231, 2009 and 2008, an
anti-dilution calculation with respect to this amount has been disputed by
Nordic).  Through its stock ownership, its right to acquire additional
shares, its substantial control over the management of the Hedrin JV (which
includes the ability to terminate our management contract with the Hedrin JV),
Nordic has the ability to exert substantial influence over the election of our
Board of Directors, the outcome of issues submitted to our stockholders, the
development of Hedrin and our ability, as a company, to benefit from the
successful development of Hedrin.  Even without the exercise of its rights
to acquire additional shares of our common stock, our directors, officers and
principal stockholders, taken as a whole, have the ability to exert substantial
influence over the election of our Board of Directors and the outcome of
issues submitted to our stockholders.


26




Risks Related to Our Common
Stock




Our
stock price is, and we expect it to remain, volatile, which could limit
investors’ ability to sell stock at a profit.




During
the last two fiscal years, our stock price has traded at a low of $0.007 in the
fourth quarter of 2008 to a high of $0.23 in the first quarter of 2008. 
The volatile price of our stock makes it difficult for investors to predict the
value of their investment, to sell shares at a profit at any given time, or to
plan purchases and sales in advance.  A variety of factors may affect the
market price of our common stock.  These include, but are not limited
to:


·
            The
      global economic crisis, which affected stock prices of many companies, and
      particularly many small pharmaceutical companies like
  ours;


·
            publicity
      regarding actual or potential clinical results relating to products under
      development by our competitors or
us;


·
            delay
      or failure in initiating, completing or analyzing nonclinical or clinical
      trials or the unsatisfactory design or results of these
      trials;


·
            achievement
      or rejection of regulatory approvals by our competitors or
    us;


·
            announcements
      of technological innovations or new commercial products by our competitors
      or us;


·
            developments
      concerning proprietary rights, including
  patents;


·
            developments
      concerning our collaborations;


·
            regulatory
      developments in the United States and foreign
  countries;


·
            economic
      or other crises and other external
factors;


·
            period-to-period
      fluctuations in our revenues and other results of
    operations;


·
            changes
      in financial estimates by securities analysts;
  and


·
            sales
      of our common stock.





We will
not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily be
indicative of our future performance.




In
addition, the stock market in general, and the market for biotechnology
companies in particular, has experienced extreme price and volume fluctuations
that may have been unrelated or disproportionate to the operating performance of
individual companies.  These broad market and industry factors may
seriously harm the market price of our common stock, regardless of our operating
performance.




Our
Common Stock is not listed on a national exchange and there is a limited market
for the Common Stock which may make it more difficult for you to sell your
stock.




Our
Common Stock is quoted on the OTC Bulletin Board under the symbol "MHAN.OB."
There is a limited trading market for our Common Stock which negatively impacts
the liquidity of our Common Stock not only in terms of the number of shares that
can be bought and sold at a given price, but also through delays in the timing
of transactions and reduction in security analysts’ and the media’s coverage of
us.  Accordingly, there can be no assurance as to the liquidity of any
markets that may develop for the Common Stock, the ability of holders of our
Common Stock to sell the Common Stock, or the prices at which holders may be
able to sell the Common Stock.


27




The
fact that our common stock is not listed on a national exchange may negatively
impact our ability to attract investors and to use our common stock to raise
capital to fund our operations.




In order
to maintain liquidity in our common stock, we depend upon the continuing
availability of a market on which our securities may be traded. We need to raise
substantial additional funds in the future to continue our operations and the
fact that our common stock is not listed on a national exchange may impact our
ability to attract investors and to use our common stock to raise sufficient
capital to continue to fund our operations.  See the Risk Factor “We have no
product revenues and will need to raise substantial additional funds in the
future.  If we are unable to obtain funds necessary to continue our
operations, we will be required to delay, scale back or eliminate one or more of
our drug development programs” above.




If
we fail to file periodic reports with the SEC our common stock may be removed
from the OTCBB.




Pursuant
to the Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely
filing of periodic reports with the SEC, any OTCBB issuer which fails to file a
periodic report (Form 10-Q's or 10-K's) by the due date of such report (as
extended by the filing of a Form 12b-25), three (3) times during any twenty-four
(24) month period is automatically de-listed from the OTCBB.  In the event
an issuer is de-listed, such issuer would not be eligible to be re-listed on the
OTCBB for a period of one-year, during which time any subsequent late filing
would reset the one-year period of de-listing. If the Company is late in its
filings three times in any twenty-four (24) month period and is de-listed from
the OTCBB, the Common Stock would likely be listed for trading only on the “Pink
Sheets,” which generally provide an even less liquid market than the
OTCBB.  In such event, investors may find it more difficult to trade the
Common Stock or to obtain accurate, current information concerning market prices
for the Common Stock.




There
is a risk of market fraud.




OTCBB
securities are frequent targets of fraud or market manipulation. Not only
because of their generally low price, but also because the OTCBB reporting
requirements for these securities are less stringent than for listed or Nasdaq
traded securities, and no exchange requirements are imposed. Dealers may
dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
market prices.




Penny
stock regulations may impose certain restrictions on marketability of our
securities.




The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:


·
            that
      a broker or dealer approve a person’s account for transactions in penny
      stocks; and


·
            the
      broker or dealer receives from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.





In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:


·
            obtain
      financial information and investment experience objectives of the person;
      and


·
            make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.


28




The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:


·
            sets
      forth the basis on which the broker or dealer made the suitability
      determination; and


·
            that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.





Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules.  This may make it more difficult for investors to
dispose of our Common Stock and cause a decline in the market value of our
stock.




Disclosure
also must be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions.  Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.




We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of your
stock.




We have
never paid dividends on our Common Stock and do not anticipate paying any
dividends for the foreseeable future.  You should not rely on an investment
in our stock if you require dividend income.  Further, you will only
realize income on an investment in our stock in the event you sell or otherwise
dispose of your shares at a price higher than the price you paid for your
shares.  Such a gain would result only from an increase in the market price
of our Common Stock, which is uncertain and unpredictable.




If
we are unable to obtain future capital on acceptable terms, this will negatively
affect our business operations and current investors.





We expect
that in the future we will seek additional capital through public or private
financings. Additional financing may not be available on acceptable terms, or at
all. If additional capital is raised through the sale of equity, or securities
convertible into equity, further dilution to then existing stockholders will
result.  In addition, certain warrants held by certain of our investors and
the Nordic Put contain full-ratchet anti-dilution protection provisions which
would result in significant dilution to existing stockholders in the event we
are required to raise capital at an effective price per share below $0.07 per
common share.  If additional capital is raised through the incurrence of
debt, our business could be affected by the amount of leverage incurred. For
instance, such borrowings could subject us to covenants restricting our business
activities, paying interest would divert funds that would otherwise be available
to support commercialization and other important activities, and holders of debt
instruments would have rights and privileges senior to those of equity
investors. If we are unable to obtain adequate financing on a timely basis, we
may be required to delay, reduce the scope of or eliminate some of our planned
activities, any of which could have a material adverse effect on the
business.


29


ITEM
2.  PROPERTIES




Our
executive offices are located at 48 Wall Street,  New York, New York
10005.  We currently occupy this space pursuant to a written lease that
expires on September 30, 2010 under which we pay rent of approximately $4,000
per month.




We
believe that our existing facilities are adequate to meet our current
requirements.  We do not own any real property.




ITEM
3.  LEGAL PROCEEDINGS




None.




ITEM
4. RESERVED


30


PART II




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




Market
for Common Stock




Our
common stock traded on the American Stock Exchange “AMEX” under the symbol
“MHA” during the period from January 1, 2008 to March 26, 2008.  On March
26, 2008 our common stock was voluntarily delisted from the AMEX and began
trading and has continued to trade on the Over the Counter Bulletin Board
(“OCTBB”) under the symbol “MHAN”.  The following table lists the high and
low price for our common stock as quoted, in U.S. dollars, on the American Stock
Exchange or the Over the Counter Bulletin Board for the periods
indicated:




Price Range2009
                    
                    
                    2008Quarter Ended
                    
                    High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowMarch
      31
                    
                    $
                    0.060
                    
                    
                    $
                    0.009
                    
                    
                    $
                    0.230
                    
                    
                    $
                    0.110June
      30
                    
                    
                    0.120
                    
                    
                    
                    0.021
                    
                    
                    
                    0.180
                    
                    
                    
                    0.100September
      30
                    
                    
                    0.100
                    
                    
                    
                    0.070
                    
                    
                    
                    0.200
                    
                    
                    
                    0.100December
      31
                    
                    
                    0.090
                    
                    
                    
                    0.060
                    
                    
                    
                    0.090
                    
                    
                    
                    0.007





Stock
Chart





Comparison
to NASDAQ Biotechnology Index








31





Record
Holders




The
number of holders of record of our common stock as of March 22, 2010 was
457.




Dividends




We have
not paid or declared any dividends on our common stock and we do not anticipate
paying dividends on our common stock in the foreseeable future, but intend
instead to retain earnings, if any, for use in our business operations. 
The payment of dividends in the future, if any, will be at the sole discretion
of our board of directors and will depend upon our debt and equity structure,
earnings and financial condition, need for capital in connection with possible
future acquisitions and other factors, including economic conditions, regulatory
restrictions and tax considerations.  We cannot guarantee that we will pay
dividends or, if we pay dividends, the amount or frequency of these
dividends.




Stock
Repurchases




We did
not make any repurchases of our common stock during 2009.




Securities
authorized for issuance under equity compensation plans




Equity Compensation Plan Information





Plan Category
                            
                            Number of securitiesto
                              be issued uponexercise
                              ofoutstanding options,
                              warrants and rights
                            
                            
                            Weighted average
                              exercise price of
                              outstanding options,
                              warrants and rights
                            
                            
                            Number of securities
                              remaing available for
                              future issuance under
                              equity compenstaion
                              plans (excluding
                              securities reflected in
                              column (a))(a)
                            
                            
                            (b)
                            
                            
                            (c)Equity
      compensation plans approved by security holders
                            
                            
                            7,459,936
                            
                            
                            $
                            0.718
                            
                            
                            
                            4,049,528Equity compensation plans not approved by security
      holders
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -Total
                            
                            
                            7,459,936
                            
                            
                            $
                            0.718
                            
                            
                            
                            4,049,528





Recent
Sales of Unregistered Securities





In
connection with the Registrant’s merger of its wholly-owned subsidiary Tarpan
Acquisition Corp., with Tarpan Therapeutics, Inc. (“Tarpan”), effective as of
April 1, 2005, it issued an aggregate of 10,731,052 shares of its common stock
to the former stockholders of Tarpan in exchange for their shares of Tarpan
common stock.  The Registrant relied on the exemption from federal
registration under Section 4(2) of the Securities Act, based on its belief that
the issuance of such securities did not involve a public offering, as there were
fewer than 35 “non-accredited” investors, all of whom, either alone or through a
purchaser representative, had such knowledge and experience in financial and
business matters so that each was capable of evaluating the risks of the
investment.


32





In August
2005, the Registrant sold in a private placement offering to accredited
investors units of its securities consisting of shares of common stock and
warrants to purchase additional shares of common stock. The private placement
was completed in two separate closings held on August 26, 2005 and August 30,
2005. In the August 26 closing, the Registrant sold a total of 10,763,926 shares
of common stock and five-year warrants to purchase 2,152,758 shares for total
gross proceeds of approximately $11.95 million. The warrants issued at the
August 26 closing are exercisable at a price of $1.44 per share, which
represented approximately 110% of the average closing price of the Registrant’s
common stock during the five trading days preceding such closing date. On August
30, 2005, the Registrant sold an additional 1,108,709 shares of common stock and
five-year warrants to purchase 221,741 shares of common stock, which resulted in
gross proceeds of approximately $1.28 million. The warrants issued in connection
with the August 30 closing are exercisable at a price of $1.49 per share, which
represented approximately 110% of the average closing price of the Company's
common stock during the five trading days preceding such closing date. The total
gross proceeds resulting from this offering was approximately $13.22 million,
before deducting selling commissions and expenses. The Registrant paid total
cash commissions of approximately $925,000 to selling agents engaged in
connection with the offering and issued 5-year warrants to purchase an aggregate
of 593,196 shares of common stock, of which warrants to purchase 538,196 shares
are exercisable at a price of $1.44 per share and the remaining are exercisable
at a price of $1.49 per share.  In connection with this offering, the
Registrant relied on the exemption from federal registration under Section 4(2)
of the Securities Act and/or Rule 506 promulgated thereunder, based on its
belief that the offer and sale of the shares and warrants did not involve a
public offering as each investor was “accredited” and no general solicitation
was involved in the offering.





On March
30, 2007, the Registrant entered into a series of subscription agreements with
various institutional and other accredited investors for the issuance and sale
in a private placement of an aggregate of 10,185,502 shares of the Registrant’s
common stock for total gross proceeds of approximately $8.56 million. Of the
total amount of shares issued, 10,129,947 were sold at a per share price of
$0.84, and an additional 55,555 shares were sold to an entity affiliated with
Neil Herskowitz, a director of Manhattan, at a per share price of $0.90, the
closing sale price of the Registrant’s common stock on March 29, 2007. Pursuant
to the subscription agreements, the Registrant also issued to the investors
5-year warrants to purchase an aggregate of 3,564,897 shares of the Registrant’s
common stock at an exercise price of $1.00 per share. The warrants are
exercisable during the period commencing September 30, 2007 and ending March 30,
2012.   Pursuant to the subscription agreements, the Registrant agreed
to file a registration statement with the Securities and Exchange Commission on
or before May 14, 2007 covering the resale of the shares issued in the private
placement, including the shares issuable upon exercise of the investor
warrants.  The Registrant engaged Paramount BioCapital, Inc., as its
placement agent in connection with the private placement. In consideration for
its services, the Registrant paid aggregate cash commissions of approximately
$600,000 and issued to Paramount a 5-year warrant to purchase an aggregate of
509,275 shares at an exercise price of $1.00 per share.   The sale of
the shares and warrants was not registered under the Securities Act of 1933.
Rather, the offer and sale of such securities was made in reliance on the
exemption from registration requirements provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. Each of the investors
was “accredited” (as defined under Regulation D) and no general solicitation was
used in connection with the offer and sale of such securities.





In April
2007, in partial consideration for entering into a license agreement, the
Registrant issued to  Thornton & Ross Ltd., the licensor, a total of
125,000 shares of the Registrant’s common stock  in accordance with the
terms thereof.   The issuance of such common stock was considered to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, or Regulation D promulgated thereunder, as a transaction
by an issuer not involving a public offering.  The recipient of such common
stock represented their intention to acquire the securities for investment only
and not with a view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates issued in this
transaction. All recipients either received adequate information about us or had
access to such information.


33





In June
2007, in consideration for entering into a license agreement, the Registrant
issued to each of Thornton & Ross, Ltd. and Kerris, S.A., each a licensor
thereunder, 75,000 shares of the Registrant’s common stock in accordance with
the terms thereof.  The issuances of such common stock were considered to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, or Regulation D promulgated thereunder, as transactions
by an issuer not involving a public offering. The recipients of such common
stock represented their intention to acquire the securities for investment only
and not with a view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates issued in these
transactions.  All recipients either received adequate information about
the Registrant or had access to such information.





In
January 2008, the Registrant and Nordic Biotech Venture Fund II K/S ("Nordic"),
entered into a joint venture agreement the Registrant, as amended on February
18, 2008 and June 9, 2008 (the "Joint Venture Agreement"), pursuant to which in
February 2008, (i)  Nordic contributed cash in the amount of $2.5 million
to H Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed
Danish limited partnership(the "Hedrin JV") in exchange for 50% of the equity
interests in the Hedrin JV, and (ii) the Registrant contributed certain assets
to North American rights (under license) to our Hedrin product to the Hedrin JV
in exchange for $2.0 million in cash and 50% of the equity interests in the
Hedrin JV.  On or around June 30, 2008, in accordance with the terms of the
Joint Venture Agreement, Nordic contributed an additional $1.25 million in cash
to the Hedrin JV, $1.0 million of which was distributed to us and equity in the
Hedrin JV was distributed to each of us and Nordic sufficient to maintain our
respective ownership interests at 50%.  Pursuant to the Joint Venture
Agreement, upon the classification by the U.S. Food and Drug Administration, or
the FDA, of Hedrin as a Class II or Class III medical device, Nordic will be
required to contribute to the Hedrin JV an additional $1.25 million in cash,
$0.5 million of which will be distributed to us and equity in the Hedrin JV will
be distributed to each of us and Nordic sufficient to maintain our respective
ownership interests at 50%.  Upon classification by the FDA of Hedrin as a
Class II or Class III medical device, the Hedrin JV will have received a total
of $1.5 million cash to be applied toward the development and commercialization
of Hedrin in North America.  If classification of Hedrin by the FDA as a
Class II or Class III medical device is not received by June 30, 2009, then
Nordic will not be obligated to make the final payment of $1.25 million and
Nordic will receive an additional 20% ownership of the joint venture and
enhanced control over the joint venture's operations and other important
decision-making.  Pursuant to the terms of the Joint Venture Agreement,
Nordic has the right to nominate one person for election or appointment to our
board of directors.





Pursuant
to the Joint Venture Agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of common
stock equal to the amount of Nordic’s investment in the Hedrin JV divided by
$0.14, as adjusted from time to time for stock splits and other specified
events, multiplied by a conversion factor, which is (i) 1.00 for so long as
Nordic's distributions from the Hedrin JV are less than the amount of its
investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin JV
are less than two times the amount of its investment but greater than or equal
to the amount of its investment amount, (iii) 1.50 for so long as Nordic's
distributions from the Hedrin JV are less than three times the amount of its
investment but greater than or equal to two times the amount of its investment
amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are
less than four times the amount of its investment but greater than or equal to
three times the amount of its investment amount and (v) 3.00 for so long as
Nordic’s distributions from Hedrin JV are greater than or equal to four times
the amount of its investment.  The put right expires upon the earlier to
occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's
distributions from the Hedrin JV exceed five times the amount Nordic has
invested in the Hedrin JV (or 10 days after such date if the Registrant has
provided Nordic notice thereof).  Pursuant to the Joint Venture Agreement,
the Registrant has the right to call all or a portion of Nordic's equity
interest in the Hedrin JV in exchange for such number of shares of common stock
equal to the portion of Nordic's investment in the Hedrin JV that the Registrant
calls by the dollar amount of Nordic's investment as of such date in the Hedrin
JV, divided by $0.14, as adjusted from time to time for stock splits and other
specified events.  The call right is only exercisable by the Registrant if
the price of common stock has closed at or above $1.40 per share for 30
consecutive trading days.  During the first 30 consecutive trading days in
which the common stock closes at or above $1.40 per share, the Registrant may
exercise up to 25% of the call right.  During the second 30 consecutive
trading days in which the common stock closes at or above $1.40 per share, the
Registrant may exercise up to 50% of the call right on a cumulative basis. 
During the third consecutive 30 trading days in which the common stock closes at
or above $1.40 per share, the Registrant may exercise up to 75% of the call
right on a cumulative basis.  During the fourth consecutive 30 days in
which the common stock closes at or above $1.40 per share, the Registrant may
exercise up to 100% of the call right on a cumulative basis.  Nordic may
refuse the call, either by paying $1.5 million multiplied by the percentage of
Nordic's investment being called or forfeiting an equivalent portion of the put
right, calculated on a pro rata basis for the percentage of the Nordic equity
interest called by us.   The call right expires on February 25,
2013.


34





In
connection with the Joint Venture Agreement, on February 25, 2008, Nordic paid
the Registrant a  non-refundable fee of $150,000 in exchange for the right
to receive a warrant to purchase up to 7,142,857 shares of  common stock at
$0.14 per share, as adjusted from time to time for stock splits and other
specified events, if Nordic did not exercise all or part of its put right on or
before April 30, 3008.  As of April 30, 2008, Nordic had not exercised all
or any portion of its put right and the Registrant issued the warrant to
Nordic.





The
offering and sale of the securities under the Joint Venture Agreement were
considered to be exempt from registration under the Securities Act, by virtue of
Section 4(2) thereof and the provisions of Regulation D promulgated
thereunder.  Nordic has represented to the Registrant that it is an
"accredited investor," as that term is defined in Rule 501(a) of Regulation D
under the Securities Act.





On
September 11, 2008, the Registrant entered into a series of 10% secured
promissory notes with certain of its directors and officers and an employee of
the Registrant (the “Note Holders”) for aggregate of $70,000. Principal and
interest on the notes shall be paid in cash on March 10, 2009 unless paid
earlier by the Registrant. In connection with the issuance of the notes, the
Registrant also issued to the Note Holders 5-year warrants to purchase an
aggregate of 140,000 shares of the Registrant's common stock at an exercise
price of $0.20 per share.  The Registrant granted to the Note Holders a
continuing security interest in certain specific refunds, deposits and
repayments due to the Registrant and expected to be repaid to the Registrant in
the next several months.   The issuance of such securities was
considered to be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
as a transaction by an issuer not involving a public offering.  The
recipient of such securities represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
warrant certificates issued in this transaction.  All recipients either
received adequate information about us or had access to such
information.





On
February 3, 2009, the Registrant completed a private placement (the "2009
Private Placement") of 345 units, with each unit consisting of a 12% senior
secured note promissory note in the principal amount of $5,000 and a warrant to
purchase up to 166,667 shares of common stock at an exercise price of $.09 per
share which expires on December 31, 2013, for aggregate gross proceeds of
$1,780,500.  The private placement was completed in three closings which
occurred on November 19, 2008 with respect to 207 units, December 23, 2008 with
respect to 56 units and February 3, 2009 with respect to 82
units.


35





On
November 19, 2008, the Registrant completed the sale of 207 units in the first
closing of the 2009 Private placement.  The Registrant issued a warrant to
purchase 5,175,010 shares of common stock at an exercise price of $.09 per share
to the placement agent as partial compensation for its services.





On
December 23, 2008, the Registrant completed a second closing of the 2009 Private
Placement under the terms of the Securities Purchase Agreement.  At the
second closing, the Registrant sold an additional 56 units to investors. 
 In connection with the second closing, the Registrant issued to the
placement agent a warrant to purchase 1,400,003 shares of common stock at an
exercise price of $.09 per share as additional compensation for its
services.





On
February 3, 2009, the Registrant completed a third closing of the 2009 Private
Placement under the terms of the Securities Purchase Agreement.  At the
third closing, the Registrant sold an additional 82 units to investors. 
 In connection with the third closing, the Registrant issued to the
placement agent a warrant to purchase 2,050,004 shares of common stock at an
exercise price of $.09 per share as additional compensation for its
services.





All of
the investors represented in the 2009 Private Placement represented that they
were “accredited investors,” as that term is defined in Rule 501(a) of
Regulation D under the Securities Act, and the sale of the units was made in
reliance on exemptions provided by Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.





On March 2, 2010, the Company raised
aggregate gross proceeds of approximately $2,547,500 pursuant to a private
placement of its securities.  The Company entered into subscription
agreements (the "Subscription Agreements") with seventy-seven accredited
investors (the "Investors") pursuant to which the Company sold an aggregate of
101.9 Units (as defined herein) for a purchase price of $25,000 per Unit. 
Pursuant to the Subscription Agreements, the Company issued to each Investor
units (the "Units") consisting of (i) 357,143 shares of common stock, $0.001 par
value per share (the “Common Stock” or “Shares”) of the Company and (ii) 535,714
warrants (each a “Warrant” and collectively the “Warrants”), each of which will
entitle the holder to purchase one additional share of Common Stock for a period
of five years (each a “Warrant Share” and collectively the “Warrant Shares”) at
an exercise price of $0.08 per share.




All of the Investors represented that
they were “accredited investors,” as that term is defined in Rule 501(a) of
Regulation D under the Securities Act, and the sale of the Units was made in
reliance on exemptions provided by Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.




In connection with the closing of the
private placement, the Company, the placement agent acting in connection with
the private placement (the “Placement Agent”) and the Investors entered into a
Registration Rights Agreement, dated as of March 2, 2010, and the Company agreed
to file a registration statement to register the resale of the Shares, within 60
days of the final closing date and to cause the registration statement to be
declared effective within 150 days (or 180 days upon review by the
SEC).




The Company received net proceeds of
approximately $2,158,000 after payment of an aggregate of $305,700 of
commissions and expense allowance to the Placement Agent, and approximately
$83,000 of other offering and related costs in connection with the private
placement. In addition, the Company issued a warrant to purchase 3,639,289
shares of Common Stock at an exercise price of $0.08 per share to the Placement
Agent as additional compensation for its services.




The Company did not use any form of
advertising or general solicitation in connection with the sale of the Units.
The Shares, the Warrants and the Warrant Shares are non-transferable in the
absence of an effective registration statement under the Act, or an available
exemption therefrom, and all certificates are imprinted with a restrictive
legend to that effect.


36


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




Overview




We were
incorporated in Delaware in 1993 under the name “Atlantic Pharmaceuticals, Inc.”
and, in March 2000, we changed our name to “Atlantic Technology Ventures,
Inc.”  In 2003, we completed a “reverse acquisition” of privately held
“Manhattan Research Development, Inc”.  In connection with this
transaction, we also changed our name to “Manhattan Pharmaceuticals, Inc.” 
From an accounting perspective, the accounting acquirer is considered to be
Manhattan Research Development, Inc. and accordingly, the historical financial
statements are those of Manhattan Research Development, Inc.




During
2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was a
privately held New York based biopharmaceutical company developing
dermatological therapeutics.  Through the merger, we acquired Tarpan’s
primary product candidate, Topical PTH (1-34) for the treatment of
psoriasis.  In consideration for their shares of Tarpan’s capital stock,
the stockholders of Tarpan received an aggregate of approximately 10,731,000
shares of our common stock, representing approximately 20% of our then
outstanding common shares.  This transaction was accounted for as a
purchase of Tarpan by the Company.




We are a
specialty healthcare product company focused on developing and
commercializing  pharmaceutical treatments for underserved patient
populations.  We aim to acquire rights to these technologies by licensing
or otherwise acquiring an ownership interest, funding their research and
development and eventually either bringing the technologies to market or
out-licensing.  In the short term we are focusing our efforts on the
commercialization of the two product candidates we currently have in
development:  HedrinTM,
through the Hedrin JV, a novel, non-insecticide treatment of pediculitis (head
lice) and a topical product for the treatment of psoriasis.  Longer term we
intend to acquire and commercialize low risk, quick to market products,
specifically products that could be marketed over-the-counter (“OTC”), treat
everyday maladies, are simple to manufacture, and/or could be classified as
medical devices by the FDA.




You
should read the following discussion of our results of operations and financial
condition in conjunction with the financial statements and notes thereto
appearing elsewhere in this Form 10-K.  This discussion includes
“forward-looking” statements that reflect our current views with respect to
future events and financial performance.  We use words such as we “expect,”
“anticipate,” “believe,” and “intend” and similar expressions to identify
forward-looking statements.  Investors should be aware that actual results
may differ materially from our expressed expectations because of risks and
uncertainties inherent in future events, particularly those risks identified
under the heading “Risk Factors” following Item 1 in this Annual Report, and
should not unduly rely on these forward looking statements.  All share and
per share information in this discussion has been adjusted for the 1-for-5
combination of our common stock effected on September 25, 2003.




Results
Of Operations




2009
versus 2008





During
each of the years ended December 31, 2009 and 2008, we had no revenues, and are
considered a development stage company.  We do not expect to have revenues
relating to our products prior to December 31, 2010.


37




Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  Increase
                    (decrease)
                  
                  
                  % Increase
                    (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                  
                  $
                  2,000
                  
                  
                  $
                  122,000
                  
                  
                  $
                  (120,000
                  )
                  
                  
                  -98.36
                  %Other
      research and development expenses
                  
                  
                  38,000
                  
                  
                  
                  1,681,000
                  
                  
                  
                  (1,643,000
                  )
                  
                  
                  -97.74
                  %Total
      research and development expenses
                  
                  
                  40,000
                  
                  
                  
                  1,803,000
                  
                  
                  
                  (1,763,000
                  )
                  
                  
                  -97.78
                  %General
      and administrative:Share-based
      compensation
                  
                  
                  351,000
                  
                  
                  
                  342,000
                  
                  
                  
                  9,000
                  
                  
                  
                  2.63
                  %Other
      general and administrative expenses
                  
                  
                  1,380,000
                  
                  
                  
                  2,268,000
                  
                  
                  
                  (888,000
                  )
                  
                  
                  -39.15
                  %Total
      general and administrative expenses
                  
                  
                  1,731,000
                  
                  
                  
                  2,610,000
                  
                  
                  
                  (879,000
                  )
                  
                  
                  -33.68
                  %Other
      income/(expense):Equity
      in loss of Hedrin JV
                  
                  
                  (500,000
                  )
                  
                  
                  (250,000
                  )
                  
                  
                  (250,000
                  )
                  
                  
                  100.00
                  %Change
      in fair value of derivative
                  
                  
                  (560,000
                  )
                  
                  
                  -
                  
                  
                  
                  (560,000
                  )
                  
                  
                  N/ASwiss
      Pharma settlement
                  
                  
                  251,000
                  
                  
                  
                  -
                  
                  
                  
                  251,000
                  
                  
                  
                  N/AInterest
      and amortization on Notes Payable
                  
                  
                  (545,000
                  )
                  
                  
                  (39,000
                  )
                  
                  
                  (506,000
                  )
                  
                  
                  1297.44
                  %Other
      interest expense
                  
                  
                  (3,000
                  )
                  
                  
                  (26,000
                  )
                  
                  
                  23,000
                  
                  
                  
                  -88.46
                  %Interest
      and other income
                  
                  
                  335,000
                  
                  
                  
                  459,000
                  
                  
                  
                  (124,000
                  )
                  
                  
                  -27.02
                  %Total
      other income/(expense)
                  
                  
                  (1,022,000
                  )
                  
                  
                  144,000
                  
                  
                  
                  (1,166,000
                  )
                  
                  
                  -809.72
                  %Net
      loss
                  
                  $
                  2,793,000
                  
                  
                  $
                  4,269,000
                  
                  
                  $
                  (1,476,000
                  )
                  
                  
                  -34.57
                  %




For the
year ended December 31, 2009 research and development expense was $40,000 as
compared to $1,803,000 for the year ended December 31, 2008.  This decrease
of $1,763,000, or 98%, is primarily due to there being no active product
development projects during 2009, as the Hedrin product is being developed by
the Hedrin JV and as we have ceased development of all other products due to the
lack of funds and other factors.




For the
year ended December 31, 2009 general and administrative expense was $1,731,000
as compared to $2,610,000 for the year ended December 31, 2008.  This
decrease of $879,000, or 34%, is primarily comprised of $493,000 of costs
recognized during 2008 related to the Swiss Pharma arbitration award with no
costs recognized during 2009, decreases in public company costs of $107,000, in
travel and related expenses of $63,000, in consulting and temporary help of
$58,000, in rent and related expenses of $51,000, in depreciation expense and
loss on abandonment of fixed assets of $38,000, in business development costs of
$28,000  and in dues and subscriptions of $18,000, partially offset by an
increase in share-based compensation of $9,000.




For the
year ended December 31, 2009 other income/(expense), net, was $(1,022,000) as
compared to $144,000 for the year ended December 31, 2008.  This change of
$(1,166,000) , or 810%, is due to the recognition of $(560,000) of change in the
fair value of a derivative liability and $251,000  relating to the
settlement of the Swiss Pharma matter during 2009 with no corresponding amounts
recognized during 2008, of increases in equity in losses of Hedrin JV of
$(250,000), in interest and amortization expense related to Notes Payable of
$(506,000) and a decrease of $(124,000), in management fee revenue from the
Hedrin JV.




Net loss
for the year ended December 31, 2009 was $2,793,000 as compared to $4,269,000
for the year ended December 31, 2008.  This decrease of $1,476,000, or 35%,
is primarily due to a decrease  in research and development expenses of
$1,763,000, a decrease in general and administrative expense of $879,000 
offset by  a change in other income/(expense) of
$(1,166,000).


38




Liquidity
and Capital Resources




From
inception to December 31, 2009, we incurred a deficit during the development
stage of $61,933,000 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least December 31, 2010 and for
the foreseeable future.  These losses have been incurred through a
combination of research and development activities related to the various
technologies under our control and expenses supporting those
activities.




We have
financed our operations since inception primarily through equity and debt
financings and a joint venture transaction.  During the year ended December
31, 2009, we had a net decrease in cash and cash equivalents of $88,000. 
This decrease resulted largely from net cash used in operating activities of
$1,050,000 partially offset by net cash provided by financing activities of
$962,000.  Total liquid resources as of December 31, 2009 were $18,000
compared to $106,000 at December 31, 2008.




Our
current liabilities as of December 31, 2009 were $2,532,000 compared to
$1,486,000 at December 31, 2008, an increase of $1,046,000.  As of December
31, 2009, we had working capital deficit of $2,268,000 compared to working
capital deficit of $612,000 at December 31, 2008.




We
received approximately $340,000 in February 2009 from the final closing of the
sale of the 12% Secured Notes, approximately $500,000 in February 2009 from a
joint venture agreement, approximately $165,000 from the sale of a 12% Note in
October 2009 and approximately $27,000 from Ariston Pharmaceuticals, Inc. in
exchange for a note in December 2009.  In addition, we issued a $250,000
non-interest bearing note in connection with the Swiss Pharma settlement. Our
available working capital and capital requirements will depend upon numerous
factors, including progress of our research and development programs, our
progress in and the cost of ongoing and planned nonclinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, in-licensing activities, competing technological
and market developments, changes in our existing collaborative and licensing
relationships, the resources that we devote to developing manufacturing and
commercializing capabilities, the status of our competitors, our ability to
establish collaborative arrangements with other organizations and our need to
purchase additional capital equipment.




Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing,
other collaborative agreements, strategic alliances, and our ability to realize
the full potential of our technology in development.  Such additional funds
may not become available on acceptable terms and there can be no assurance that
any additional funding that we do obtain will be sufficient to meet our needs in
the long term.  Through December 31, 2009, a significant portion of our
financing has been through private placements of common stock and
warrants.  Unless our operations generate significant revenues and cash
flows from operating activities, we will continue to fund operations from cash
on hand and through the similar sources of capital previously described. 
We can give no assurances that any additional capital that we are able to obtain
will be sufficient to meet our needs.  We believe that we will continue to
incur net losses and negative cash flows from operating activities for the
foreseeable future.


39


Based on
the resources of the Company available at December 31, 2009, and the net
proceeds of $2.2 million received in March 2010 from a private placement of
common stock and warrants, management believes that we have sufficient capital
to fund our operations through 2010, including the operations of Ariston
Pharmaceuticals, Inc. which we acquired in March 2010.  Management believes
that we will need additional equity or debt financing or will need to generate
positive cash flow from the Hedrin joint venture, or generate revenues through
licensing of our products or entering into strategic alliances to be able to
sustain our operations into 2011.  Furthermore, we will need additional
financing thereafter to complete development and commercialization of its
products.  There can be no assurances that we can successfully complete
development and commercialization of our products.




These
matters raise substantial doubt about the Company’s ability to continue as a
going concern.  The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




We have
reported net losses of $2,793,000 and $4,269,000 for the years ended December
31, 2009 and 2008, respectively.  The net loss attributable to common
shares from date of inception, including preferred stock dividends, August 6,
2001 to December 31, 2009, amounts to $61,933,000.  Management believes
that we will continue to incur net losses through at least December 31,
2010.




Joint
Venture Agreement




We and
Nordic Biotech Venture Fund II K/S, or Nordic, entered into a joint venture
agreement on January 31, 2008, which was amended on February 18, 2008 and on
June 9, 2008.  Pursuant to the joint venture agreement, in February 2008,
(i) Nordic contributed cash in the amount of $2.5 million to H Pharmaceuticals
K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed Danish limited
partnership, or the Hedrin JV, in exchange for 50% of the equity interests in
the Hedrin JV, and (ii) we contributed certain assets to North American rights
(under license) to our Hedrin product to the Hedrin JV in exchange for $2.0
million in cash and 50% of the equity interests in the Hedrin JV.  On or
around June 30, 2008, in accordance with the terms of the joint venture
agreement, Nordic contributed an additional $1.25 million in cash to the Hedrin
JV, $1.0 million of which was distributed to us and equity in the Hedrin JV was
distributed to each of us and Nordic sufficient to maintain our respective
ownership interests at 50%.





Pursuant
to the joint venture agreement, upon the classification by the U.S. Food and
Drug Administration, or the FDA, of Hedrin as a Class II or Class III medical
device, Nordic was required to contribute to the Hedrin JV an additional $1.25
million in cash, $0.5 million of which was to be distributed to us and equity in
the Hedrin JV was to be distributed to each of us and Nordic sufficient to
maintain our respective ownership interests at 50%.    The FDA
notified the Hedrin JV that Hedrin has been classified as a Class III medical
device and in February 2009, Nordic made the $1.25 million investment in the
Hedrin JV, the Hedrin JV made the $0.5 million milestone payment to us and
equity in the Hedrin JV was distributed to us and Nordic sufficient to maintain
our respective ownership interests at 50%.





The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The Hedrin
JV has engaged us to provide management services to the Hedrin JV in exchange
for a management fee, which for years ended December 31, 2009 and 2008 was
approximately $334,000 and $447,000, respectively.


40


The
profits of the Hedrin JV will be shared by us and Nordic in accordance with our
respective equity interests in the Hedrin JV, of which we each currently hold
50%, except that Nordic is entitled to receive a minimum return each year from
the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Hedrin JV, before any distribution is made to
us.  If the Hedrin JV realizes a profit in excess of the Nordic minimum
return in any year, then such excess shall first be distributed to us until our
distribution and the Nordic minimum return are in the same ratio as our
respective equity interests in the Hedrin JV and then the remainder, if any, is
distributed to Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5 million) plus 10% per year, less the cumulative distributions
received by Nordic from the Hedrin JV before any distribution is made to
us.  If the Hedrin JV’s assets in liquidation exceed the Nordic liquidation
preference amount, then any excess shall first be distributed to us until our
distribution and the Nordic liquidation preference amount are in the same ratio
as our respective equity interests in the Hedrin JV and then the remainder, if
any, is distributed to Nordic and us in the same ratio as our respective equity
interests.  Further, in no event shall Nordic’s distribution in liquidation
be greater than assets available for distribution in liquidation.




The
Hedrin JV's Board consists of 4 members, 2 appointed by us and 2 appointed by
Nordic.  Nordic has appointed one of the directors as chairman of the
Board.  The chairman has certain tie breaking powers.




Nordic
has the right to nominate a person to serve on the Company’s Board of
Directors.  Nordic has nominated a person, however, that person has
declined to stand for appointment to the Company’s Board of
Directors.




Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.09, as adjusted for the sale of  the Secured 12% Notes in the fourth
quarter of 2008, and as further adjusted from time to time for stock splits and
other specified events, multiplied by a conversion factor, which is (i) 1.00 for
so long as Nordic's distributions from the Hedrin JV are less than the amount of
its investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin
JV are less than two times the amount of its investment but greater than or
equal to the amount of its investment amount, (iii) 1.50 for so long as Nordic's
distributions from the Hedrin JV are less than six times the amount of its
investment but greater than or equal to two times the amount of its investment
amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are
less than four times the amount of its investment but greater than or equal to
six times the amount of its investment amount and (v) 3.00 for so long as
Nordic’s distributions from Hedrin JV are greater than or equal to four times
the amount of its investment.  The put right expires upon the earlier to
occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's
distributions from the Hedrin JV exceed five times the amount Nordic has
invested in the Hedrin JV (or 10 days after such date if we have provided Nordic
notice thereof).





Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.09, as adjusted for the sale of  the Secured 12%
Notes in the fourth quarter of 2008, and as further adjusted from time to time
for stock splits and other specified events.  The call right is only
exercisable by us if the price of our common stock has closed at or above $1.40
per share for 30 consecutive trading days.  During the first 30 consecutive
trading days in which our common stock closes at or above $1.40 per share, we
may exercise up to 25% of the call right.  During the second 30 consecutive
trading days in which our common stock closes at or above $1.40 per share, we
may exercise up to 50% of the call right on a cumulative basis.  During the
third consecutive 30 trading days in which our common stock closes at or above
$1.40 per share, we may exercise up to 75% of the call right on a cumulative
basis.  During the fourth consecutive 30 days in which our common stock
closes at or above $1.40 per share, we may exercise up to 100% of the call right
on a cumulative basis.  Nordic may refuse the call, either by paying $1.5
million multiplied by the percentage of Nordic's investment being called or
forfeiting an equivalent portion of the put right, calculated on a pro rata
basis for the percentage of the Nordic equity interest called by us. 
 The call right expires on February 25, 2013.  For purposes of
Nordic’s right to put, and our right to call, all or a portion of Nordic’s
equity interest in the Hedrin JV, the amount of Nordic’s investment is currently
$5,000,000.


41





In
connection with our joint venture agreement, on February 25, 2008, Nordic paid
us a non-refundable fee of $150,000 in exchange for the right to receive a
warrant to purchase up to 11,111,111 shares of our common stock at $0.09 per
share, as adjusted for the sale of the Secured 12% Notes in the fourth quarter
of 2008, and as further adjusted from time to time for stock splits and other
specified events, if Nordic did not exercise all or part of its put right on or
before April 30, 3008.  As of April 30, 2008, Nordic had not exercised all
or any portion of its put right and we issued the warrant to
Nordic.





We
granted Nordic registration rights for the shares to be issued upon exercise of
the warrant, the put or the call.  We filed an initial registration
statement on May 1, 2008.  The registration statement was declared
effective on October 15, 2008.  On June 2, 2009, we filed an additional
Registration Statement registering the additional 28,769,841 shares of Common
Stock that may be issued to Nordic upon exercise of a put right held by
Nordic as a result of Nordic’s additional investment of $1,250,000 in
Newco pursuant to the terms of the Partnership Agreement and as
adjusted pursuant to the anti-dilution provisions of the put right (the
"Put Shares") and the additional 3,968,254 shares issuable upon exercise of an
outstanding warrant held by Nordic.    The Securities and Exchange
Commission (“SEC”) has informed us that we may not register the Put Shares for
resale until Nordic exercises its put right and such shares of Common Stock are
outstanding.  We believe that we have used commercially reasonable efforts
to cause the registration statement to be declared effective and have satisfied
our obligations under the registration rights agreement with respect to the
registration of the Put Shares.  The Company is awaiting input from Nordic
as to whether Nordic would like us to continue to pursue registration of the
additional 3,968,254 shares issuable upon exercise of an outstanding warrant
held by Nordic which were included within the June 2009 registration
statement.




We are
required to file additional registration statements, if required, within 45 days
of the date we first knew that such additional registration statement was
required.  We are required to use commercially reasonable efforts to cause
the additional registration statements to be declared effective by the SEC
within 105 calendar days from the filing date (the "Effective Date").  If
we fail to file a registration statement on time or if a registration statement
is not declared effective by the SEC within 105 days of filing we will be
required to pay to Nordic, or its assigns, an amount in cash, as partial
liquidated damages, equal to 0.5% per month of the amount invested in the Hedrin
JV by Nordic until the registration statement is declared effective by the
SEC.  In no event shall the aggregate amount payable by us exceed 9% of the
amount invested in the Hedrin JV by Nordic.





As per
the Limited Partnership Agreement between the Company and Nordic (the “LPA”) in
the event that a limited partner in the Hedrin JV (a “Limited Partner”)
determines, in its reasonable good faith discretion, that the Hedrin JV requires
additional capital for the proper conduct of its business that Limited Partner
shall provide each Limited Partner with a written request for contribution of
such Limited Partner’s proportionate share, in accordance to the then respective
equity ownership in the Hedrin JV, of such requested additional capital
amount.





As per
the terms of the LPA, if a Limited Partner declines to so contribute, elects to
contribute but thereafter fails to do so timely, or elects to contribute and
timely does contribute some, but not all of, its proportionate share of the
requested additional capital amount, the other Limited Partner shall have the
option to contribute the remaining balance of such requested additional capital
amount.


42





As per
the terms of the LPA,the General Partner shall determine the fair market value
of the shares for purposes of determining how to allocate the number of shares
of the Hedrin JV to be issued in consideration for the contribution of
capital.  If the General Partner is unable to determine the fair market
value of the shares, the fair market value for the shares shall be determined in
good faith by the contributing Limited Partner if such amount is equal to or
greater than the most recent valuation of such Hedrin JV shares.





On
December 31, 2009, Nordic Biotech Venture Fund II (“Nordic”) delivered a written
notice to the Company for a $1,000,000 capital increase to the Hedrin JV. 
In January 2010, Nordic made its capital contribution to the Hedrin JV of
$500,000.  The Company did not have sufficient funds to make such a capital
contribution within the required time prescribed in the LPA.





The
General Partner was unable to determine the fair market value of the
shares.  The contributing Limited Partner, Nordic, determined in good faith
that the fair market value of the shares is equal to the most recent
valuation.  The most recent valuation was the February 2009 investment of
$1,500,000 into the Hedrin JV by Nordic at $5,000 per share.  As a result
of Nordic’s investing an additional $500,000 in the Hedrin JV the ownership
percentages of the Hedrin JV have changed from 50% to Nordic and 50% for us to
52.38% to Nordic and 47.62% for us.  In the event that Nordic exercises its
option to invest the remaining $500,000 of the $1,000,000 capital increase then
the ownership percentage shall change to 54.55% for Nordic and 45.45% for
us.





Secured
10% Notes Payable





On
September 11, 2008, we issued secured 10% promissory notes to certain of our
directors and officers and an employee for aggregate principal amount of
$70,000.  Principal and interest on the notes are payable in cash on March
10, 2009 unless paid earlier by the Company.  In connection with the
issuance of the notes, we issued to the noteholders 5-year warrants to purchase
an aggregate of 140,000 shares of our common stock at an exercise price of $0.20
per share.  We granted to the noteholders a continuing security interest in
certain specific refunds, deposits and repayments due to us and expected to be
repaid to us in the next several months.  The secured 10% notes were repaid
in February 2009 along with interest thereon.





Secured
12% Notes Payable




On
February 3, 2009, we completed a private placement of 345 units, with each unit
consisting of Secured 12% Notes in the principal amount of $5,000 and a warrant
to purchase up to 166,667 shares of our common stock at an exercise price of
$.09 per share which expires on December 31, 2013, for aggregate gross proceeds
of $1,725,000.  The private placement was completed in three closings which
occurred on November 19, 2008 with respect to 207 units, December 23, 2008 with
respect to 56 units and February 3, 2009 with respect to 82 units.





To secure
our obligations under the notes, we entered into a security agreement and a
default agreement with the investors. The security agreement provides that the
notes will be secured by a pledge of our assets other than (i) our interest in
the Hedrin joint venture, including, without limitation, our interest in H
Pharmaceuticals K/S and H Pharmaceuticals General Partner ApS, (ii) our rent
deposit for our former office space, (iii) our refund of a prepayment and (iv)
our tax refund for the 2007 fiscal year from the State of New York and City of
New York.  In addition, to provide additional security for our obligations
under the notes, we entered into a default agreement, which provides that upon
an event of default under the notes, we shall, at the request of the holders of
the notes, use our reasonable commercial efforts to either (i) sell a part or
all of our interests in the Hedrin joint venture or (ii) transfer all or part of
our interest in the Hedrin JV to the holders of the notes, as necessary, in
order to fulfill our obligations under the notes, to the extent required and to
the extent permitted by the applicable Hedrin joint venture
agreements.


43





In
connection with the private placement, we, the placement agent and the investors
entered into a registration rights agreement.  Pursuant to the registration
rights agreement, we agreed to file a registration statement to register the
resale of the shares of our common stock issuable upon exercise of the warrants
issued to the investors in the private placement, within 20 days of the final
closing date and to cause the registration statement to be declared effective
within 90 days (or 120 days upon full review by the SEC).   During the
year ended December 31, 2009, we filed the registration statement, received a
comment letter from the SEC, responded to the SEC comment letter and re-filed
the registration statement.  The registration statement was declared
effective by the SEC on April 17, 2009.





SwissPharma
Contract LLC Settlement





On
October 27, 2009, we entered into a Settlement Agreement and Mutual Release with
Swiss Pharma Contract LTD (“Swiss Pharma”) pursuant to which we agreed to pay
Swiss Pharma $200,000 and issue Swiss Pharma an interest free promissory note in
the principal amount of $250,000 in full satisfaction of the September 5, 2008
arbitration award. The amount of the Arbitration award was $683,027 at September
30, 2009 and is included as a component of accrued expenses in the balance sheet
as of September 30, 2009.




In
conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma
described above, on October 28, 2009, we entered into a Subscription Agreement
(the “Subscription Agreement”) pursuant to which we sold a 12% Original Issue
Discount Senior Subordinated Convertible Debenture with a stated value of
$400,000 (the “Convertible 12% Note”) and a warrant (the “Warrant” and, together
with the Convertible 12% Note, (the “Securities”) to purchase 2,222,222 shares
of our common stock, par value $.001 per share (“Common Stock”) for a purchase
price of $200,000.  The Convertible 12% Note is convertible into shares of
Common Stock at an initial conversion price of $0.09 per share, subject to
adjustment or, in the event that we issues new securities in connection with a
financing, the Convertible 12% Note may be converted into such new securities at
a conversion price equal to the purchase price paid by the purchasers of such
new securities.  We may also, in our sole discretion, elect to pay interest
due under the Debenture quarterly in shares of our common stock provided such
shares are subject to an effective registration statement.  The Convertible
12% Note is subordinated to our outstanding Secured 12% Notes in the principal
amount of $1,725,000.  The Warrant is exercisable at an exercise price of
$0.11 per share, subject to adjustment, prior to October 28, 2014.





In
connection with the issuance of the Securities, we issued warrants to purchase
an aggregate of 222,222 shares of Common Stock at an exercise price of $0.11 per
share to the placement agent and certain of its designees.





Acquisition
of Ariston Pharmaceuticals, Inc.





On March
8, 2010, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware
corporation ("Ariston") and Ariston Merger Corp., a Delaware corporation and
wholly-owned subsidiary of the Company (the "Merger Sub").  Pursuant to the
terms and conditions set forth in the Merger Agreement, on March 8, 2010, the
Merger Sub merged with and into Ariston (the "Merger"), with Ariston being the
surviving corporation of the Merger.  As a result of the Merger, Ariston
became our wholly-owned subsidiary.


44


Under the
terms of the Merger Agreement, the consideration payable by us to the
stockholders and note holders of Ariston consists of the issuance of 7,062,423
shares of our common stock at closing (as defined in the Merger Agreement)
plusthe right to
receive up to an additional 24,718,481 shares of our common stock (the
“Milestone Shares”) upon the achievement of certain product-related milestones
described below.  In addition, we have reserved 38,630,723 shares of our
Common Stock for possible future issuance in connection with the conversion of
$15.45 million of outstanding Ariston convertible promissory notes.  The
note holders will not have any recourse to us for repayment of the notes (their
sole recourse being to Ariston), but the note holders will have the right to
convert the notes into shares of our  common stock at the rate of $0.40 per
share.  Further, we have reserved 5,000,000 shares of our common stock for
possible future issuance in connection with the conversion of $1.0 million of
outstanding Ariston convertible promissory note issued in satisfaction of a
trade payable.  The note holder will not have any recourse to us for
repayment of the note (their sole recourse being to Ariston), but the note
holder will have the right to convert the note into shares of the our common
stock at the rate of $0.20 per share.





Upon the
achievement of the milestones described below, we would be obligated to issue
portions of the Milestone Shares to the former Ariston stockholders and
noteholders:


·
            Upon
      the affirmative decision of our Board of Directors, provided that such
      decision is made prior to March 8, 2011, to further develop the AST-914
      metabolite product candidate, either internally or through a corporate
      partnership, we would issue 8,828,029 of the Milestone
    Shares.


·
            Upon
      the acceptance by the FDA of the Company's filing of the first New Drug
      Application for the AST-726 product candidate,  we would issue
      7,062,423 of the Milestone Shares.


·
            Upon
      the Company receiving FDA approval to market the AST-726 product candidate
      in the United States of America, we would issue 8,828,029 of the Milestone
      Shares.





Certain
members of our Board of Directors and principal stockholders of the Company
owned Ariston securities.  Timothy McInerney, a director of Manhattan,
owned 16,668 shares of Ariston common stock which represented less than 1% of
Ariston’s outstanding common stock as of the closing of the Merger.  Neil
Herskowitz, a director of Manhattan, indirectly owned convertible promissory
notes of Ariston with interest and principal in the amount of $192,739. 
Michael Weiser, a director of Manhattan, owned 117,342 shares of Ariston common
stock, which represented approximately 2.1% of Ariston’s outstanding common
stock as of the closing of the Merger.  Lindsay Rosenwald, a more than 5%
beneficial owner of Manhattan common stock, in his individual capacity and
indirectly through trusts and companies he controls owned 497,911 shares of
Ariston common stock, which represented approximately 8.9% of Ariston’s
outstanding common stock as of the closing of the Merger and indirectly owned
convertible promissory notes of Ariston in the amount of $141,438.





The
Company merged with Ariston principally to add new products to our portfolio.
Ariston, prior to the Merger,  was a private, clinical stage specialty
biopharmaceutical company based in Shrewsbury, Massachusetts that in-licenses,
develops and plans to market novel therapeutics for the treatment of serious
disorders of the central and peripheral nervous systems.




AST-726




Ariston
is developing a nasally-delivered Vitamin B12
remediation treatment which it calls AST-726.  AST-726 has demonstrated
pharmacokinetic equivalence to a marketed intramuscular injection product for
Vitamin B12
remediation.  Ariston believes that AST-726 may enable both a single,
once-monthly treatment for maintenance of normal Vitamin B12 levels in
deficient patients, and more frequent administration to restore normal levels in
newly diagnosed B12
deficiency.  Further, Ariston believes that AST-726 could offer a
convenient, painless, safe and cost-effective treatment for Vitamin B12
deficiency, without the need for intramuscular injections.


45




Ariston
has positioned AST-726 to currently require only a single, relatively small
Phase III clinical trial prior to submission of a 505(b)(2) new drug application
(“NDA”) to the FDA.




Ariston
has developed a CMC/manufacturing process for AST-726 that Ariston believes
provides a commercially viable stability profile.  Ariston has two issued
patents in the United States with respect to AST-726, one of which relates to
its application in Vitamin B12
remediation.




More than
9 million people in the US are deficient in Vitamin B12 ,
indicating substantial market potential for a facile, convenient, safe and
effective treatment that can replace the need for painful and frequent
intramuscular injections or other less than fully effective delivery forms.
Ariston believes that substantial market opportunity also exists
internationally.




Vitamin
B12
Deficiency-Background of the Disease




Untreated
Vitamin B12
deficiency can result in serious clinical problems including hematological
disorders, such as life-threatening anemias, and a range of central and
peripheral neurological abnormalities such as fatigue, confusion, cognition
impairment, dementia, depression, peripheral neuropathies and gait
disturbances.  Neuronal damage may involve peripheral nerves, the spinal
cord and the brain and if the condition is left untreated may become
permanent.  Furthermore, clinically asymptomatic patients with low normal
or below normal Vitamin B12 levels
may have changes in blood chemistries, including elevated levels of
methylmalonic acid or homocysteine, known risk factors for other medical
conditions associated with an increased risk of circulatory problems, blood
clots and cardiovascular disease.




The
primary diagnosis of Vitamin B12
deficiency is made when measurement of its blood concentration falls below the
expected normal range of 200 to 900 picograms/ml. Vitamin B12
deficiency is most often caused by pathological conditions that limit the body’s
ability to absorb the vitamin.  Such disorders include pernicious anemia,
atrophic gastritis, problems caused by gastric surgical procedures to treat
stomach cancer and obesity, Crohn’s disease and simple age-related
changes.  Some studies show the inability to properly absorb Vitamin B12 as a side
effect from chronic use of certain widely prescribed antacid medications such as
Prilosec ® and
diabetes treatments such as Glucophage ®.




Approximately
15% of the elderly and up to 40% of nursing home residents in the U.S. have
Vitamin B12
deficiency. A study of over 11,000 U.S. civilians ages four and older found a 3%
prevalence of Vitamin B12
deficiency in the general population using the 200 picograms/ml deficiency
standard, indicating that approximately 9 million people in the U.S. are in need
of B12
replacement therapy. Some experts advocate a higher deficiency standard of
300-350 picograms/ml on the basis that levels below this coincide with elevated
methylmalonic acid and homocysteine, risk factors for cardiovascular disease as
found in the Framingham Heart Study. On this basis the prevalence of Vitamin
B12
deficiency increases substantially.




Current
Treatments for Vitamin B12
Deficiency




Once
Vitamin B12
deficiency is diagnosed by a simple blood test, the goal of treatment is
generally to:




o 
     restore circulating blood levels to normal as rapidly as
possible;


o 
     replenish and normalize the substantial stores of the
vitamin in the body; and


o 
     institute a lifelong therapeutic regimen that will maintain
normal levels of the vitamin.


46





Ariston
believes that parenteral (intramuscular injection) treatment is often considered
the treatment of choice for Vitamin B12
deficiency.  Cyanocobalamin is predominantly used for this purpose in the
United States, but hydroxocobalamin, the active ingredient in AST-726, is also
available for pediatrics and for adults for whom injection of cyanocobalamin is
poorly tolerated.  Hydroxocobalamin injection is the predominant treatment
for Vitamin B12
deficiency in Europe.




In the
United States, intramuscular injections are generally given by a physician or
nurse, necessitating an office/medical center visit by the patient or a visiting
nurse home call for each treatment. Following a diagnosis of B12
deficiency, injections are required quite frequently in order to restore normal
vitamin levels. Once normalization is achieved, the frequency can be reduced to
once or twice per month. While the treatment is usually highly effective, the
inconvenience and cost of frequent office visits and the pain and side-effects
associated with intramuscular injections are problematic for many
patients.




Intranasal
treatment with Vitamin B12
deficiency seeks to alleviate these problems, but the two intranasal products
currently available in the United States have to be administered on a daily or
weekly basis and are not usually recommended for the treatment of newly
diagnosed patients.  Both products are based on
cyanocobalamin.




Oral or
sublingual administration of high doses of Vitamin B12 can
restore deficient patients to normal in certain cases.  Such high dose
supplements are generally available in pharmacies and nutrition/health food
stores.  Adequate results can almost certainly be obtained when nutritional
insufficiency (e.g., strict vegan diet) is the primary cause of the problem.
However, the normal gastrointestinal tract has a very limited capability to
absorb Vitamin B12 and if
this is compromised, as is the case in many deficient patients, oral or
sublingual supplementation may not be ideal for rapidly restoring circulating
levels and storage depots of the vitamin to normal. In such cases of
pathological Vitamin B12
deficiency, intramuscular injection still often remains the current treatment of
choice.




An
unapproved Vitamin B12 patch is
available in the United States, but Ariston believes that its effectiveness in
moderate to severe Vitamin B12 deficient
patients is substantially untested.




Potential
Advantages of Ariston’s AST-726 Treatment




Ariston
believes that Ariston’s AST-726 treatment has the potential to directly
substitute for and replace the need for injection treatment by applying the
current injection frequency paradigms for both newly diagnosed and normalized
Vitamin B12 deficient
patients.  AST-726 is proposed to be self-administered at home by the
patient, without costly, time-consuming and inconvenient visits to a doctor’s
office or medical facility needed for each of the many intramuscular injections
required for life.  Because it is delivered through a nasal spray,
additional advantages include freedom from injection pain and reduced anxiety in
individuals, including children and the elderly, who may have fear of
injections.  Ariston believes that the delivery profile of AST-726 is
comparable to that of the marketed intramuscular injection, and that therefore
newly diagnosed patients will be able to self-administer the nasal spray on a
daily basis or several times a week to restore their Vitamin B12 status to
normal and will then be self-maintained on a single monthly nasal spray
treatment.


47


Additional
Clinical Trial Is Needed




AST-726,
a commercial nasal spray formulation of hydroxocobalamin, has satisfactorily
completed preclinical toxicology, and an Investigational New Drug (“IND”)
Application  has been filed with the FDA.  This product candidate is
being developed utilizing the 505(b)(2) regulatory pathway.  AST-726 has
also successfully completed a safety and pharmacokinetic study in healthy
volunteers and an end of Phase II meeting with FDA has been completed. 
Manhattan Pharmaceuticals is planning a Phase III Vitamin B12
replacement study in the United States.  The study is designed to enroll
approximately 40 Vitamin B12 deficient
patients currently treated with injection therapy.  Patients will first be
evaluated on injection therapy and then will receive AST-726 by nasal spray on a
monthly basis for 12 weeks.  The primary purpose of this study is to
determine that levels of Vitamin B12 in the
patients’ bloodstream remain within the normal range following monthly
administration of AST-726.  We anticipate that the data from this study and
additional manufacturing information will support the planned 505(b)(2) new drug
application (“NDA”) filing for AST-726.





AST-915





AST-915
is an orally delivered treatment for essential tremor.  Manhattan
Pharmaceuticals acquired global rights to AST-915 as part of the Ariston
acquisition.  This product candidate is being studied under a Cooperative
Research and Development Agreement (CRADA) with the National Institutes of
Health (NIH) and a Phase 1 clinical study is currently underway in essential
tremor patients.  AST-915 was formerly referred to as “AST-914
metabolite”.





Essential
Tremor





Essential
tremor is a neurological disorder that is characterized by involuntary shaking
of the hands, arms, head, voice, and upper body. The most disabling tremors
occur during voluntary movement, affecting common skills such as writing, eating
and drinking.  Essential tremor is often misdiagnosed as Parkinson’s
disease, yet according to the National Institutes of Neurological Disorders and
Stroke, approximately 8 times as many people have essential tremor as have
Parkinson’s.  Essential tremor is not confined to the elderly. 
Children, newborns, and middle-aged people can also have the
condition.





Market
opportunity





Essential
tremor is the most common involuntary movement disorder, with increasing
incidence as people age.  According to the National Institute of Health
(NIH), essential tremor affects 14% of people 65 years and older, which equates
to approximately 5.4 million Americans.  There is no cure for essential
tremor and the currently available drug therapies do not work in certain
patients, produce at best a 50% response in others and have significant side
effects.  Manhattan Pharmaceuticals believes AST-915 may provide a new
treatment option for this serious and prevalent disorder. Manhattan
Pharmaceuticals believes that substantial market opportunity also exists
internationally.





8%
Note





In December  2009, we entered into
a Future Advance Promissory Note (the “8% Note”) with Ariston under which the
Company may withdraw up to $67,000.  Principal and interest accrued at 8%
shall be due and payable to Ariston on February 10, 2010.  As of December
31, 2009, the Company has withdrawn $27,000 from Ariston subject to the terms of
the 8% Note.  On January 13, 2010, the Company withdrew $20,000 subject to
the 8% Note with Ariston Pharmaceuticals, Inc.  On January 28, 2010, the
Company withdrew an additional $20,000 subject to the 8% Note.  On March 4,
2010, the Company repaid Ariston the $67,000 withdrawn subject to the 8% Note
and accrued interest of $816.




Equity
PIPE





On March 2, 2010, we raised aggregate
gross proceeds of approximately $2,547,500 pursuant to a private placement of
our securities.  We entered into subscription agreements (the "Subscription
Agreements") with seventy-seven accredited investors (the "Investors") pursuant
to which we sold an aggregate of 101.9 Units (as defined herein) for a purchase
price of $25,000 per Unit.  Pursuant to the Subscription Agreements, we
issued to each Investor units (the "Units") consisting of (i) 357,143 shares of
common stock, $0.001 par value per share (the “Common Stock” or “Shares”) of the
Company and (ii) 535,714 warrants (each a “Warrant” and collectively the
“Warrants”), each of which will entitle the holder to purchase one additional
share of Common Stock for a period of five years (each a “Warrant Share” and
collectively the “Warrant Shares”) at an exercise price of $0.08 per
share.


48


The
Nordic Put and Nordic Warrant were issued at a value of $0.14 per share and were
issued with anti-dilution rights. The issuance of any securities at a value of
less than $0.14 per share activates Nordic’s anti-dilution rights. The Secured
12% Note transaction included warrants with an exercise price of $0.09 per
share, this activated Nordic’s anti-dilution rights as reflected in the table
below under the caption “Before the Equity Pipe Transaction”.  Any
issuances of any securities subsequent to the Secured 12% Note transaction at a
value of less than $0.09 further activates Nordic’s anti-dilution rights. 
The Equity Pipe transaction in March 2010 effectively included the sale of one
share of common stock and a warrant to purchase 1.5 shares of common stock for a
price of $0.07. The JV Agreement between Nordic and Manhattan governs the
antidilution protection to Nordic.  Section 5.1 of that agreement state ”If
shares of Common Stock or Common Stock Equivalents are issued or sold together
with other stock or securities or other assets of MHA (Manhattan) for a
consideration which covers both, the effective price per share shall be computed
with regard to the portion of the consideration so received that may reasonably
be determined in good faith by the Board of Directors, to be allocable to such
Common Stock or Common Stock Equivalent.”  The good faith determination of
the effective price per share was $0.07 for each share of common stock sold and
a de minimus value to the warrants.  The Nordic Put and the Nordic Warrant
are now valued at a price of $0.07 per share.  The following table shows
the effect of Nordic’s anti-dilution rights.





Shares Issuable
                    Upon Exercise of
                    Nordic's Put
                  
                  
                  Shares Issuable
                    Upon Exercise of
                    Nordic's Warrant
                  
                  
                  Total Shares
                    Issuable Upon
                    Exercise of
                    Nordic's Put and
                    WarrantBefore
      the Equity Pipe Transaction
                  
                  
                  55,555,556
                  
                  
                  
                  11,111,111
                  
                  
                  
                  66,666,667Antidilution
      shares
                  
                  
                  15,873,015
                  
                  
                  
                  3,174,603
                  
                  
                  
                  19,047,618After
      the Equity Pipe Transaction
                  
                  
                  71,428,571
                  
                  
                  
                  14,285,714
                  
                  
                  
                  85,714,285





In March 2010, we received
correspondence from Nordic that questions how we calculated the anti-dilution
shares, as shown above, and suggesting that we did not employ a good faith
estimate.  We believe our determination was made in good faith and is
appropriate.




All of the Investors represented that
they were “accredited investors,” as that term is defined in Rule 501(a) of
Regulation D under the Securities Act, and the sale of the Units was made in
reliance on exemptions provided by Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.




In connection with the closing of the
private placement, we, the placement agent acting in connection with the private
placement (the “Placement Agent”) and the Investors entered into a Registration
Rights Agreement, dated as of March 2, 2010, and we agreed to file a
registration statement to register the resale of the Shares, within 60 days of
the final closing date and to cause the registration statement to be declared
effective within 150 days (or 180 days upon review by the SEC).




We received net proceeds of
approximately $2,158,000 after payment of an aggregate of $305,700 of
commissions and expense allowance to the Placement Agent, and approximately
$83,000 of other offering and related costs in connection with the private
placement. In addition, we issued a warrant to purchase 3,639,289 shares of
Common Stock at an exercise price of $0.08 per share to the Placement Agent as
additional compensation for its services.


49




We did not use any form of advertising
or general solicitation in connection with the sale of the Units. The Shares,
the Warrants and the Warrant Shares are non-transferable in the absence of an
effective registration statement under the Act, or an available exemption
therefrom, and all certificates are imprinted with a restrictive legend to that
effect.




Commitments




General




We often
contract with third parties to facilitate, coordinate and perform agreed upon
research and development of our product candidates.  To ensure that
research and development costs are expensed as incurred, we record monthly
accruals for clinical trials and nonclinical testing costs based on the work
performed under the contracts.




These
contracts typically call for the payment of fees for services at the initiation
of the contract and/or upon the achievement of certain milestones.  This
method of payment often does not match the related expense recognition resulting
in either a prepayment, when the amounts paid are greater than the related
research and development costs recognized, or an accrued liability, when the
amounts paid are less than the related research and development costs
recognized.




Development
Commitments




At
present we have no development commitments.




Hedrin




In
collaboration with Nordic and through the Hedrin JV we are developing Hedrin for
the treatment of pediculosis (head lice).  To date, Hedrin has been
clinically studied in 326 subjects and is currently marketed as a device in
Western Europe and as a pharmaceutical in the United Kingdom
(U.K.).




In a
randomized, controlled, equivalence clinical study conducted in Europe by
T&R, Hedrin was administered to 253 adult and child subjects with head louse
infestation.  The study results, published in the British Medical Journal
in June 2005, demonstrated Hedrin’s equivalence when compared to the insecticide
treatment, phenothrin, the most widely used pediculicide in the U.K.  In
addition, according to the same study, the Hedrin-treated subjects experienced
significantly less irritation (2%) than those treated with phenothrin
(9%).




An
additional clinical study published in the November 2007 issue of PLoS One, an
international, peer-reviewed journal published by the Public Library of Science
(PLoS), demonstrated Hedrin’s superior efficacy compared to a U.K. formulation
of malathion, a widely used insecticide treatment in both Europe and North
America.  In this randomized, controlled, assessor blinded, parallel group
clinical trial, 73 adult and child subjects with head lice infestations were
treated with Hedrin or malathion liquid.  Using intent-to-treat analysis,
Hedrin achieved a statistically significant cure rate of 70% compared to 33%
with malathion liquid.  Using the per-protocol analysis Hedrin achieved a
highly statistically significant cure rate of 77% compared to 35% with
malathion.  In Europe it has been widely documented that head lice had
become resistant to European formulations of malathion, and we believe this
resistance had influenced these study results.  To date, there have been no
reports of resistance to U.S. formulations of malathion.  Additionally,
Hedrin treated subjects experienced no irritant reactions, and Hedrin showed
clinical equivalence to malathion in its ability to inhibit egg hatching. 
Overall, investigators and study subjects rated Hedrin as less odorous, easier
to apply, and easier to wash out, and 97% of Hedrin treated subjects stated they
were significantly more inclined to use the product again versus 31% of those
using malathion.


50




Two new,
unpublished Hedrin studies were completed by T&R in 2008.  In the
first, Hedrin achieved a 100% kill rate in vitro, including in malathion
resistant head lice.  In the other, a clinical field study conducted in
Manisa province, a rural area of Western Turkey, Hedrin was administered to 36
adult and child subjects with confirmed head lice infestations.  Using per
protocol analysis, Hedrin achieved a 97% cure rate.  Using intent-to-treat
analysis, Hedrin achieved a 92% cure rate since 2 subjects were eliminated due
to protocol violations.  No subjects reported any adverse
events.




In the
U.S., we, through the Hedrin JV, are pursuing the development of Hedrin as a
medical device.  In January 2009, the U.S. Food and Drug Administration
(“FDA”) Center for Devices and Radiological Health (“CDRH”) notified Hedrin JV
that Hedrin had been classified as a Class III medical device.  A Class III
designation means that a Premarket Approval (“PMA”) Application will need to be
obtained before Hedrin can be marketed in the U.S.  At a July 2009 meeting
with the FDA, the FDA requested that the confirmatory clinical trials consist of
two parallel studies of sixty patients each.  The confirmatory clinical
trials are expected to commence in the second quarter of 2010.




To date,
we have incurred $1,084,000 of project costs for the development of
Hedrin.  None of these costs were incurred during the year ended December
31, 2009.  We do not expect to incur any future costs as the Hedrin JV is
now responsible for all costs associated with Hedrin.




Topical
GEL for Psoriasis




As a
result of our merger with Tarpan Therapeutics in 2005, we held an exclusive,
worldwide license to develop and commercialize Topical PTH (1-34) for the
treatment of psoriasis.  Tarpan acquired the exclusive, worldwide rights
pursuant to a 2004 license agreement with IGI, Inc (“IGI”).




In April
2006, we encountered a stability issue with the original topical PTH (1-34)
product which utilized IGI’s Novosome®
formulation technology.  In order to resolve that stability issue we
created a new topical gel version of PTH (1-34).




In
September 2007, the U.S. FDA accepted our Investigational New Drug (“IND”)
application for this new gel formulation of Topical PTH (1-34), and in October
2007, we initiated and began dosing subjects in a Phase 2a clinical study of
Topical PTH (1-34) for the treatment of psoriasis.  This U.S.,
multi-center, randomized, double-blind, vehicle-controlled, parallel group study
was designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
in patients with mild to moderate psoriasis.  Approximately 54 subjects
were enrolled and randomized to receive one of two dose levels of Topical PTH
(1-34), or the gel vehicle (placebo), for an 8 week treatment period.  In
this study the vehicle was the topical gel (“GEL”) without the active
ingredient, PTH (1-34).




In July
2008 we announced the results of a Phase 2a clinical study where PTH (1-34)
failed to show statistically or clinically meaningful improvements in psoriasis
as compared to the vehicle (placebo).  The Company has conducted no further
clinical activities with PTH (1-34), terminated the agreement with IGI in May
2009 and has no further financial liability or commitment to IGI under the
license agreement.


51


The gel
vehicle (placebo) used in the above-mentioned study is the Company’s proprietary
topical GEL which unexpectedly showed evidence of psoriasis improving
properties.  At the end of week 2, 15% of study subjects treated with the
GEL achieved a clear or almost clear state.  At the end of week 4, 20% of
subjects treated with the GEL had achieved a clear or almost clear state, and at
the end of week 8, 25% of subjects had achieved a clear or almost clear
state.  The Company owns worldwide rights to this topical GEL and is
exploring the possibility of developing it as an OTC product for mild
psoriasis.




To date,
we have incurred $6,504,000 of project costs related to our development of
Topical PTH (1-34).  These project costs have been incurred since April 1,
2005, the date of the Tarpan Therapeutics acquisition.  None of these costs
were incurred during the year ended December 31, 2009.




Summary
of Contractual Commitments




Leases




Rent
expense for the years ended December 31, 2009 and 2008 was $88,363 and $139,636,
respectively.  Future minimum rental payments subsequent to December 31,
2009 under an operating lease for the Company’s office facility, which expires
on September 30, 2010, are as follows:




Years Ending December 31,
                      
                      Commitment2010
                      
                      $
                      36,000




Off-Balance
Sheet Arrangements




We have
not entered into any off-balance sheet arrangements.




Critical
Accounting Policies




In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations.  The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.




Use
of Estimates




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




Research
and Development Expenses




All
research and development costs are expensed as incurred and include costs of
consultants who conduct research and development on behalf of the Company and
its subsidiaries.  Costs related to the acquisition of technology rights
and patents for which development work is still in process are expensed as
incurred and considered a component of research and development
costs.




The
Company often contracts with third parties to facilitate, coordinate and perform
agreed upon research and development of a new drug.  To ensure that
research and development costs are expensed as incurred, the Company records
monthly accruals for clinical trials and preclinical testing costs based on the
work performed under the contracts.


52




These
contracts typically call for the payment of fees for services at the initiation
of the contract and/or upon the achievement of certain milestones.  This
method of payment often does not match the related expense recognition resulting
in either a prepayment, when the amounts paid are greater than the related
research and development costs expensed, or an accrued liability, when the
amounts paid are less than the related research and development costs
expensed.




Share-Based
Compensation




We have
stockholder-approved stock incentive plans for employees, directors, officers
and consultants.  Prior to January 1, 2006, we accounted for the employee,
director and officer plans using the intrinsic value method. Effective January
1, 2006, we adopted the share-based payment method for employee options using
the modified prospective transition method. This new method of accounting for
stock options eliminated the option to use the intrinsic value method and
required us to expense the fair value of all employee options over the vesting
period.  Under the modified prospective transition method, we recognized
compensation cost for the years ended December 31, 2009 and 2008 which includes
a) period compensation cost related to share-based payments granted prior to,
but not yet vested, as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions; and b) period compensation
cost related to share-based payments granted on or after January 1, 2006, based
on the grant date fair value estimated in accordance with the new accounting
methodology. In accordance with the modified prospective method, we have not
restated prior period results.




New
Accounting Pronouncements




In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
FASB Accounting Standards Codification (“Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Codification will supersede all existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. The FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, the FASB will issue Accounting Standards Updates, which will serve only
to: (a) update the Codification; (b) provide background information
about the guidance; and (c) provide the bases for conclusions on the change(s)
in the Codification.




In
December 2007, the FASB issued a statement that requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. This statement establishes a single method of
accounting for changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation and expands disclosures in the consolidated
financial statements. This statement was effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The
adoption of this statement did not have any impact on our financial
statements.




In
February 2008, the FASB issued two Staff  Positions as well as other
accounting pronouncements that address fair value measurements on lease
classification. The adoption of these pronouncements did not have a material
impact on our financial statements.


53




In March
2008, the FASB issued a pronouncement which requires expanded disclosures about
an entity's derivative instruments and hedging activities. This pronouncement
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments. This pronouncement was effective
for the Company as of January 1, 2009, and its adoption did not have any impact
on our financial statements.




In June
2008, the FASB ratified a pronouncement which provides that an entity should use
a two step approach to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. It also clarifies
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. This statement
was effective for fiscal years beginning after December 15, 2008. The adoption
of this statement had a significant impact on our financial statements (see Note
13 to our financial statements for the period ended December 31,
2009).




In
April 2009, the FASB issued a pronouncement which provides guidance on
determining when there has been a significant decrease in the volume and level
of activity for an asset or liability, when a transaction is not orderly, and
how that information must be incorporated into a fair value measurement. This
pronouncement also requires expanded disclosures on valuation techniques and
inputs and specifies the level of aggregation required for all quantitative
disclosures.  The provisions of this pronouncement were effective for the
quarter ending June 30, 2009. The adoption of this pronouncement did not have
any impact on our financial statements.




In
April 2009, the FASB issued several pronouncements which makes the guidance
on other-than-temporary impairments of debt securities more operational and
requires additional disclosures when a company records an other-than-temporary
impairment. These pronouncements were effective for interim and annual reporting
periods ending after June 15, 2009. We adopted these principles in the
second quarter of 2009, which did not have any impact on our financial
statements.




In
April 2009, the FASB issued several statements which require companies to
disclose in interim financial statements the fair value of financial
instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. In addition, the companies are
required to disclose the method or methods and significant assumptions used to
estimate the fair value of financial instruments and a discussion of changes, if
any, in the method or methods and significant assumptions during the period.
This statement shall be applied prospectively and was effective for interim and
annual periods ending after June 15, 2009. To the extent relevant, we
adopted the disclosure requirements of this pronouncement for the quarter ended
June 30, 2009.  The adoption of these statements did not have a
material impact on our financial statements




In
May 2009, the FASB issued a statement which sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This
statement was effective for interim or annual periods ending after June 15,
2009, and we adopted the provisions of this statement for the quarter ended
June 30, 2009. The adoption of this statement did not have a material
impact on our financial statements.  We have evaluated all events or
transactions that occurred after December 31, 2009 up through the date we issued
these financial statements, and we have disclosed all events or transactions
that have a material impact on our financial statements.


54




In
August 2009, the FASB issued a new pronouncement to provide clarification
on measuring liabilities at fair value when a quoted price in an active market
is not available. In particular, this pronouncement specifies that a valuation
technique should be applied that uses either the quote of the liability when
traded as an asset, the quoted prices for similar liabilities when traded as
assets, or another valuation technique consistent with existing fair value
measurement guidance. This statement is prospectively effective for financial
statements issued for interim or annual periods ending after October 1,
2009. The adoption of this statement at December 31, 2009 did not impact the
Company’s results of operations or financial condition.


55


ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




For a
list of the financial statements filed as part of this report, see the Index to
Financial Statements beginning at Page F-1 of this Annual Report.




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




None.




ITEM
9A(T).     CONTROLS AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




As of
December 31, 2009, we carried out an evaluation, under the supervision and with
the participation of our Chief Operating and Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that
evaluation, our Chief Operating and Financial Officer concluded that our
disclosure controls and procedures were effective as of that date to ensure that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded , processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and to ensure that information
required to be disclosed by us in such reports is accumulated and communicated
to the our management, including our Chief Operating and Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.  There
were no changes in our internal controls over financial reporting (as defined in
Exchange Act Rules 13a – 15(f) and 15d – 15(f)) during  the quarter ended
December 31, 2009 that have materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.




Our
disclosure controls or internal controls over financial reporting were designed
to provide only reasonable assurance that such disclosure controls or internal
control over financial reporting will prevent all errors or all instances of
fraud, even as the same are improved to address any deficiencies. The design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be only reasonable, not absolute
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.




Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls.


56


Management’s
Report on Internal Control




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting.  As defined by the SEC, internal
control over financial reporting is a process designed by, or under the
supervision of our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements in accordance with U.S. generally
accepted accounting principles.




Our
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In
connection with the preparation of our annual financial statements, management
has undertaken an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO Framework.  Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of those
controls.




Based on
this evaluation, management has concluded that our internal control over
financial reporting is effective as of December 31, 2009.




This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit us to provide only management’s report on internal control in
this report.


57


ITEM
9B.  OTHER INFORMATION




Submission
of Matters to a Vote of Security Holders




We held
our Annual Meeting of Stockholders at the offices of Lowenstein Sandler, 65
Livingston Avenue, Roseland, New Jersey 07068, on November 30, 2009. 
 The stockholders took the following actions:




(i)
            The
      stockholders ratified the amendment of the Company’s Certificate of
      Incorporation to increase the authorized shares of the Company’s common
      stock from 300,000,000 to 500,000,000. .  The stockholders cast
      56,236,296 votes for the amendment, 1,912,345 votes against the amendment
      and 80,219 votes abstained.




(ii)
            The
      stockholders elected six directors to serve until the next Annual Meeting
      of Stockholders.  The stockholders present in person or by proxy cast
      the following numbers of votes in connection with the election of
      directors, resulting in the election of all
  nominees:




Nominee
                        
                        Votes for
                        
                        
                        Votes withheldDouglas
      Abel
                        
                        
                        57,617,493
                        
                        
                        
                        611,368Neil
      Herskowitz
                        
                        
                        57,608,691
                        
                        
                        
                        620,170Malcolm
      Hoenlein
                        
                        
                        57,618,193
                        
                        
                        
                        610,668Timothy
      McInerney
                        
                        
                        57,544,966
                        
                        
                        
                        683,895Richard
      Steinhart
                        
                        
                        57,608,966
                        
                        
                        
                        619,895Michael
      Weiser
                        
                        
                        57,544,964
                        
                        
                        
                        683,897




(iii)
            The
      stockholders ratified the amendment of the Company’s 2003 Stock option
      Plan to increase the number of shares available for issuance thereunder
      from 10,400,000 to 15,000,000.  The stockholders cast 26,558,851
      votes for the amendment, 841,975 votes against the amendment, 153,873
      votes abstained and there were 30,674,162 broker
  non-votes.




(iv)
            The
      stockholders ratified the appointment of J.H. Cohn LLP as our independent
      registered public accounting firm for fiscal 2009.  The
      stockholders cast 57,335,262 votes for the appointment, 262,914 votes
      against the appointment and 630,685 votes
  abstained.


58


PART III
  ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
 
 Directors
 
 The name
and age of each of our six directors as of March 23, 2009, his position with us,
his principal occupation, and the period during which such person has served as
a director of our company are set forth below.  All directors hold
office until the next annual meeting of shareholders or until their respective
successors are elected and qualified. We believe that each of our directors has
professional experience in areas relevant to our strategy and operations. Each
of the nominees holds or has held senior-level positions in complex business,
government, or academic settings. We also believe each of our nominees has other
attributes necessary to create an effective board: high personal and
professional ethics, integrity and values; practical wisdom and judgment; an
inquisitive and objective perspective; the willingness to engage management and
each other in a constructive and collaborative fashion; the ability to devote
significant time to serve on our board and its committees; and a commitment to
representing the long-term interests of all our shareholders.
 
 Name
                
                Age
                
                Position(s) Held
                
                Director
                  SinceDouglas
      Abel
                
                48
                
                Director,
      Chairman of the Board
                
                2005Neil
      Herskowitz
                
                53
                
                Director
                
                2004Michael
      McGuinness
                
                56
                
                Principal
      Operating and Financial Officer and Director
                
                2010Timothy
      McInerney
                
                49
                
                Director
                
                2004Malcolm
      Morville
                
                64
                
                Director
                
                2010David
      Shimko
                
                49
                
                Director
                
                2010Richard
      I. Steinhart
                
                52
                
                Director
                
                2004
 
 Douglas
Abel was our President and Chief Executive Officer of our company from
April 2005 through June 2009.  Mr. Abel current serves as General
Manager for Onset Therapeutics LLC.  Mr. Abel was President and CEO of
Tarpan Therapeutics, Inc., a privately-held biopharmaceutical company, from
November 2004 until April 2005, when Tarpan was acquired by us. Prior to
becoming President and CEO of Tarpan, Mr. Abel served as Vice President of the
Dermatology Business Unit at Biogen Idec where he worked from August 2000 to
November 2004. While at Biogen, he led more than 100 employees to support the
launch of AMEVIVE®. Before that, Mr. Abel was at Allergan Pharmaceuticals from
December 1987 to August of 2000, with his most recent position being Director of
BOTOX® Marketing. Mr. Abel received his A.B. in chemistry from Lafayette College
and an M.B.A. from Temple University.
 Mr.
Abel’s qualifications to serve as a director include his 4 years of experience
as our Chief Executive Officer, his experience as the CEO of Tarpan, his
experience as a vice president at Biogen Idec, his A.B. degree in chemistry and
his MBA degree. Serving as the CEO of Manhattan and Tarpan has provided him with
relevant perspective on the dynamics and challenges of small, specialty Pharma
companies. While at Biogen Idec he has overseen the successful growth and
evolution of a business unit.
  59
  Neil
Herskowitz was appointed to our Board of Directors in July 2004. He has
served as the Managing Member of ReGen Partners LLC, an investment fund located
in New York, and as the President of its affiliate, Riverside Contracting LLC
since June 1998. Mr. Herskowitz currently serves as a director of Innovive
Pharmaceuticals (OTCBB: IVPH) a publicly traded pharmaceutical development
company. He also serves on the board of directors of Starting Point Services for
Children, a not-for-profit corporation, and of Vacation Village, a 220-unit
development in Sullivan County, New York. Mr. Herskowitz received a B.B.A. in
Finance from Bernard M. Baruch College in 1978
 Mr.
Herskowitz’s qualifications to serve as a director include his executive
positions with ReGen Partners and Riverside Contracting and his service as a
director of another publicly traded company, Innovive. Serving as an executive
of two small companies, ReGen Partners and Riverside Contracting has provided
him with relevant perspective on the dynamics and challenges of small companies.
His service as a director for Innovive has provided him with relevant
perspective on the dynamics and challenges of small, publicly traded life
science companies.
 
 Michael G.
McGuinness has been our Chief Financial Officer and Secretary since July
2006. Mr. McGuinness was appointed Chief Operating Officer on April 1,
2008.  Prior to joining Manhattan, Mr. McGuinness served as chief
financial officer of Vyteris Holdings (Nevada), Inc. (OTCBB: VYHN), a
product-based drug delivery company, from September 2001 to April 2006, and from
1998 to 2001 he was chief financial officer of EpiGenesis Pharmaceuticals, a
privately-held biotechnology company. Mr. McGuinness received a BBA in public
accounting from Hofstra University.
 Mr.
McGuinness’ qualifications to serve as a director include his three plus years
of service as our Chief Financial Officer and his service as the chief financial
officer of Vyteris and his BBA degree in public accounting.  Serving
as a chief financial officer of publicly traded companies for over eight years
has provided him with relevant perspective on the dynamics and challenges of
small, publicly traded life science companies.
 
 Timothy
McInerney has been a director of our company since July 2004.  Mr.
McInerney serves as a partner at Riverbank Capital Securities, Inc., a position
he has held since June 2007.  Mr. McInerney currently serves on the
board of directors of ZIOPHARM Oncology Inc. (NASDAQ: ZIOP).  From 1992 to
March 2007, Mr. McInerney was a Managing Director of Paramount BioCapital, Inc.
where he oversaw the overall distribution of Paramount’s private equity
product.  Prior to 1992, Mr. McInerney was a research analyst focusing on
the biotechnology industry at Ladenburg, Thalman & Co.  Prior to that,
Mr. McInerney held equity sales positions at Bear, Stearns & Co. and
Shearson Lehman Brothers, Inc.  Mr. McInerney also worked in sales and
marketing for Bristol-Myers Squibb.  He received his B.S. in pharmacy from
St. John’s University at New York.  He also completed a post-graduate
residency at the New York University Medical Center in drug information
systems.
 Mr.
McInerney’s qualifications to serve as a director include his executive
positions with Rvierbank Capital and Paramount, his service as a director of
another publicly traded company, ZIOPHARM, his service as a research analyst at
Ladenburg Thalman and his B.S. degree in pharmacy. Serving as an executive of
two financial firms that specialize in small cap companies, Riverbank Capital
and Paramount, and serving on the board of directors for ZIOPHARM has provided
him with relevant perspective on the dynamics and challenges of small, publicly
traded companies.
 
 Malcolm Morville,
Ph.D., was appointed a director of our Company in March
2010.  Dr. Morville serves as President and CEO of Ariston, which as a
result of the merger is a wholly-owned subsidiary of Manhattan.  Dr.
Morville was appointed President and CEO of Ariston in December 2003 and served
as a director of Ariston until the consummation of the merger between Ariston
and Manhattan.  From 1970 to 1988, Dr. Morville was employed by
Pfizer, both in the UK and US, in the discovery, development and marketing of
many drugs and potential drugs for the treatment of neurology and central
nervous system disorders, infectious, immunological, respiratory, cardiovascular
and gastrointestinal diseases as well as diabetes and obesity. From 1988 to
1993, he held senior executive management positions at Immulogic Pharmaceuticals
Corporation, a public biotechnology company. From 1993 to 2003, Dr. Morville was
President and CEO and a director of Phytera, Inc., a private biotechnology
corporation. He remains a director of Phytera. From 1993 to 2009, Dr. Morville
was a director of Indevus Pharmaceuticals, Inc. (formerly Interneuron
Pharmaceuticals, Inc.) a public biopharmaceutical company acquired Endo
Pharmaceuticals Holdings, Inc. in March, 2009. Dr.  Morville received
his B.Sc. and Ph.D. in biochemistry from the University of Manchester Institute
of Science and Technology in the U.K.
  60
 
 Dr.
Morville’s qualifications to serve as a director include his service as the CEO
of Ariston, his service as the CEO of Phytera, his service as an executive with
Immulogics, his service in the discovery, development and marketing functions
for Pfizer and his Ph. D. in biochemistry.  Serving as an executive
for Ariston, Phytera and Immulogics has provided Dr. Morville with relevant
perspective on the dynamics and challenges of life science
companies.  His service at Pfizer has provided Dr. Morville with
relevant perspective on the dynamics and challenges of the development and
marketing of pharmaceutical products
 
 David Shimko,
Ph.D., was appointed a director of our Company in March
2010.  Mr. Shimko served as a director of Ariston until the
consummation of the merger between Ariston and Manhattan.  Mr. Shimko
co-founded Risk Capital Management Partners LLC, an independent risk management
consulting firm with a specialization in financial risk, and served as its
President until it was acquired by Towers Perrin in June 2006.  Mr.
Shimko provided transition services to Towers Perrin in connection with its
acquisition of Risk Capital Management through December 2007.  Since
the acquisition, Mr. Shimko has continued to act as an independent risk
management consultant and has served as President of Winhall LLC.  Mr.
Shimko received his Ph.D. in finance from Northwestern University.
 Mr.
Shimko’s qualifications to serve as a director include his service on the board
of directors of Ariston, his serviced as an executive at Risk Capital and
Winhall and his Ph.D. in economics. Serving as on the board of directors of
Ariston and serving as an executive for Risk Capital and Winhall has provided
Mr. Shimko with relevant perspective on the dynamics and challenges of small
companies.  His Ph.D. in economics and his service as an executive
with two companies provided Mr. Shimko with the relevant perspective on the
dynamics and challenges of the audit committee of small, publicly traded
companies.
 
 Richard I.
Steinhart has been a director of our company since July 2004. Since April
2006, Mr. Steinhart has served as Chief Financial Officer of Electro-Optical
Sciences, Inc., a publicly-held medical device company. From May 1992 to April
2006, Mr. Steinhart was principal of Forest Street Capital, a boutique
investment banking, venture capital, and management consulting firm. Prior to
Forest Street Capital, from May 1991 to May 1992, he was the Vice President and
Chief Financial Officer of Emisphere Technologies, Inc., a publicly held
biopharmaceutical company that is working to develop and commercialize a
proprietary oral drug delivery system. Prior to joining Emisphere Technologies,
Mr. Steinhart spent seven years at CW Group, Inc., a venture capital firm
focused on medical and healthcare investments, where he was a General Partner
and Chief Financial Officer. Mr. Steinhart has previously served as a director
of a number of privately-held companies, including ARRIS Pharmaceuticals, Inc.,
a biotechnology company involved with rational drug design; Membrex, Inc., a
laboratory equipment manufacturing company; and Photest, Inc., a diagnostics
company. He began his career working as a certified public accountant and
continues to be a New York State Certified Public Accountant. Mr. Steinhart
holds a Bachelors of Business Administration and Masters of Business
Administration from Pace University.
 Mr.
Steeinhart’s qualifications to serve as a director include his service as Chief
Financial Officer of Electro-Optical Sciences, as a director include his service
principal of Forest Street Capital, as Chief Financial Officer of Emisphere
Technologies, Inc., and his Certified Public Accounting license. Serving as a
chief financial officer of two life science publicly traded companies,
Electro-Optical and Emisphere, and serving as executive of a financial firm that
specialize in small cap companies has provided Mr. Steinhart with relevant
perspective on the dynamics and challenges of small, life science, publicly
traded companies.  His service as a chief financial officer of two
public companies and his Certified Public Accounting license provided Mr.
Steinhart with the relevant perspective on the dynamics and challenges of the
audit committee of small, publicly traded companies.
  61
  There are
no family relationships among any of our executive officers, directors and key
employees.
  Independence
of the Board of Directors
  Our
common stock has not been listed on a national securities exchange since we
voluntarily de-listed our shares from the American Stock Exchange, or AMEX,
effective March 26, 2008 and therefore, we are not subject to any corporate
governance requirements regarding independence of board or committee
members.  However, we have chosen the definition of independence
contained in the AMEX rules  as a benchmark to evaluate the
independence of its directors.  Under the AMEX listing standards, an
"independent director" of a company means a person who is not an officer or
employee of the company or its subsidiaries and who the board of directors has
affirmatively determined does not have a relationship that would interfere with
the exercise of independent judgment in carrying out the responsibilities of a
director.  After review of all relevant transactions or relationships
between each director, or any of his family members, and our company, our senior
management and our independent registered public accounting firm, the Board has
determined that all of our directors are independent directors within the
meaning of the applicable AMEX listing standard, except for Mr. Abel, our former
President and Chief Executive Officer, Mr. McGuinness, our Chief Operating and
Financial Officer and Dr. Morville, President and CEO of Ariston, a wholly owned
subsidiary of the Company.
 
 There were no directors, officers or
beneficial owners of more than 10% of any class of equity securities of the
Company or any other person subject to section 16 of the Exchange Act that
failed to file on a timely basis reports required by section 16(a) of the
Exchange Act during the most recent fiscal year or prior fiscal
years.
 
 Board
Committees
  The Board
of Directors has three standing committees: an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee. The following
table provides the current membership for each of the Board
committees:
  Name of Committee
              
              MembershipAudit
              
              Messrs.
      Herskowitz, Shimko and Steinhart (Chair)Compensation
              
              Messrs.
      Shimko, Steinhart and McInereny (Chair)Nominating
      and Governance
              
              Messrs.
      Herskowitz, McInerney and Abel
(Chair)
  Audit
Committee
  The Audit
Committee oversees our accounting and financial reporting process. For these
purposes, the Audit Committee performs several functions. For example, the
Committee evaluates and assesses the qualifications of the independent
registered public accounting firm; determines the engagement of the independent
registered public accounting firm; determines whether to retain or terminate the
existing independent registered public accounting firm; reviews and approves the
retention of the independent registered public accounting firm to perform any
non-audit services; reviews the financial statements to be included in our
Annual Report on Form 10-K; and discusses with management and the independent
registered public accounting firm the results of the annual audit and the
results of our quarterly financial statements. The Board of Directors adopted a
written Audit Committee Charter, a copy of which can be found on our company
website at www.manhattanpharma.com
..
  62
  Our Board of Directors has reviewed the
definition of independence for Audit Committee members and has determined that
each member of our Audit Committee is independent (as independence for audit
committee members is currently defined under applicable SEC rules and the
relevant AMEX listing standards.  The Board has further determined
that Mr. Steinhart qualifies as an “audit committee financial expert,” as
defined by applicable rules of the SEC.
 
 Compensation
Committee
  The Compensation Committee of the Board
of Directors oversees our compensation policies, plans and programs. The
Compensation Committee reviews and approves corporate performance goals and
objectives relevant to the compensation of our executive officers and other
senior management; reviews and recommends to the Board the compensation and
other terms of employment of our Chief Executive Officer and our other executive
officers; administers our equity incentive and stock option plans; and makes
recommendations to the Board concerning the issuance of awards pursuant to those
plans. All current members of the Compensation Committee are independent (as
independence is currently defined under applicable AMEX listing
standards).  The Board of Directors has adopted a written charter of
the Compensation Committee, a copy of which can be found on our company website
at www.manhattanpharma.com.
 
 Nominating
and Governance Committee
  The
Nominating and Governance Committee considers and recommends to the Board
persons to be nominated for election by the stockholders as directors. In
addition to nominees recommended by directors, the Nominating and Governance
Committee will consider nominees recommended by stockholders if submitted in
writing to our Secretary at the address of Company’s principal offices. The
Board believes that any candidate for director, whether recommended by
stockholders or by the Board, should be considered on the basis of all factors
relevant to the needs of our company and the credentials of the candidate at the
time the candidate is proposed. Such factors include relevant business and
industry experience and demonstrated character and judgment. All current members
of the Nominating and Corporate Governance Committee are independent (as
independence is currently defined under applicable AMEX listing standards). The
Board of Directors adopted a written charter of the Nominating and Governance
Committee, a copy of which can be found on our company website at www.manhattanpharma.com.
 
 Communication
with the Board of Directors
 
 Although
we have not adopted a formal process for stockholder communications with our
Board of Directors, we believe stockholders should have the ability to
communicate directly with the Board so that their views can be heard by the
Board or individual directors, as applicable, and that appropriate and timely
responses are provided to stockholders. All communications regarding general
matters should be directed to our Secretary at the address below and should
prominently indicate on the outside of the envelope that it is intended for the
complete Board of Directors or for any particular director(s). If no designation
is made, the communication will be forwarded to the entire board. Stockholder
communications to the Board should be sent to:   Corporate
Secretary,  Attention: Board of Directors (or name(s) of particular
directors), Manhattan Pharmaceuticals, Inc., 48 Wall Street, New York, NY
10005.
 
 Code
of Ethics
 
 We have
adopted a Code of Business Conduct and Ethics that applies to all officers,
directors and employees of our company. A copy of our Code of Business Conduct
and Ethics is available on our company’s website at www.manhattanpharma.com.
If we make any substantive amendments to the Code of Business Conduct and Ethics
or grant any waiver from a provision of the code to an executive officer or
director, we will promptly disclose the nature of the amendment or waiver by
filing with the SEC a current report on Form 8-K.
  63
 
 Executive
Officers
 
 Set forth
below are the names, ages and titles of all of our executive officers as of
March 23, 2010.  All directors hold office until the next annual
meeting of stockholders or until their respective successors are elected and
qualified.
  Name
              
              Age
              
              PositionMichael
      G. McGuinness
              
              56
              
              Chief
      Operating and Financial Officer &
Secretary
  The
biographies of our executive officers are set forth below.
 
 Michael G.
McGuinness has been our Chief Financial Officer and Secretary since July
2006. Mr. McGuinness was appointed Chief Operating Officer on April 1,
2008.  Prior to joining Manhattan, Mr. McGuinness served as chief
financial officer of Vyteris Holdings (Nevada), Inc. (OTCBB: VYHN), a
product-based drug delivery company, from September 2001 to April 2006, and from
1998 to 2001 he was chief financial officer of EpiGenesis Pharmaceuticals, a
privately-held biotechnology company. Mr. McGuinness received a BBA in public
accounting from Hofstra University.
  None of
our executive officers is related to any other executive officer or to any of
our directors.
  64
  ITEM
11.  EXECUTIVE COMPENSATION
  Summary
Compensation of Executive Officers
  The
following table sets forth all of the compensation awarded to, earned by or paid
to (i) each individual serving as our principal executive officer during our
last completed fiscal year and (ii) the two most highly compensated executive
officers, other than the principal executive officer, that served as an
executive officer at the conclusion of the fiscal year ended December 31, 2009
and who received total compensation in excess of $100,000 during such fiscal
year (collectively, the “named executives”).
  NonqualifiedNon-Equity
                                            
                                            
                                            DeferredOption
                                            
                                            
                                            Incentive Plan
                                            
                                            
                                            Compensation
                                            
                                            
                                            All OtherName and Principal Position
                                            
                                            
                                            
                                            Year
                                            
                                            Salary
                                            
                                            
                                            Bonus
                                            
                                            
                                            Awards
                                            
                                            
                                            Compensation
                                            
                                            
                                            Earnings
                                            
                                            
                                            Compensation
                                            
                                            
                                            TotalDouglas
      Abel
                                            
                                            (1)
                                            
                                            2009
                                            
                                            $
                                            164,053
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            129,571
                                            (3)
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            30,896
                                            (2)
                                            
                                            $
                                            324,520Chief
      Executive Officer and President
                                            
                                            
                                            
                                            2008
                                            
                                            $
                                            338,750
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            153,244
                                            (3)
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            34,000
                                            (2)
                                            
                                            $
                                            525,994Michael
      McGuinness
                                            
                                            
                                            
                                            2009
                                            
                                            $
                                            277,500
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            145,576
                                            (3)
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            9,800
                                            (4)
                                            
                                            $
                                            432,876Chief
      Operating and Financial Officer, Secretary
                                            
                                            
                                            
                                            2008
                                            
                                            $
                                            263,750
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            199,274
                                            (3)
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            0
                                            
                                            
                                            $
                                            9,000
                                            (4)
                                            
                                            $
                                            472,024
  (1)
                              Mr.
      Abel’s employment with us ended effective June 15,
2009.(2)
                              For
      2009 represents consulting fees of $25,000 and a matching contributions by
      us pursuant to our company’s 401(k) retirement plan of
      $5,896.  For 2008 represents a payment in the amount of $25,000,
      which amount represents the approximate amount of additional expense
      incurred by Mr. Abel relating to his commuting between Boston and New
      York, without a tax “gross up”, and a matching contributions by us
      pursuant to our company’s 401(k) retirement plan of
  $9,000.
 (3)
                              Represents
      the amount of share-based costs recognized by us during 2008 and 2007
      under SFAS No. 123(R).   See Note 3 to our Financial
      Statements included in our annual reports for 2008 and 2007 on Form 10-K
      for the assumptions made in the valuation.(4)
                              Represents
      matching contributions by us pursuant to our company’s 401(k) retirement
      plan.
  Outstanding
Equity Awards at Fiscal Year-End
  The following table sets forth
information regarding the unexercised options held by each of our named
executive officers as of December 31, 2009.
  Option AwardsName
                                                    
                                                    Number of
                                                      Securities
                                                      Underlying
                                                      Unexercised
                                                      Options (#)
                                                      Exercisable
                                                    
                                                    
                                                    Number of
                                                      Securities
                                                      Underlying
                                                      Unexercised
                                                      Options (#)
                                                      Unexercisable
                                                    
                                                    
                                                    Option
                                                      Exercise Price
                                                      ($)
                                                    
                                                    Option
                                                      Expiration
                                                      DateMichael
      McGuinness
                                                    
                                                    
                                                    220,000
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    $
                                                    0.70
                                                    
                                                    07/10/201660,000
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    $
                                                    1.35
                                                    
                                                    07/10/2016213,334
                                                    
                                                    
                                                    
                                                    106,666
                                                    
                                                    
                                                    $
                                                    0.95
                                                    
                                                    04/25/2017733,334
                                                    
                                                    
                                                    
                                                    366,666
                                                    
                                                    
                                                    $
                                                    0.17
                                                    
                                                    03/25/2018Douglas
      Abel
                                                    
                                                    
                                                    1,300,000
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    $
                                                    0.17
                                                    
                                                    03/25/2018
  65
  Employment
Agreements
  Michael G.
McGuinness.Mr. McGuinness’
employment with us was governed by an employment agreement from July 7, 2006 to
July 6, 2009. Mr. McGuinness has been working for the Company without an
employment agreement since July 7, 2009 on the same terms and conditions that
were set forth in the employment agreement that expired.  The
agreement provided for an initial three-year term of employment ending July
2009, subject to additional one-year renewal periods upon the mutual agreement
of the parties. Pursuant to the agreement, Mr. McGuinness was entitled to an
annual base salary of $205,000 and an annual bonus, payable in the discretion of
our Board, of up to 30 percent of his annual base salary. Mr. McGuinness was
also entitled to certain other fringe benefits that are made available to our
senior executives from time to time, including medical and dental insurance and
participation in our 401(k) plan.  On November 19, 2008, at the first
closing of our Secured 12% Notes private placement, we entered an amendment to
the employment agreement, which provide for a reduction of up to one-third of
the salary payable to Mr. McGuinness until we shall have received at least
$2,500,000 of gross proceeds from the sale of the units or other sales of
securities or from other revenue received by us in the operation of our business
or any combination of the foregoing.
 
 In
addition, in accordance with the terms of the employment agreement, we issued to
Mr. McGuinness two 10-year stock options pursuant to our 2003 Stock Option Plan.
The first option relates to 220,000 shares of common stock and is exercisable at
a price of $0.70, the closing price of our common stock on the date of his
employment agreement. The second option relates to 60,000 shares and is
exercisable at a price of $1.35 per share. Both options vest in three annual
installments commencing July 10, 2007. To the extent Mr. McGuinness’ employment
with us is terminated prior to the end of such 10-year term, the options shall
remain exercisable for a period of 90 days.
 
 Mr.
McGuinness’ employment agreement further provided that in the event we terminate
his employment with us other than as a result of death, for “cause,”
“disability” or upon a “change of control” (as those terms are defined in the
agreement), then (1) Mr. McGuinness would continue receiving his base salary and
fringe benefits for a period of six months following such termination, provided,
that our obligation to pay such compensation shall be offset by any amounts
received by Mr. McGuinness from subsequent employment during such 6-month
period, and (2) the vesting of the stock options issued to Mr. McGuinness in
accordance with the employment agreement will accelerate and be deemed vested as
of the date of termination and will remain exercisable for a period of 90 days
following such termination. In the event we terminate Mr. McGuinness’ employment
during the term of the agreement upon a “change of control” and, if at the time
of such termination, the aggregate value of our outstanding common stock is less
than $80 million, then (i) Mr. McGuinness will continue receiving his base
salary and fringe benefits for a period of six months following such termination
and (ii) the portions of the stock options issued in accordance with the
employment agreement that have vested as of the date of such termination or that
are scheduled to vest in the calendar year of such termination will be deemed
vested and will remain exercisable for a period of 90 days following such
termination.
 
 Douglas
Abel.Mr.
Abel’s employment with us was governed by an employment agreement from April 1,
2005 to June 15, 2009. Mr. Abel’s employment with the Company ended on June 15,
2009.The
agreement provided for Mr. Abel’s agreement to serve as our President and Chief
Executive Officer for (i) an annual base salary of $300,000, subject to a
retroactive increase in the amount of $25,000 upon our completing a financing
transaction of at least $5,000,000, (ii) a signing bonus in the amount of
$200,000, which was payable in two installments during the first year of the
agreement, (iii) a discretionary performance-based bonus in an amount equal to
up to 50% of Mr. Abel’s base salary, and (iv) an option to purchase 2,923,900
shares of our common stock at $1.50 per share with three-year annual vesting,
purchasable for a 10-year term. In accordance with the terms of his employment
agreement and as a result of our private placement financing that we completed
in August 2005, Mr. Abel’s salary was increased to $325,000 retroactive to April
1, 2005.   On November 19, 2008, at the first closing of our
Secured 12% Notes private placement, we entered an amendment to the employment
agreement, which provide for a reduction of up to one-third of the salary
payable to Mr. Abel until we shall have received at least $2,500,000 of gross
proceeds from the sale of the units or other sales of securities or from other
revenue received by us in the operation of our business or any combination of
the foregoing.
  66
 
 The
employment agreement contains customary provisions relating to confidentiality,
work-product assignment, non-competition and non-solicitation. In the event Mr.
Abel’s employment is terminated by us (other than for cause) during the term of
the agreement, including a termination upon a change of control (as defined in
the agreement), we are required to pay a severance payment ranging from between
6 and 12 month of base salary, depending upon the circumstances of such
termination.
 
 Compensation
of Directors
  Non-employee directors are eligible to
participate in our Non-employee Director Compensation Arrangement, which was
adopted on January 30, 2007.  Under the arrangement, non-employee
directors are granted an option to purchase 50,000 shares of common stock upon
their initial election or appointment to the board.  Thereafter on an
annual basis, non-employee directors are entitled to an option to purchase
50,000 shares of common stock.  Each non-employee director is entitled
to a retainer of $20,000 per year, payable on a quarterly basis. In addition,
each such director shall be entitled to a fee of $1,000 for each meeting of the
Board attended in person, or $500 for attending a meeting by telephone or other
electronic means.  Each non-employee director serving on a committee
of the Board is entitled to a fee of $1,000 for each meeting of such committee
attended by such director in person, or $500 for attending a committee meeting
by telephone or other electronic means.  Each non-employee director is
also entitled to reimbursement for reasonable out-of-pocket expenses incurred in
connection with the performance of his service as a director, including without
limitation, travel related expenses incurred in connection with attendance at
Board or Board committee meetings.
  Due to our need to retain funds for the
Company’s operations payment of cash fees to our directors were suspended for
all periods subsequent to March 31, 2008.
  The
following table shows the compensation earned by each of our non-employee
directors for the year ended December 31, 2009:
 
 Name
                                        
                                        
                                        
                                        Fees Earned or
                                          Paid in Cash
                                        
                                        
                                        Option Awards
                                          (1)
                                        
                                        
                                        All Other
                                          Compensation
                                        
                                        
                                        TotalNeil
      Herskowitz
                                        
                                        (3)
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809Malcolm
      Hoenlein
                                        
                                        (2),(4)
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809Timothy
      McInerney
                                        
                                        (5)
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809Richard
      Steinhart
                                        
                                        (6)
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809Michael
      Weiser
                                        
                                        (2),(7)
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        10,809
  (1)
                            Represents
      the amount of share-based costs recognized by us during 2009 under SFAS
      No. 123(R).   See Note 3 to our Financial Statements
      included in our annual report for 2009 on Form 10-K for the assumptions
      made in the valuation.
 (2)
                            Messrs.
      Hoenlein and Weiser resigned from the Board of Directors upon the
      consummation of the merger with Ariston Pharmaceuticals, Inc. on March 8,
      2010.
  67
 
 (3)
                            As
      of March 27, 2009, Mr. Herskowitz had options to purchase an aggregate of
      516,010 shares of our common stock.
 (4)
                            As
      of March 27, 2009, Mr. Hoenlein had options to purchase an aggregate of
      466,010 shares of our common stock.
 (5)
                            As
      of March 27, 2009, Mr. McInerney had options to purchase an aggregate of
      550,000 shares of our common stock.
 (6)
                            As
      of March 27, 2009, Mr. Steinhart had options to purchase an aggregate of
      516,010 shares of our common stock.
 (7)
                            As
      of March 27, 2009, Mr. Weiser had options to purchase an aggregate of
      480,000 shares of our common stock.
 
 Compensation
Committee Interlocks and Insider Participation
 
 There were no interlocks or other
relationships with other entities among our executive officers and directors
that are required to be disclosed under applicable SEC regulations relating to
compensation committee interlocks and insider participation.
  68
  ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENMENT
AND RELATED STOCKHOLDER MATTERS.
  The following table sets forth
information regarding ownership of shares of our common stock, as of March 23,
2010:
 ·      by
each person known by us to be the beneficial owner of 5% or more
 ·      of
our common stock;
 ·      by
each of our directors and executive officers; and
 ·      by
all of our directors and executive officers as a group.
 
 Except as otherwise indicated, each
person and each group shown in the table has sole voting and investment power
with respect to the shares of common stock indicated.  For purposes of
the table below, in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended, a person is deemed to be the beneficial owner, of any
shares of our common stock over which he or she has or shares, directly or
indirectly, voting or investment power or of which he or she has the right to
acquire beneficial ownership at any time within 60 days. As used in this
prospectus, "voting power" is the power to vote or direct the voting of shares
and "investment power" includes the power to dispose or direct the disposition
of shares.  Common stock beneficially owned and percentage ownership
as of March 23, 2010 was based on 114,079,527 shares
outstanding.  Unless otherwise indicated, the address of each
beneficial owner is c/o Manhattan Pharmaceuticals, Inc., 48 Wall Street, New
York, NY 10005.
 
 Name of Beneficial Owners,
                                    Officers and Directors
                                  
                                  Number of
                                    Shares
                                    Beneficially
                                    Owned (#)
                                  
                                  
                                  Percentage
                                    Beneficially
                                    Owned (%)Douglas
      Abel (1)
                                  
                                  
                                  1,379,000
                                  
                                  
                                  
                                  1.19
                                  %Neil
      Herskowitz (2)
                                  
                                  
                                  725,457
                                  
                                  
                                  
                                  0.63
                                  %Michael
      McGuinness (3)
                                  
                                  
                                  2,734,000
                                  
                                  
                                  
                                  2.34
                                  %Timothy
      McInerney (4)
                                  
                                  
                                  1,313,870
                                  
                                  
                                  
                                  1.14
                                  %Malcolm
      Morville
                                  
                                  
                                  211,568
                                  
                                  
                                  
                                  0.19
                                  %David
      Shimko
                                  
                                  
                                  42,313
                                  
                                  
                                  
                                  0.04
                                  %Richard
      Steinhart (5)
                                  
                                  
                                  471,643
                                  
                                  
                                  
                                  0.41
                                  %All
      directors and officers as a group (6) (7 persons)
                                  
                                  
                                  6,877,851
                                  
                                  
                                  
                                  5.69
                                  %Lester
      Lipschutz (7)
                                    1650
      Arch Street
                                    Philadelphia,
      PA 19103
                                  
                                  
                                  8,943,362
                                  
                                  
                                  
                                  7.27
                                  %Lindsay
      Rosenwald (8)
                                    787
      Seventh Avenue
                                    New
      York, NY 10019
                                  
                                  
                                  12,665,163
                                  
                                  
                                  
                                  9.99
                                  %Nordic
      Biotech Venture Fund II K/S (9)
                                    Ostergrade
      5, DK-1100
                                    Copenhagen
      K, Denmark
                                  
                                  
                                  85,714,285
                                  
                                  
                                  
                                  42.90
                                  %
  69
 
 (1)
                            Includes
      1,300,000 shares issuable upon exercise of vested portions of options and
      24,000 shares issuable upon exercise of warrants.(2)
                            Includes
      466,010 shares issuable upon exercise of vested portions of options, and
      43,444 shares issuance upon exercise of warrants; 138,951 shares held by
      Riverside Contracting, LLC, a limited liability company of which Mr.
      Herskowitz is a member holding 50% ownership and 44,168 shares held by
      ReGen Capital II, LLC, a limited liability company of which Mr. Herskowitz
      is a member holding 50% ownership.(3)
                            Includes
      2,700,000 shares issuable upon the exercise of vested portions of options
      and 24,000 shares issuable upon exercise of
  warrants.(4)
                            Includes
      500,000 shares issuable upon exercise of vested portions of options; and
      139,863 shares issuable upon exercise of
warrants.(5)
                            Includes
      466,010 shares issuable upon exercise of vested portions of
      options.(6)
                            Includes
      5,432,020 shares issuable upon exercise of vested portions of options;
      231,307 shares issuable upon the exercise of warrants; 138,951 shares held
      by Riverside Contracting, LLC, a limited liability company of which Mr.
      Herskowitz is a member holding 50% ownership and 44,168 shares held by
      ReGen Capital II, LLC, a limited liability company of which Mr. Herskowitz
      is a member holding 50% ownership.(7)
                            Includes
      8,943,362 shares of Common Stock held by separate trusts for the benefit
      of Dr. Rosenwald or his family with respect to which Mr. Lipschutz is
      either trustee or investment manager and in either case has investment and
      voting power. Mr. Lipschutz disclaims beneficial ownership of these
      shares, except to the extent of his pecuniary interest therein, if
      any.   The foregoing information is derived from a Schedule
      13G filed on behalf of the reporting person on August 1,
    2007(8)
                            Includes
      6,920,516 shares held directly by Dr. Rosenwald, 5,699,283 shares issuable
      upon the exercise of warrants, 80 shares held by the Dr. Rosenwald's wife,
      over which Dr. Rosenwald may be deemed to have sole voting and dispositive
      power, although he disclaims beneficial ownership of such shares except
      with regard to his pecuniary interest therein, if any, 33 shares held by
      Dr. Rosenwald’s children, over which Dr. Rosenwald may be deemed to have
      sole voting and dispositive power, although he disclaims beneficial
      ownership of such shares except with regard to his pecuniary interest
      therein, if any, and 45,251 shares held by Paramount Biosciences LLC, of
      which Dr. Rosenwald is the sole member.  The foregoing
      information is derived from a Schedule 13G/A filed on behalf of the
      reporting person on February 3, 2009.(9)
                            Includes
      71,428,571 shares issuable upon exercise of Nordic's right to put all or a
      portion of Nordic Biotech Venture Fund II K/S' equity interest in H
      Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a Danish
      limited partnership, of which we and Nordic are partners
      and  14,285,714 shares issuable upon exercise of an outstanding
      warrant held by Nordic.  Florian Schonharting and Christian
      Hansen have voting and investment control over such
      securities.
  70
 
 ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
  The
Hedrin JV
 
 We and
Nordic Biotech Venture Fund II K/S, or Nordic, entered into a joint venture
agreement on January 31, 2008, which was amended on February 18, 2008 and on
June 9, 2008.  Pursuant to the joint venture agreement, in February
2008, (i) Nordic contributed cash in the amount of $2.5 million to H
Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed Danish
limited partnership, or the Hedrin JV, in exchange for 50% of the equity
interests in the Hedrin JV, and (ii) we contributed certain assets to North
American rights (under license) to our Hedrin product to the Hedrin JV in
exchange for $2.0 million in cash and 50% of the equity interests in the Hedrin
JV.  On or around June 30, 2008, in accordance with the terms of the
joint venture agreement, Nordic contributed an additional $1.25 million in cash
to the Hedrin JV, $1.0 million of which was distributed to us and equity in the
Hedrin JV was distributed to each of us and Nordic sufficient to maintain our
respective ownership interests at 50%.
 
 Pursuant
to the joint venture agreement, upon the classification by the U.S. Food and
Drug Administration, or the FDA, of Hedrin as a Class II or Class III medical
device, Nordic was required to contribute to the Hedrin JV an additional $1.25
million in cash, $0.5 million of which was to be distributed to us and equity in
the Hedrin JV was to be distributed to each of us and Nordic sufficient to
maintain our respective ownership interests at 50%.    The
FDA notified the Hedrin JV that Hedrin has been classified as a Class III
medical device and in February 2009, Nordic made the $1.25 million investment in
the Hedrin JV, the Hedrin JV made the $0.5 million milestone payment to us and
equity in the Hedrin JV was distributed to us and Nordic Nordic sufficient to
maintain our respective ownership interests at 50%.  In accordance
with the terms of the joint venture agreement, the Hedrin JV has received a
total of $1.5 million cash to be applied toward the development and
commercialization of Hedrin in North America.
 
 The
Hedrin JV will be responsible for the development and commercialization of
Hedrin for the North American market and all associated costs including clinical
trials, if required, regulatory costs, patent costs, and future milestone
payments owed to Thornton & Ross Ltd., or T&R, the licensor of
Hedrin.  The Hedrin JV will engage us to provide management services
to the Hedrin JV in exchange for an annualized management fee, which for 2008,
on an annualized basis, is $527,000.   The profits of the Hedrin
JV will be shared by us and Nordic in accordance with our respective equity
interests in the Hedrin JV, of which we each currently hold 50%, except that
Nordic is entitled to receive a minimum return each year from the Hedrin JV
equal to 6% on Hedrin sales, as adjusted for any change in Nordic’s equity
interest in the Hedrin JV, before any distribution is made to us.  If
the Hedrin JV realizes a profit in excess of the Nordic minimum return in any
year, then such excess shall first be distributed to us until our distribution
and the Nordic minimum return are in the same ratio as our respective equity
interests in the Hedrin JV and then the remainder, if any, is distributed to
Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5 million) plus 10% per year, less the cumulative distributions
received by Nordic from the Hedrin JV before any distribution is made to
us.  If the Hedrin JV’s assets in liquidation exceed the Nordic
liquidation preference amount, then any excess shall first be distributed to us
until our distribution and the Nordic liquidation preference amount are in the
same ratio as our respective equity interests in the Hedrin JV and then the
remainder, if any, is distributed to Nordic and us in the same ratio as our
respective equity interests.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.
   71
  Pursuant
to the terms of the joint venture agreement, Nordic has the right to nominate
one person for election or appointment to our board of directors.  The
Hedrin JV's board of directors consists of four members, two members appointed
by us and two members appointed by Nordic.  Nordic has the right to
appoint one of the directors as chairman of the board.  The chairman
has certain tie breaking powers.  In the event that the final payment
milestone described above is not achieved by March 30, 2009, then the Hedrin JV
's board of directors will increase to five members, two appointed by us and
three appointed by Nordic.
 
 Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.14, as adjusted from time to time for stock splits and other specified
events, multiplied by a conversion factor, which is (i) 1.00 for so long as
Nordic's distributions from the Hedrin JV are less than the amount of its
investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin JV
are less than two times the amount of its investment but greater than or equal
to the amount of its investment amount, (iii) 1.50 for so long as Nordic's
distributions from the Hedrin JV are less than three times the amount of its
investment but greater than or equal to two times the amount of its investment
amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are
less than four times the amount of its investment but greater than or equal to
three times the amount of its investment amount and (v) 3.00 for so long as
Nordic’s distributions from Hedrin JV are greater than or equal to four times
the amount of its investment.  The put right expires upon the earlier
to occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's
distributions from the Hedrin JV exceed five times the amount Nordic has
invested in the Hedrin JV (or 10 days after such date if we have provided Nordic
notice thereof).
 
 Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.14, as adjusted from time to time for stock splits and
other specified events.  The call right is only exercisable by us if
the price of our common stock has closed at or above $1.40 per share for 30
consecutive trading days.  During the first 30 consecutive trading
days in which our common stock closes at or above $1.40 per share, we may
exercise up to 25% of the call right.  During the second 30
consecutive trading days in which our common stock closes at or above $1.40 per
share, we may exercise up to 50% of the call right on a cumulative
basis.  During the third consecutive 30 trading days in which our
common stock closes at or above $1.40 per share, we may exercise up to 75% of
the call right on a cumulative basis.  During the fourth consecutive
30 days in which our common stock closes at or above $1.40 per share, we may
exercise up to 100% of the call right on a cumulative basis.  Nordic
may refuse the call, either by paying $1.5 million multiplied by the percentage
of Nordic's investment being called or forfeiting an equivalent portion of the
put right, calculated on a pro rata basis for the percentage of the Nordic
equity interest called by us.   The call right expires on
February 25, 2013.  For purposes of Nordic’s right to put, and our
right to call, all or a portion of Nordic’s equity interest in the Hedrin JV,
the amount of Nordic’s investment is currently $5,000,000.
 
 As per
the limited Partnership Agreement between the Company and Nordic (the “LPA”) in
the event that a limited partner in the Hedrin JV (a “Limited Partner”)
determines, in its reasonable goods faith discretion, that the Hedrin JV
requires additional capital for the proper conduct of its business that Limited
Partner shall provide each Limited Partner with a written request for
contribution of such Limited Partner’s proportionate share, in accordance to the
then respective equity ownership in the Hedrin JV, of such requested additional
capital amount.
 
 As per
the terms of the LPA if a Limited partner declines to so contribute, elects to
contribute but thereafter fails to do so timely, or elects to contribute and
timely does contribute some, but not all of, its proportionate share of the
requested additional capital amount, the other Limited Partner shall have the
option to contribute the remaining balance of such requested additional capital
amount.
  72
 
 As per
the terms of the LPA the General Partner shall determine the fair market value
of the shares for purposes of determining how to allocate the number of shares
of the Hedrin JV to be issued in consideration for the contribution of
capital.  If the general Partner is unable to determine the fair
market value of the shares, the fair market value for the shares shall be
determined in good faith by the contributing Limited Partner if such amount is
equal to or greater than the most recent valuation of such Hedrin JV
shares.
 
 On
December 31, 2009 Nordic Biotech Venture Fund II (“Nordic”) delivered a written
notice to the Company for a $1,000,000 capital increase to the Hedrin
JV.  In January 2010 Nordic made its capital contribution to the
Hedrin JV of $500,000.  The Company did not have sufficient funds to
make such a capital contribution within the required time prescribed in the
LPA.
 
 The
General Partner was unable to determine the fair market value of the
shares.  The contributing Limited Partner, Nordic, determined in good
faith that the fair market value of the shares is equal to the most recent
valuation.  The most recent valuation was the February 2009 investment
of $1,500,000 into the Hedrin JV by Nordic at $5,000 per share.  As a
result of Nordic’s investing an additional $500,000 in the Hedrin JV the
ownership percentages of the Hedrin JV have changed from 50% to Nordic and 50%
for the Company to 52.38% to Nordic and 47.62% for the Company.  In
the event that Nordic exercises its option to invest the remaining $500,000 of
the $1,000,000 capital increase then the ownership percentage shall change to
54.55% for Nordic and 45.45% for the Company.
 
 Issuance
of Secured Promissory Notes and Warrants
 
 On
September 11, 2008, we issued a secured promissory note in the principal amount
of $12,000 to each of Douglas Abel, our President and Chief Executive Officer
and a director of our company; Michael Weiser, a director of our company;
Timothy McInerny, a director of our company; Neil Herskowitz, a director of our
company, and Michael McGuiness, our Chief Financial Officer and Chief Operating
Officer.  Principal and interest on the notes are payable in cash on
March 10, 2009 unless paid earlier by us.  In connection with the
issuance of the notes, we issued to each noteholder a 5-year warrant to purchase
24,000 shares of our common stock at an exercise price of $0.20 per
share.  We granted to the noteholders a continuing security interest
in certain specific refunds, deposits and repayments due to us and expected to
be repaid to us in the next several months. The secured 10% notes were repaid in
February 2009 along with interest thereon.
 
 We believe that all of the transactions
set forth above were made on terms no less favorable to us than could have been
obtained from unaffiliated third parties.  All such transactions have
been reviewed by the audit committee of our Board of Directors and approved by
them.  All future transactions between us and our officers, directors
and principal shareholders and their affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by our audit committee or another independent committee of our Board of
Directors.
 
 Issuance
of Common Shares and Warrants
 
 On March 2, 2010, the Company raised
aggregate gross proceeds of approximately $2,547,500 pursuant to a private
placement of its securities.  The Company entered into subscription
agreements (the "Subscription Agreements") with seventy-seven accredited
investors (the "Investors") pursuant to which the Company sold an aggregate of
101.9 Units (as defined herein) for a purchase price of $25,000 per
Unit.  Pursuant to the Subscription Agreements, the Company issued to
each Investor units (the "Units") consisting of (i) 357,143 shares of common
stock, $0.001 par value per share (the “Common Stock” or “Shares”) of the
Company and (ii) 535,714 warrants (each a “Warrant” and collectively the
“Warrants”), each of which will entitle the holder to purchase one additional
share of Common Stock for a period of five years (each a “Warrant Share” and
collectively the “Warrant Shares”) at an exercise price of $0.08 per
share.  Dr. Lindsay Rosenwald, a more than 5% beneficial owner of
Manhattan common stock, purchased 10 units for $250,000.
  73
  Director
Independence
 
 For information on director
independence, please see Item 10 above under the caption “Independence of the
Board of Directors”.
  ITEM
14.  PRINCIPAL ACCOUNTANTING FEES AND SERVICES.
  Fees
Billed to the Company by Its Independent Auditors
  The
following is a summary of the fees billed to us by J.H. Cohn LLP, our
independent registered public accounting firm for professional services rendered
for fiscal years ended December 31, 2009 and 2008:
  J.H. Cohn LLPFee Category
                                  
                                  Fiscal 2009 Fees
                                  
                                  
                                  Fiscal 2008 FeesAudit
      Fees
                                  
                                  $
                                  65,797
                                  
                                  
                                  $
                                  149,818Audit-Related
      Fees (1)
                                  
                                  
                                  35,504
                                  
                                  
                                  
                                  29,403Tax
      Fees (2)
                                  
                                  
                                  12,250
                                  
                                  
                                  
                                  12,500All
      Other Fees (3)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
      Fees
                                  
                                  $
                                  113,551
                                  
                                  
                                  $
                                  191,721
  (1)
                            Audit-Related
      Fees consist principally of assurance and related services that are
      reasonably related to the performance of the audit or review of the
      Company’s financial statements but not reported under the caption “Audit
      Fees.”  These fees include review of registration
      statements.
  (2)
                            Tax
      Fees consist of fees for tax compliance, tax advice and tax
      planning.
  (3)
                            All
      Other Fees consist of aggregate fees billed for products and services
      provided by the independent registered public accounting firm, other than
      those disclosed above.
 
 Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm
  At
present, our audit committee approves each engagement for audit or non-audit
services before we engage our independent registered public accounting firm to
provide those services.  Our audit committee has not established any
pre-approval policies or procedures that would allow our management to engage
our independent registered public accounting firm to provide any specified
services with only an obligation to notify the audit committee of the engagement
for those services. None of the services provided by our independent registered
public accounting firm for fiscal 2008 was obtained in reliance on the waiver of
the pre-approval requirement afforded in SEC regulations.
  74
  ITEM
15.  EXHIBITS LIST
  The
following documents are included or incorporated by reference in this
report.
  Exhibit No.
                            
                            Description2.1
                            
                            Agreement
      and Plan of Merger among the Company, Manhattan Pharmaceuticals
      Acquisition Corp. and Manhattan Research Development, Inc. (formerly
      Manhattan Pharmaceuticals, Inc.) dated December 17, 2002 (incorporated by
      reference to Exhibit 2.1 from Form 8-K filed March 5,
    2003).2.2
                            
                            Agreement
      and Plan of Merger among the Registrant, Tarpan Therapeutics, Inc. and
      Tarpan Acquisition Corp., dated April 1, 2005 (incorporated by reference
      to Exhibit 2.1 of the Registrant’s Form 8-K/A filed June 15,
      2005).2.3
                            
                            Agreement
      and Plan of Merger among the Registrant, Ariston Pharmaceuticals, Inc.,
      and Ariston Merger Corp. dated March 8, 2010 (incorporated by reference to
      the Registrant’s Current Report on Form 8_K filed March 12,
      2010.3.1
                            
                            Certificate
      of incorporation, as amended through September 25, 2003 (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Form 10-QSB for the quarter
      ended September 30, 2003).3.2
                            
                            Bylaws,
      as amended to date (incorporated by reference from Registrant’s
      registration statement on Form SB-2, as amended (File
      No.33-98478)).4.1
                            
                            Specimen
      common stock certificate (incorporated by reference from Registrant’s
      registration statement on Form SB-2, as amended (File
      No.33-98478)).4.2
                            
                            Form
      of warrant issued by Manhattan Research Development, Inc., which
      automatically converted into warrants to purchase shares of the
      Registrant’s common stock upon the merger transaction with such company
      (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB
      for the quarter ended March 31, 2003).4.3
                            
                            Form
      of warrant issued to placement agents in connection with the Registrant’s
      November 2003 private placement of Series A Convertible Preferred Stock
      and the Registrant’s January 2004 private placement (incorporated by
      reference to Exhibit 4.18 to the Registrant’s Registration Statement on
      Form SB-2 filed January 13, 2004 (File No.
333-111897)).4.4
                            
                            Form
      of warrant issued to investors in the Registrant’s August 2005 private
      placement (incorporated by reference to Exhibit 4.1 of the Registrant’s
      Current Report on Form 8-K filed September 1, 2005).4.5
                            
                            Form
      of warrant issued to placement agents in the Registrant’s August 2005
      private placement (incorporated by reference to Exhibit 4.2 of the
      Registrant’s Form 8-K filed September 1, 2005).4.6
                            
                            Warrant,
      dated April 30, 2008, issued to Nordic Biotech Venture Fund II K/S
      (incorporated by reference to Exhibit 4.6 of the Registrant’s Registration
      Statement on Form S-1 filed on May 1, 2008 (File No.
      333-150580)).4.7
                            
                            Form
      of Warrant issued to Noteholders on September 11, 2008 (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed on
      September 15, 2008)
  75
 
 4.8
                                    
                                    Form
      of Warrant issued to Noteholders on November 19, 2008 (incorporated by
      reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K
      filed on November 25, 2008)4.9
                                    
                                    Form
      of Warrant issued to investors in March 2010 private
    placement4.10
                                    
                                    Form
      of Warrant issued to placement agent in March 2010 private
      placement10.1
                                    
                                    1995
      Stock Option Plan, as amended (incorporated by reference to Exhibit 10.18
      to the Registrant’s Form 10-QSB for the quarter ended September 30,
      1996).10.2
                                    
                                    Form
      of Notice of Stock Option Grant issued to employees of the Registrant from
      April 12, 2000 to February 21, 2003 (incorporated by reference to Exhibit
      99.2 of the Registrant’s Registration Statement non Form S-8 filed March
      24, 1998 (File 333-48531)).10.3
                                    
                                    Schedule
      of Notices of Stock Option Grants, the form of which is attached hereto as
      Exhibit 4.2.10.4
                                    
                                    Form
      of Stock Option Agreement issued to employees of the Registrant from April
      12, 2000 to February 21, 2003 (incorporated by reference to Exhibit 99.3
      to the Registrant’s Registration Statement on Form S-8 filed March 24,
      1998 (File 333-48531)).10.5
                                    
                                    License
      Agreement dated on or about February 28, 2002 between Manhattan Research
      Development, Inc. (f/k/a Manhattan Pharmaceuticals, Inc.) and
      Oleoyl-Estrone Developments SL (incorporated by reference to Exhibit 10.6
      to the Registrant’s Amendment No. 2 to Form 10-QSB/A for the quarter ended
      March 31, 2003 filed on March 12, 2004).10.6
                                    
                                    License
      Agreement dated April 4, 2003 between the Registrant and NovaDel Pharma,
      Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s
      Amendment No. 1 to Form 10-QSB/A for the quarter ended June 30, 2003 filed
      on March 12, 2004).++10.7
                                    
                                    2003
      Stock Option Plan (incorporated by reference to Exhibit 4.1 to
      Registrant’s Registration Statement on Form S-8 filed February 17,
      2004).10.8
                                    
                                    Employment
      Agreement dated April 1, 2005, between the Registrant and Douglas Abel
      (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K/A
      filed June 15, 2005).10.9
                                    
                                    Sublicense
      Agreement dated April 14, 2004 between Tarpan Therapeutics, Inc., the
      Registrant’s wholly-owned subsidiary, and IGI, Inc. (incorporated by
      reference to Exhibit 10.109 to IGI Inc.’s Form 10-Q for the quarter ended
      March 31, 2004 (File No. 001-08568).10.10
                                    
                                    Form
      of subscription agreement between the Registrant and the investors in the
      Registrant’s August 2005 private placement (incorporated by reference as
      Exhibit 10.1 to the Registrant’s Form 8-K filed September 1,
      2005).10.11
                                    
                                    Separation
      Agreement between the Registrant and Alan G. Harris December 21, 2007
      (incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K
      filed March 31, 2008.)10.12
                                    
                                    Employment
      Agreement dated July 7, 2006 between the Registrant and Michael G.
      McGuinness (incorporated by reference to Exhibit 10.1 of the Registrant’s
      Form 8-K filed July 12, 2006.)10.13
                                    
                                    Summary
      terms of compensation plan for Registrant’s non-employee directors
      (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
      February 5, 2007).10.14
                                    
                                    Form
      of Stock Option Agreement issued under the Registrant’s 2003 Stock Option
      Plan (Incorporated by reference to Exhibit 10.15 to the Registrant's Form
      10-KSB filed April 2,
2078.)
  76
 
 10.15
                              
                              Exclusive
      License Agreement for “Altoderm” between Thornton & Ross Ltd. and
      Manhattan Pharmaceuticals, Inc. dates April 3, 2007. (Incorporated by
      reference to Exhibit 10.3 of the registrant’s form 10-Q for the quarter
      ended June 30, 2007 filed on August 14, 2007.)10.16
                              
                              Exclusive
      License Agreement for “Altolyn” between Thornton &Ross Ltd. and
      Manhattan Pharmaceuticals, Inc. dated April 3,
      2007.  (Incorporated by reference to Exhibit 10.4 of the
      registrant’s form 10-Q for the quarter ended June 30, 2007 filed on August
      14, 2007.)10.17
                              
                              Exclusive
      License Agreement for “Hedrin” between Thornton &Ross Ltd. , Kerris,
      S.A. and Manhattan Pharmaceuticals, Inc. dated June 26, 2007.
      (Incorporated by reference to Exhibit 10.5 of the registrant’s form 10-Q
      for the quarter ended June 30, 2007 filed on August 14,
    2007.)10.18
                              
                              Supply
      Agreement for “Hedrin” between Thornton & Ross Ltd. and Manhattan
      Pharmaceuticals, Inc. dated June 26, 2007. (Incorporated by reference to
      Exhibit 10.6 of the registrant’s form 10-Q for the quarter ended June 30,
      2007 filed on August 14, 2007.)10.19
                              
                              Joint
      Venture Agreement between Nordic Biotech Fund II K/S and Manhattan
      Pharmaceuticals, Inc. to develop and commercialize “Hedrin” dated January
      31, 2008.10.20
                              
                              Amendment
      No. 1, dated February 25, 2008, to the Joint Venture Agreement between
      Nordic Biotech Fund II K/S and Manhattan Pharmaceuticals, Inc. to develop
      and commercialize “Hedrin” dated January 31, 2008 (Incorporated by
      reference to Exhibit 10.20 to the Registrant's Form 10-K filed March 31,
      2008).10.21
                              
                              Omnibus
      Amendment to Joint Venture Agreement and Additional Agreements, dated June
      9, 2008, among Manhattan Pharmaceuticals, Inc., Hedrin Pharmaceuticals
      K/S, Hedrin Pharmaceuticals General Partner ApS and Nordic Biotech Venture
      Fund II K/S.10.22
                              
                              Assignment
      and Contribution Agreement between Hedrin Pharmaceuticals K/S and
      Manhattan Pharmaceuticals, Inc. dated February 25,
      2008.  (Incorporated by reference to Exhibit 10.21 to the
      Registrant's Form 10-K filed March 31, 2008.)10.23
                              
                              Registration
      Rights Agreement between Nordic Biotech Venture Fund II K/S and Manhattan
      Pharmaceuticals, Inc. dated February 25, 2008.  (Incorporated by
      reference to Exhibit 10.22 to the Registrant's Form 10-K filed March 31,
      2008.)10.24
                              
                              Letter
      Agreement, dated September 17, 2008, between Nordic Biotech Venture Fund
      II K/S and Manhattan Pharmaceuticals, Inc.10.25
                              
                              Amendment
      to Employment Agreement by and between Manhattan Pharmaceuticals, Inc. and
      Douglas Abel (Incorporated by reference to Exhibit 10.23 to the
      Registrant's Form 10-K filed March 31, 2008.)10.26
                              
                              Form
      of Secured Promissory Note, dated September 11, 2008 (Incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed on September 15, 2008)10.27
                              
                              Securities
      Purchase Agreement, dated November 19, 2008, by and among the Registrant
      and the investors listed on Exhibit A-1 and A-2
      thereto  (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.28
                              
                              Registration
      Rights Agreement, dated November 19, 2008, by and among the Registrant,
      the Placement Agent and the investors listed on Exhibit A thereto
      (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
      Report on Form 8-K filed on November 25,
2008)
  77
 
 10.29
                                            
                                            Security
      Agreement, dated November 19, 2008, by and among the Registrant and each
      person named on Exhibit A-1 and A-2 of the Securities Purchase
      Agreement  (incorporated by reference to Exhibit 10.3 to the
      Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.30
                                            
                                            Default
      Agreement, dated November 19, 2008, by and among the Registrant and the
      persons and entities listed on Schedule A thereto  (incorporated
      by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
      8-K filed on November 25, 2008)10.31
                                            
                                            Form
      of 12% Senior Secured Promissory Note (incorporated by reference to
      Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on
      November 25, 2008)10.32
                                            
                                            Amendment
      No. 2 to the Employment Agreement between the Registrant and Douglas Abel,
      dated November 19, 2008  (incorporated by reference to Exhibit
      10.7 to the Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.33
                                            
                                            Amendment
      No. 1 to the Employment Agreement between the Registrant and Michael
      McGuinness, dated November 19, 2008  (incorporated by reference
      to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on
      November 25, 2008)10.34
                                            
                                            Form
      of Placement Agent Warrant (incorporated by reference to Exhibit 10.9 to
      the Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.35
                                            
                                            Form
      of Subscription Agreement by and among Manhattan Pharmaceuticals,
      Inc., the Placement Agent and certain investors listed therein in
      connection with the March 2010 private placement10.36
                                            
                                            Placement
      Agency Agreement dated December 28, 2009 by and between National
      Securities Corporation and Manhattan Pharmaceuticals, Inc. in connection
      with the March 2010 private placement10.37
                                            
                                            Registration
      Rights Agreement dated March 2, 2010 by and among Manhattan
      Pharmaceuticals, Inc., the Placement Agent and certain investors listed
      therein in connection with the March 2010 private
  placement23.1
                                            
                                            Consent
      of J.H. Cohn LLP31.1
                                            
                                            Certification
      of Principal Executive Officer31.2
                                            
                                            Certification
      of Principal Financial Officer32.1
                                            
                                            Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 ________________________
 ++
                            Confidential
      treatment has been granted as to certain portions of this exhibit pursuant
      to Rule 24b-2 of the Securities Exchange Act of 1934, as
      amended.
  78
  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, on March 31, 2010.
  Manhattan
      Pharmaceuticals, Inc.By:
                                /s/ Michael McGuinnessMichael McGuinnessChief
      Operating and Financial
Officer
 
 In
accordance with the Securities Exchange Act, this report has been signed below
by the following persons on behalf of Manhattan Pharmaceuticals, Inc. and in the
capacities and on the dates indicated.
 
 Signature
                            
                            Title
                            
                            Date/s/ Michael G. McGuinness
                            
                            Secretary
      and Chief Operating and
                            
                            March
      31, 2010Michael
      G. McGuinness
                            
                            Financial
      Officer, and Director (principalexecutive,
      accounting and financial officer)/s/ Douglas Abel
                            
                            Director
      and Chairman
                            
                            March
      31, 2010Douglas
      Abel/s/ Neil Herskowitz
                            
                            Director
                            
                            March
      31, 2010Neil
      Herskowitz/s/ Timothy McInerney
                            
                            Director
                            
                            March
      31, 2010Timothy
      McInerney/s/ Malcolm Morville
                            
                            Director
                            
                            March
      31, 2010Malcolm
      Morville/s/ David Shimko
                            
                            Director
                            
                            March
      31, 2010David
      Shimko/s/ Richard Steinhart
                            
                            Director
                            
                            March
      31, 2010Richard
      Steinhart
  79
  Index to Financial
Statements
  PageReport
      of Independent Registered Public Accounting Firm
                                              F-2Balance
      Sheets as of December 31, 2009 and 2008
                                              F-3Statements
      of Operations for the Years Ended December 31, 2009 and 2008 and the
      cumulative period from August 6, 2001 (inception) to December 31,
      2009
                                              F-4Statements
      of Stockholders’ Equity (Deficiency) for the Years EndedDecember
      31, 2009 and 2008 and the cumulative period from August 6, 2001
      (inception) to December 31, 2009
                                              F-5Statements
      of Cash Flows for the Years Ended December 31, 2009 and 2008 and the
      cumulative period from August 6, 2001 (inception) to December 31,
      2009
                                              F-7Notes
      to Financial Statements
                                              F-8
  F-1
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  The Board
of Directors and Stockholders
 Manhattan
Pharmaceuticals, Inc.
  We have
audited the accompanying balance sheets of Manhattan Pharmaceuticals, Inc. (a
development stage company) as of December 31, 2009 and 2008, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended and for the period from August 6, 2001 (date of inception)
to December 31, 2009. 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 audits.
  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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Manhattan Pharmaceuticals, Inc. as
of December 31, 2009 and 2008, and its results of operations and cash flows for
the years then ended and for the period from August 6, 2001 (date of inception)
to December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
  As
discussed in Note 13 to the financial statements, the Company adopted new
accounting guidance for whether an equity linked financial instrument is indexed
to its own stock.
  The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred net losses and negative cash flows from
operating activities from its inception through December 31, 2009 and has an
accumulated deficit and negative working capital as of December 31, 2009. These
matters raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans regarding these matters are also described in
Note 2. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
  /s/ J.H.
Cohn LLP
 
 Roseland,
New Jersey
 March 31,
2010
  F-2
 
 MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Balance
Sheets
 
 December 31,
                                  
                                  
                                  December 31,2009
                                  
                                  
                                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  17,996
                                  
                                  
                                  $
                                  106,023Restricted
      cash
                                  
                                  
                                  -
                                  
                                  
                                  
                                  730,499Secured
      12% notes payable issue costs, current portion
                                  
                                  
                                  158,552
                                  
                                  
                                  
                                  -Other
      current assets
                                  
                                  
                                  87,177
                                  
                                  
                                  
                                  37,718Total
      current assets
                                  
                                  
                                  263,725
                                  
                                  
                                  
                                  874,240Property
      and equipment, net
                                  
                                  
                                  3,541
                                  
                                  
                                  
                                  9,072Secured
      12% notes payable issue costs
                                  
                                  
                                  42,420
                                  
                                  
                                  
                                  330,756Convertible
      12% note payable issue costs
                                  
                                  
                                  34,606
                                  
                                  
                                  
                                  -Other
      assets
                                  
                                  
                                  21,370
                                  
                                  
                                  
                                  34,895Total
      assets
                                  
                                  $
                                  365,662
                                  
                                  
                                  $
                                  1,248,963Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Secured
      10% notes payable
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  70,0008%
      note payable
                                  
                                  
                                  27,000
                                  
                                  
                                  
                                  -Secured
      12% notes payable, current portion, net
                                  
                                  
                                  1,247,062
                                  
                                  
                                  
                                  -Accounts
      payable
                                  
                                  
                                  215,400
                                  
                                  
                                  
                                  542,296Interest
      payable on secured 12% notes, current portion
                                  
                                  
                                  182,193
                                  
                                  
                                  
                                  -Accrued
      expenses
                                  
                                  
                                  75,775
                                  
                                  
                                  
                                  874,072Derivative
      liability
                                  
                                  
                                  784,777
                                  
                                  
                                  
                                  -Total
      current liabilities
                                  
                                  
                                  2,532,207
                                  
                                  
                                  
                                  1,486,368Secured
      12% notes payable, net
                                  
                                  
                                  384,473
                                  
                                  
                                  
                                  1,174,107Interest
      payable on secured 12% notes payable
                                  
                                  
                                  46,381
                                  
                                  
                                  
                                  15,237Convertible
      12% note payable, net
                                  
                                  
                                  17,808
                                  
                                  
                                  
                                  -Interest
      payable on convertible 12% note
                                  
                                  
                                  8,667
                                  
                                  
                                  
                                  -Non-interest
      bearing note payable, net
                                  
                                  
                                  211,900
                                  
                                  
                                  
                                  -Exchange
      obligation
                                  
                                  
                                  3,949,176
                                  
                                  
                                  
                                  2,949,176Total
      liabilities
                                  
                                  
                                  7,150,612
                                  
                                  
                                  
                                  5,624,888Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no shares issued
      and outstanding at December 31, 2009 and 2008
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $.001 par value. Authorized 500,000,000 shares;
      70,624,232 shares issued and outstanding at December 31, 2009 and
      2008
                                  
                                  
                                  70,624
                                  
                                  
                                  
                                  70,624Additional
      paid-in capital
                                  
                                  
                                  55,077,861
                                  
                                  
                                  
                                  54,821,379Deficit
      accumulated during the development stage
                                  
                                  
                                  (61,933,435
                                  )
                                  
                                  
                                  (59,267,928
                                  )Total
      stockholders’ deficiency
                                  
                                  
                                  (6,784,950
                                  )
                                  
                                  
                                  (4,375,925
                                  )Total
      liabilities and stockholders' deficiency
                                  
                                  $
                                  365,662
                                  
                                  
                                  $
                                  1,248,963
 
 See
accompanying notes to financial statements.
  F-3
 
 MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Statements
of Operations
 
 Years ended December 31,
                                  
                                  
                                  Cumulative
                                    period from
                                    August 6, 2001
                                    (inception) to
                                    December 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009Revenue
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Costs
      and expenses:Research
      and development
                                  
                                  
                                  40,376
                                  
                                  
                                  
                                  1,802,793
                                  
                                  
                                  
                                  28,332,211General
      and administrative
                                  
                                  
                                  1,731,182
                                  
                                  
                                  
                                  2,609,910
                                  
                                  
                                  
                                  18,193,455In-process
      research and development charge
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11,887,807Impairment
      of intangible assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,248,230Loss
      on disposition of intangible assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,213,878Total
      operating expenses
                                  
                                  
                                  1,771,558
                                  
                                  
                                  
                                  4,412,703
                                  
                                  
                                  
                                  60,875,581Operating
      loss
                                  
                                  
                                  (1,771,558
                                  )
                                  
                                  
                                  (4,412,703
                                  )
                                  
                                  
                                  (60,875,581
                                  )Other
      (income) expense:Equity
      in losses of Hedrin JV
                                  
                                  
                                  500,000
                                  
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  750,000Interest
      and other income
                                  
                                  
                                  (586,697
                                  )
                                  
                                  
                                  (458,634
                                  )
                                  
                                  
                                  (1,867,229
                                  )Change
      in fair value of derivative
                                  
                                  
                                  560,065
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  430,070Interest
      and amortization expense
                                  
                                  
                                  548,359
                                  
                                  
                                  
                                  64,790
                                  
                                  
                                  
                                  641,400Realized
      gain on sale of marketable equity securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (76,032
                                  )Total
      other (income) expense
                                  
                                  
                                  1,021,727
                                  
                                  
                                  
                                  (143,844
                                  )
                                  
                                  
                                  (121,791
                                  )Net
      loss
                                  
                                  
                                  (2,793,285
                                  )
                                  
                                  
                                  (4,268,859
                                  )
                                  
                                  
                                  (60,753,790
                                  )Preferred
      stock dividends (including imputed amounts)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,179,645
                                  )Net
      loss applicable to common shares
                                  
                                  $
                                  (2,793,285
                                  )
                                  
                                  $
                                  (4,268,859
                                  )
                                  
                                  $
                                  (61,933,435
                                  )Net
      loss per common share:Basic
      and diluted
                                  
                                  $
                                  (0.04
                                  )
                                  
                                  $
                                  (0.06
                                  )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                                  
                                  
                                  70,624,232
                                  
                                  
                                  
                                  70,624,232
 
 See
accompanying notes to financial statements.
  F-4
 
 MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Statements
of Stockholders' Equity (Deficiency)
 
 Common
                                            stock
                                            shares
                                          
                                          
                                          Common
                                            stock
                                            amount
                                          
                                          
                                          Additional
                                            paid-in
                                            capital
                                          
                                          
                                          Deficit
                                            accumulated
                                            during
                                            development
                                            stage
                                          
                                          
                                          Other
                                          
                                          
                                          Total
                                            stockholders’
                                            equity
                                            (deficiency)Stock
      issued at $0.0004 per share for subscription receivable
                                          
                                          
                                          10,167,741
                                          
                                          
                                          $
                                          10,168
                                          
                                          
                                          $
                                          (6,168
                                          )
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (4,000
                                          )
                                          
                                          $
                                          -Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (56,796
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (56,796
                                          )Balance
      at December 31, 2001
                                          
                                          
                                          10,167,741
                                          
                                          
                                          
                                          10,168
                                          
                                          
                                          
                                          (6,168
                                          )
                                          
                                          
                                          (56,796
                                          )
                                          
                                          
                                          (4,000
                                          )
                                          
                                          
                                          (56,796
                                          )Proceeds
      from subscription receivable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,000
                                          
                                          
                                          
                                          4,000Stock
      issued at $0.0004 per share for license rights
                                          
                                          
                                          2,541,935
                                          
                                          
                                          
                                          2,542
                                          
                                          
                                          
                                          (1,542
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,000Stock
      options issued for consulting services
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          60,589
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (60,589
                                          )
                                          
                                          
                                          -Amortization
      of unearned consulting services
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          22,721
                                          
                                          
                                          
                                          22,721Common
      stock issued at $0.63 per share, net of expenses
                                          
                                          
                                          3,043,332
                                          
                                          
                                          
                                          3,043
                                          
                                          
                                          
                                          1,701,275
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,704,318Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,037,320
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,037,320
                                          )Balance
      at December 31, 2002
                                          
                                          
                                          15,753,008
                                          
                                          
                                          
                                          15,753
                                          
                                          
                                          
                                          1,754,154
                                          
                                          
                                          
                                          (1,094,116
                                          )
                                          
                                          
                                          (37,868
                                          )
                                          
                                          
                                          637,923Common
      stock issued at $0.63 per share, net of expenses
                                          
                                          
                                          1,321,806
                                          
                                          
                                          
                                          1,322
                                          
                                          
                                          
                                          742,369
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          743,691Effect
      of reverse acquisition
                                          
                                          
                                          6,287,582
                                          
                                          
                                          
                                          6,287
                                          
                                          
                                          
                                          2,329,954
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2,336,241Amortization
      of unearned consulting costs
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          37,868
                                          
                                          
                                          
                                          37,868Unrealized
      loss on short-term investments
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (7,760
                                          )
                                          
                                          
                                          (7,760
                                          )Payment
      for fractional shares for stock combination
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (300
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (300
                                          )Preferred
      stock issued at $10 per share, net of expenses
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          9,045,176
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,000
                                          
                                          
                                          
                                          9,046,176Imputed
      preferred stock dividend
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          418,182
                                          
                                          
                                          
                                          (418,182
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,960,907
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (5,960,907
                                          )Balance
      at December 31, 2003
                                          
                                          
                                          23,362,396
                                          
                                          
                                          
                                          23,362
                                          
                                          
                                          
                                          14,289,535
                                          
                                          
                                          
                                          (7,473,205
                                          )
                                          
                                          
                                          (6,760
                                          )
                                          
                                          
                                          6,832,932-Exercise
      of stock options
                                          
                                          
                                          27,600
                                          
                                          
                                          
                                          27
                                          
                                          
                                          
                                          30,073
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          30,100Common
      stock issued at $1.10, net of expenses
                                          
                                          
                                          3,368,952
                                          
                                          
                                          
                                          3,369
                                          
                                          
                                          
                                          3,358,349
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,361,718Preferred
      stock dividend accrued
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (585,799
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (585,799
                                          )Preferred
      stock dividends paid by issuance of shares
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          281,073
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          25
                                          
                                          
                                          
                                          281,098Conversion
      of preferred stock to common stock at $1.10 per share
                                          
                                          
                                          1,550,239
                                          
                                          
                                          
                                          1,551
                                          
                                          
                                          
                                          (1,380
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (171
                                          )
                                          
                                          
                                          -Warrants
      issued for consulting services
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          125,558
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (120,968
                                          )
                                          
                                          
                                          4,590Amortization
      of unearned consulting costs
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          100,800
                                          
                                          
                                          
                                          100,800Unrealized
      gain on short-term investments and reversal of unrealized loss on
      short-term investments
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20,997
                                          
                                          
                                          
                                          20,997Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,896,031
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (5,896,031
                                          )Balance
      at December 31, 2004
                                          
                                          
                                          28,309,187
                                          
                                          
                                          
                                          28,309
                                          
                                          
                                          
                                          18,083,208
                                          
                                          
                                          
                                          (13,955,035
                                          )
                                          
                                          
                                          (6,077
                                          )
                                          
                                          
                                          4,150,405Common
      stock issued at $1.11 and $1.15, net of expenses
                                          
                                          
                                          11,917,680
                                          
                                          
                                          $
                                          11,918
                                          
                                          
                                          $
                                          12,238,291
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          12,250,209Common
      stock issued to vendor at $1.11 per share in satisfaction of accounts
      payable
                                          
                                          
                                          675,675
                                          
                                          
                                          
                                          676
                                          
                                          
                                          
                                          749,324
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          750,000Exercise
      of stock options
                                          
                                          
                                          32,400
                                          
                                          
                                          
                                          33
                                          
                                          
                                          
                                          32,367
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          32,400Exercise
      of warrants
                                          
                                          
                                          279,845
                                          
                                          
                                          
                                          279
                                          
                                          
                                          
                                          68,212
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          68,491Preferred
      stock dividend  accrued
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (175,663
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (175,663
                                          )Preferred
      stock dividends paid by issuance of shares
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          477,736
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          42
                                          
                                          
                                          
                                          477,778Conversion
      of preferred stock to common stock at $1.10 per share
                                          
                                          
                                          8,146,858
                                          
                                          
                                          
                                          8,147
                                          
                                          
                                          
                                          (7,251
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (896
                                          )
                                          
                                          
                                          -Share-based
      compensation
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          66,971
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20,168
                                          
                                          
                                          
                                          87,139Reversal
      of unrealized gain on short-term investments
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (12,250
                                          )
                                          
                                          
                                          (12,250
                                          )Stock
      issued in connection with acquisition of Tarpan Therapeutics,
      Inc.
                                          
                                          
                                          10,731,052
                                          
                                          
                                          
                                          10,731
                                          
                                          
                                          
                                          11,042,253
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          11,052,984Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (19,140,997
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (19,140,997
                                          )Balance
      at December 31, 2005
                                          
                                          
                                          60,092,697
                                          
                                          
                                          
                                          60,093
                                          
                                          
                                          
                                          42,751,111
                                          
                                          
                                          
                                          (33,271,695
                                          )
                                          
                                          
                                          987
                                          
                                          
                                          
                                          9,540,496Cashless
      exercise of warrants
                                          
                                          
                                          27,341
                                          
                                          
                                          
                                          27
                                          
                                          
                                          
                                          (27
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Share-based
      compensation
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,675,499
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,675,499Unrealized
      loss on short-term investments
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (987
                                          )
                                          
                                          
                                          (987
                                          )Costs
      associated with private placement
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (15,257
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (15,257
                                          )Net
      loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (9,695,123
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (9,695,123
                                          )Balance
      at December 31, 2006
                                          
                                          
                                          60,120,038
                                          
                                          
                                          
                                          60,120
                                          
                                          
                                          
                                          44,411,326
                                          
                                          
                                          
                                          (42,966,818
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,504,628
  F-5
 
 MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Statements
of Stockholders' Equity (Deficiency)
 
 Commonstock
                                          shares
                                        
                                        
                                        Commonstock
                                          amount
                                        
                                        
                                        Additionalpaid-incapital
                                        
                                        
                                        Deficit
                                          accumulated
                                          during
                                          development
                                          stage
                                        
                                        
                                        Other
                                        
                                        
                                        Total
                                          stockholders’
                                          equity
                                          (deficiency)Common stock issued at $0.84 and $0.90 per
      shares, net of expenses
                                        
                                        
                                        10,185,502
                                        
                                        
                                        $
                                        10,186
                                        
                                        
                                        $
                                        7,841,999
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        7,852,185Common
      stock issued to directors at $0.72 per share in satisfaction of accounts
      payable
                                        
                                        
                                        27,776
                                        
                                        
                                        
                                        28
                                        
                                        
                                        
                                        19,972
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,000Common
      stock issued to in connection with in-licensing agreement at $0.90 per
      share
                                        
                                        
                                        125,000
                                        
                                        
                                        
                                        125
                                        
                                        
                                        
                                        112,375
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        112,500Common
      stock issued to in connection with in-licensing agreement at $0.80 per
      share
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        150
                                        
                                        
                                        
                                        119,850
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        120,000Exercise
      of warrants
                                        
                                        
                                        10,327
                                        
                                        
                                        
                                        15
                                        
                                        
                                        
                                        7,219
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,234Cashless
      exercise of warrants
                                        
                                        
                                        5,589
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6
                                        )Share-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,440,956
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,440,956Warrants
      issued for consulting
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        83,670
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        83,670Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,032,252
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (12,032,252
                                        )Balance
      at December 31, 2007
                                        
                                        
                                        70,624,232
                                        
                                        
                                        
                                        70,624
                                        
                                        
                                        
                                        54,037,361
                                        
                                        
                                        
                                        (54,999,070
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (891,085
                                        )Sale
      of warrant
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        150,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        150,000Share-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        463,890
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        463,890Warrants
      issued with secured 12% notes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        170,128
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        170,128Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (4,268,858
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (4,268,858
                                        )Balance
      at December 31, 2008
                                        
                                        
                                        70,624,232
                                        
                                        
                                        
                                        70,624
                                        
                                        
                                        
                                        54,821,379
                                        
                                        
                                        
                                        (59,267,928
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (4,375,925
                                        )Cumulative
      effect of a change in accounting principle
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (150,000
                                        )
                                        
                                        
                                        127,778
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,222
                                        )Balance
      at January 1, 2009, as adjusted
                                        
                                        
                                        70,624,232
                                        
                                        
                                        
                                        70,624
                                        
                                        
                                        
                                        54,671,379
                                        
                                        
                                        
                                        (59,140,150
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (4,398,147
                                        )Share-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        353,438
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        353,438Warrants
      issued with secured 12% notes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        46,125
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        46,125Warrant
      issued to placement agent - secured 12% notes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6,919
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6,919Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,793,285
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,793,285
                                        )Balance
      at December 31, 2009
                                        
                                        
                                        70,624,232
                                        
                                        
                                        $
                                        70,624
                                        
                                        
                                        $
                                        55,077,861
                                        
                                        
                                        $
                                        (61,933,435
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (6,784,950
                                        )
 
 See
accompanying notes to financial statements.
  F-6
  MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 Statements
of Cash Flows
 
 Years Ended,
                                
                                
                                Cumulative period from
                                  August 6, 2001
                                  (inception) to
                                  December 31,2009
                                
                                
                                2008
                                
                                
                                2009Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (2,793,285
                                )
                                
                                $
                                (4,268,858
                                )
                                
                                $
                                (60,753,790
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                                
                                
                                500,000
                                
                                
                                
                                250,000
                                
                                
                                
                                750,000Share-based
      compensation
                                
                                
                                353,438
                                
                                
                                
                                463,890
                                
                                
                                
                                4,182,311Interest
      and amortization of OID and issue costs on Secured 12%
    Notes
                                
                                
                                543,182
                                
                                
                                
                                38,574
                                
                                
                                
                                583,973Change
      in fair value of derivative
                                
                                
                                560,065
                                
                                
                                
                                -
                                
                                
                                
                                430,070Shares
      issued in connection with in-licensing agreement
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                232,500Warrants
      issued to consultant
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                83,670Amortization
      of intangible assets
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                145,162Gain
      on sale of marketable equity securities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (76,032
                                )Depreciation
                                
                                
                                5,531
                                
                                
                                
                                26,106
                                
                                
                                
                                227,462Non
      cash portion of in-process research and development charge
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                11,721,623Loss
      on impairment and disposition of intangible assets
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2,462,108Other
                                
                                
                                -
                                
                                
                                
                                18,327
                                
                                
                                
                                23,917Changes
      in operating assets and liabilities, net of acquisitions:Decrease
      (increase) in restricted cash
                                
                                
                                730,499
                                
                                
                                
                                (730,499
                                )
                                
                                
                                -Decrease
      in prepaid expenses and other current assets
                                
                                
                                (49,460
                                )
                                
                                
                                178,134
                                
                                
                                
                                (28,934
                                )Decrease
      (increase) in other assets
                                
                                
                                13,525
                                
                                
                                
                                35,611
                                
                                
                                
                                (36,370
                                )Increase
      (decrease) in accounts payable
                                
                                
                                (326,896
                                )
                                
                                
                                (737,189
                                )
                                
                                
                                635,613Increase
      (decrease) in accrued expenses
                                
                                
                                (586,398
                                )
                                
                                
                                281,895
                                
                                
                                
                                (252,647
                                )Net
      cash used in operating activities
                                
                                
                                (1,049,799
                                )
                                
                                
                                (4,444,009
                                )
                                
                                
                                (39,669,364
                                )Cash
      flows from investing activities:Purchase
      of property and equipment
                                
                                
                                -
                                
                                
                                
                                (8,973
                                )
                                
                                
                                (239,608
                                )Cash
      paid in connection with acquisitions
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (26,031
                                )Net
      cash provided from the purchase and sale of short-term
      investments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                435,938Proceeds
      from sale of license
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                200,001Net
      cash (used in) provided by investing activities
                                
                                
                                -
                                
                                
                                
                                (8,973
                                )
                                
                                
                                370,300Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                                
                                
                                500,000
                                
                                
                                
                                2,699,176
                                
                                
                                
                                3,199,176Sale
      of warrant
                                
                                
                                -
                                
                                
                                
                                150,000
                                
                                
                                
                                150,000Proceeds
      from sale of (repayment of)  Secured 10% Notes
                                
                                
                                (70,000
                                )
                                
                                
                                70,000
                                
                                
                                
                                -Proceeds
      from sale of Secured 12% Notes
                                
                                
                                340,270
                                
                                
                                
                                990,143
                                
                                
                                
                                1,345,413Proceeds
      from sale of 8% Note
                                
                                
                                27,000
                                
                                
                                
                                -
                                
                                
                                
                                27,000Proceeds
      from sale of Convertible 12% Notes
                                
                                
                                164,502
                                
                                
                                
                                -
                                
                                
                                
                                164,502Repayments
      of notes payable to stockholders
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (884,902
                                )Proceeds
      (costs) related to sale of common stock, net
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                25,896,262Proceeds
      from sale of preferred stock, net
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                9,046,176Proceeds
      from exercise of warrants and stock options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                138,219Other,
      net
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                235,214Net
      cash provided by financing activities
                                
                                
                                961,772
                                
                                
                                
                                3,909,319
                                
                                
                                
                                39,317,060Net
      (decrease) increase in cash and cash equivalents
                                
                                
                                (88,027
                                )
                                
                                
                                (543,663
                                )
                                
                                
                                17,996Cash
      and cash equivalents at beginning of period
                                
                                
                                106,023
                                
                                
                                
                                649,686
                                
                                
                                
                                -Cash
      and cash equivalents at end of period
                                
                                $
                                17,996
                                
                                
                                $
                                106,023
                                
                                
                                $
                                17,996Supplemental
      disclosure of cash flow information:Interest
      paid
                                
                                $
                                5,397
                                
                                
                                $
                                475
                                
                                
                                $
                                31,430Supplemental
      disclosure of noncash investing and financing activities:Investment
      in Hedrin JV
                                
                                $
                                500,000
                                
                                
                                $
                                250,000
                                
                                
                                $
                                250,000Warrants
      issued with Secured 12% Notes
                                
                                
                                53,044
                                
                                
                                
                                170,128
                                
                                
                                
                                223,172Warrants
      issued with 12% Notes
                                
                                
                                27,390
                                
                                
                                
                                -
                                
                                
                                
                                27,390Note
      issued to settle accrued expenses
                                
                                
                                211,900
                                
                                
                                
                                -
                                
                                
                                
                                211,900Common
      stock issued in satisfaction of accounts payable
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                770,000Imputed
      and accrued preferred stock dividend
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,179,645Conversion
      of preferred stock to common stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,067Preferred
      stock dividends paid by issuance of shares
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                759,134Issuance
      of common stock for acquisitions
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                13,389,226Issuance
      of common stock in connection with in-licensing agreement
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                232,500Marketable
      equity securities received in connection with sale of
    license
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                359,907Warrants
      issued to consultant
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                83,670Net
      liabilities assumed over assets acquired in business
      combination
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (675,416
                                )Cashless
      exercise of warrants
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                33
 
 See
accompanying notes to financial statements.
  F-7
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
 
 (1)
                            Merger
      and Nature of Operations
 
 2003
Reverse Merger
  On
February 21, 2003, the Company (formerly known as “Atlantic Technology Ventures,
Inc.”) completed a reverse acquisition of privately held Manhattan Research
Development, Inc. (“Manhattan Research”) (formerly Manhattan Pharmaceuticals,
Inc.), a Delaware corporation.  At the effective time of the merger,
the outstanding shares of common stock of Manhattan Research automatically
converted into  shares of the Company’s common stock representing 80
percent of the Company’s outstanding voting stock after giving effect to the
merger. Since the stockholders of Manhattan Research received the majority of
the voting shares of the Company, the merger was accounted for as a reverse
acquisition whereby Manhattan Research was the accounting acquirer (legal
acquiree) and the Company was the accounting acquiree (legal acquirer) under the
purchase method of accounting.  In connection with the merger, the
Company changed its name from “Atlantic Technology Ventures, Inc.” to “Manhattan
Pharmaceuticals, Inc.”  The results of the combined operations have
been included in the Company’s financial statements since February
2003.
  As
described above, the Company resulted from the February 21, 2003 reverse merger
between Atlantic Technology Ventures, Inc. (“Atlantic”), which was incorporated
on May 18, 1993, and privately-held Manhattan Research Development, Inc.,
incorporated on August 6, 2001.  The Company was incorporated in the
State of Delaware.  In connection with the merger, the former
stockholders of Manhattan Research received a number of shares of Atlantic's
common stock so that following the merger they collectively owned 80 percent of
the outstanding shares.  Upon completion of the merger, Atlantic
changed its name to Manhattan Pharmaceuticals, Inc. and thereafter adopted the
business of Manhattan Research.
  The
Company is a biopharmaceutical company focused on developing and commercializing
innovative pharmaceutical therapies for underserved patient
populations.  The Company acquires rights to these technologies by
licensing or otherwise acquiring an ownership interest, funding their research
and development and eventually either bringing the technologies to market or
out-licensing.  We currently have two product candidates in
development:  HedrinTM, a novel, non-insecticide treatment of
pediculitis (head lice) which is being developed by the Hedrin JV (see note 6)
and a topical product for the treatment of psoriasis.  During 2009,
the Company discontinued development of PTH (1-34), Altoderm and
Altolyn.
  Acquisition
of Tarpan Therapeutics, Inc.
  In April
2005, the Company merged with Tarpan Therapeutics, Inc., a Delaware corporation
(“Tarpan”), and Tarpan Acquisition Corp., a Delaware corporation. The
acquisition of Tarpan has been accounted for by the Company under the purchase
method of accounting.  Under the purchase method, assets acquired and
liabilities assumed by the Company are recorded at their estimated fair values
and the results of operations of the acquired company are consolidated with
those of the Company from the date of acquisition.  The excess
purchase price paid by the Company to acquire the net assets of Tarpan was
allocated to acquired in-process research and development totaling
$11,887,807.  As required by the purchase method of accounting, the
Company recorded a charge in its consolidated statement of operations for the
year ended December 31, 2005 for the in-process research and
development.
  F-8
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  (2)          Liquidity
and Basis of Presentation
  Liquidity
  The
Company incurred a net loss of $2,793,285 and negative cash flows from operating
activities of $1,049,799 for the year ended December 31, 2009 and a net loss of
$4,268,858 and negative cash flows from operating activities of $4,444,009 for
the year ended December 31, 2008.  The net loss applicable to common
shares from date of inception, August 6, 2001, to December 31, 2009 amounts to
$61,933,435.
  The
Company received approximately $1.8 million in February 2008 and approximately
$0.9 million in June 2008 from a joint venture agreement.  This joint
venture agreement is more fully described in Note 8.  The Company also
received $70,000 in Secured 10% Notes in September 2008 which was repaid in full
in February 2009. The Company received $1.0 million in November and December
2008 from the sale of Secured 12% Notes.
  The
Company received approximately $0.3 million in February 2009 from the final
closing of the sale of Secured 12% Notes, approximately $0.5 million in February
2009 from a joint venture agreement, approximately $0.2 million from the sale of
a Convertible 12% Note and approximately $27,000 from Ariston Pharmaceuticals,
Inc. in exchange for a note in December 2009.  In addition, the
Company issued a $0.2 million non-interest bearing note in connection with the
Swiss Pharma Settlement. These notes are more fully described in Notes 9, 10, 11
and 12.
  Management
believes that the Company will continue to incur net losses through at least
December 31, 2010 and for the foreseeable future thereafter.  Based on
the resources of the Company available at December 31, 2009 and the net proceeds
of $2.2 received in March 2010 from the sale of common stock and warrants,
management believes that the Company has sufficient capital to fund its
operations through 2010.  Management believes that the Company will
need additional equity or debt financing or will need to generate positive cash
flow from a joint venture agreement (see Note 6) or generate revenues through
licensing of its products or entering into strategic alliances to be able to
sustain its operations into 2010.  Furthermore, we will need
additional financing thereafter to complete development and commercialization of
our products.  There can be no assurances that we can successfully
complete development and commercialization of our products.
  The
Company’s continued operations will depend on its ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances and its ability to realize the
full potential of its technology in development.  Additional funds may
not become available on acceptable terms, and there can be no assurance that any
additional funding that the Company does obtain will be sufficient to meet the
Company’s needs in the long-term.
  These
matters raise substantial doubt about the Company’s ability to continue as a
going concern.  The accompanying financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
  F-9
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  (3)          Summary
of Significant Accounting Policies
  Basis
of Presentation
  The
Company has not generated any revenue from its operations and, accordingly, the
financial statements have been prepared in accordance with the provisions of
accounting and reporting for Development Stage Enterprises.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
  Research
and Development
  All
research and development costs are expensed as incurred and include costs of
consultants who conduct research and development on behalf of the Company and
its subsidiaries.  Costs related to the acquisition of technology
rights and patents for which development work is still in process are expensed
as incurred and considered a component of research and development
costs.
  The
Company often contracts with third parties to facilitate, coordinate and perform
agreed-upon research and development of a new drug.  To ensure that
research and development costs are expensed as incurred, the Company records
monthly accruals for clinical trials and preclinical testing costs based on the
work performed under the contracts.
  These
contracts typically call for the payment of fees for services at the initiation
of the contract and/or upon the achievement of certain
milestones.  This method of payment often does not match the related
expense recognition resulting in either a prepayment, when the amounts paid are
greater than the related research and development costs expensed, or an accrued
liability, when the amounts paid are less than the related research and
development costs expensed.
  Income
Taxes
  Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between financial statement carrying
amounts of existing assets and liabilities, and their respective tax bases and
operating loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  A valuation allowance is provided when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
  F-10
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
 
 Computation
of Net Loss per Common Share
  Basic net
loss per common share is calculated by dividing net loss applicable to common
shares by the weighted-average number of common shares outstanding for the
period.  Diluted net loss per common share is the same as basic net
loss per common share, since potentially dilutive securities from stock options,
stock warrants and convertible preferred stock would have an antidilutive effect
because the Company incurred a net loss during each period
presented.  The amounts of potentially dilutive securities excluded
from the calculation were 99,159,628 and 80,068,144 shares at December 31, 2009
and 2008, respectively.  These amounts do not include the 55,555,555
shares issuable upon the exercise of the put or call rights issued in connection
with the Hedrin JV (see Note 6) which were subject to anti-dilution rights upon
the issuance of warrants with the Secured 12% Notes (see Note 8).
 
 Share-Based
Compensation
  The
Company has stockholder-approved stock incentive plans for employees, directors,
officers and consultants.  Prior to January 1, 2006, the Company
accounted for the employee, director and officer plans using the intrinsic value
method. Effective January 1, 2006, the Company adopted the share-based payment
method for employee options using the modified prospective transition method.
This new method of accounting for stock options eliminated the option to use the
intrinsic value method and required the Company to expense the fair value of all
employee options over the vesting period.  Under the modified
prospective transition method, the Company recognized compensation cost for the
years ended December 31, 2009 and 2008 which includes a) period compensation
cost related to share-based payments granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions; and b) period compensation cost related to share-based
payments granted on or after January 1, 2006, based on the grant date fair value
estimated in accordance with the new accounting methodology. In accordance with
the modified prospective method, the Company has not restated prior period
results.
  The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.  For the years ended
December 31, 2009 and 2008, the Company recognized share-based employee
compensation cost of $353,438 and $463,890, respectively.  The Company
did not capitalize any share-based compensation cost.
  Options
granted to consultants and other non-employees are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.  As a result of adjusting consultant and other non-employee
options to fair value as of December 31, 2009 and 2008, respectively, net of
amortization, the Company recognized an increase to general and administrative
and research and development expenses of $1,725 for the year ended December 31,
2009 and an increase to general and administrative and research and development
expenses of $1,579 for the year ended December 31, 2008.  The Company
has allocated share-based compensation costs to general and administrative and
research and development expenses as follows:
  F-11
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  2009
                                  
                                  
                                  2008General
      and administrative expense:Share-based
      employee compensation cost
                                  
                                  $
                                  351,713
                                  
                                  
                                  $
                                  341,706Share-based
      consultant and non-employee cost
                                  
                                  
                                  172
                                  
                                  
                                  
                                  158351,885
                                  
                                  
                                  
                                  341,864Research
      and development expenseShare-based
      employee compensation cost
                                  
                                  
                                  -
                                  
                                  
                                  
                                  120,605Share-based
      consultant and non-employee cost
                                  
                                  
                                  1,553
                                  
                                  
                                  
                                  1,4211,553
                                  
                                  
                                  
                                  122,026Total
      share-based compensation
                                  
                                  $
                                  353,438
                                  
                                  
                                  $
                                  463,890
  To
compute compensation expense in 2009 and 2008 the Company estimated the fair
value of each option award on the date of grant using the Black-Scholes model.
The Company based the expected volatility assumption on a volatility index of
peer companies as the Company did not have a sufficient number of years of
historical volatility of its common stock.  The expected term of
options granted represents the period of time that options are expected to be
outstanding.  The Company estimated the expected term of stock options by
the simplified method.  The expected forfeiture rates are based on the
historical employee forfeiture experiences. To determine the risk-free
interest rate, the Company utilized the U.S. Treasury yield curve in effect at
the time of grant with a term consistent with the expected term of the Company’s
awards.  The Company has not declared a dividend on its common stock
since its inception and has no intentions of declaring a dividend in the
foreseeable future and therefore used a dividend yield of zero.
  The
following table shows the weighted average assumptions the Company used to
develop the fair value estimates for the determination of the compensation
charges in 2009 and 2008:
  2009
                                  
                                  
                                  2008Expected
      volatility
                                  
                                  
                                  94%
                                  
                                  
                                  
                                  92.0%Dividend
      yield
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Expected
      term (in years)
                                  
                                  
                                  6.5
                                  
                                  
                                  
                                  5 -
      10Risk-free
      interest rate
                                  
                                  
                                  2.63
                                  
                                  
                                  
                                  2.81
  The
Company has shareholder-approved incentive stock option plans for employees
under which it has granted non-qualified and incentive stock
options.  In December 2003, the Company established the 2003 Stock
Option Plan (the “2003 Plan”), which provided for the granting of up to
5,400,000 options to officers, directors, employees and consultants for the
purchase of stock.  In August 2005, the Company increased the number
of shares of common stock reserved for issuance under the 2003 Plan by 2,000,000
shares.  In May 2007, the Company increased the number of shares of
common stock reserved for issuance under the 2003 Plan by 3,000,000
shares.  At December 31, 2009, 10,400,000 shares were authorized for
issuance.  The options have a maximum term of 10 years and vest over a
period determined by the Company’s Board of Directors (generally 3 years) and
are issued at an exercise price equal to or greater than the fair market value
of the shares at the date of grant.  The 2003 Plan expires on December
10, 2013 or when all options have been granted, whichever is sooner. At December
31, 2009, options to purchase 6,322,696 shares were outstanding, 27,776 shares
of common stock were issued and there were 4,049,528 shares reserved for future
grants under the 2003 Plan.
  F-12
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  In July
1995, the Company established the 1995 Stock Option Plan (the “1995 Plan”),
which provided for the granting of options to purchase up to 130,000 shares of
the Company’s common stock to officers, directors, employees and
consultants.  The 1995 Plan was amended several times to increase the
number of shares reserved for stock option grants.  In June 2005 the
1995 Plan expired and no further options can be granted.   At
December 31, 2009, options to purchase 1,137,240 shares were outstanding and no
shares were reserved for future stock option grants under the 1995
Plan.
  Financial
Instruments
  At
December 31, 2009 and 2008, the fair values of cash and cash equivalents,
accounts payable and the secured 12% notes payable approximate their carrying
values.  At December 31, 2009 the fair value of the convertible 12%
note does not approximate its carrying value as a portion of the fair value is
reflected as a component of derivative liability.
  Cash
and Cash Equivalents
  Cash
equivalents consist of cash or short term investments with original maturities
at the time of purchase of three months or less.
  Property
and Equipment
  Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in operations
for the period. Amortization of leasehold improvements is calculated using the
straight-line method over the remaining term of the lease or the life of the
asset, whichever is shorter. The cost of repairs and maintenance is charged to
operations as incurred; significant renewals and improvements are
capitalized.
  Equity
in Joint Venture
 
 The
Company accounts for its investment in joint venture (See Note 6) using the
equity method of accounting. Under the equity method, the Company records its
pro-rata share of joint venture income or losses and adjusts the basis of its
investment accordingly.
 
 New
Accounting Pronouncements
  In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
FASB Accounting Standards Codification (“Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Codification will supersede all existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. The FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, the FASB will issue Accounting Standards Updates, which will serve only
to: (a) update the Codification; (b) provide background information
about the guidance; and (c) provide the bases for conclusions on the change(s)
in the Codification.
  F-13
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  In
December 2007, the FASB issued a statement that requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. This statement establishes a single method of
accounting for changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation and expands disclosures in the consolidated
financial statements. This statement was effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The
adoption of this statement did not have any impact on the Company’s financial
statements.
  In
February 2008, the FASB issued two Staff  Positions as well as other
accounting pronouncements that address fair value measurements on lease
classification. The adoption of these pronouncements did not have a material
impact on the Company’s financial statements.
  In March
2008, the FASB issued a pronouncement which requires expanded disclosures about
an entity's derivative instruments and hedging activities. This pronouncement
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments. This pronouncement was effective
for the Company as of January 1, 2009, and its adoption did not have any impact
on the Company’s financial statements.
  In June
2008, the FASB ratified a pronouncement which provides that an entity should use
a two step approach to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. It also clarifies
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. This statement
was effective for fiscal years beginning after December 15, 2008. The adoption
of this statement had a significant impact on the Company’s financial statements
(see Note 13 to our financial statements for the period ended December 31,
2009).
  In
April 2009, the FASB issued a pronouncement which provides guidance on
determining when there has been a significant decrease in the volume and level
of activity for an asset or liability, when a transaction is not orderly, and
how that information must be incorporated into a fair value measurement. This
pronouncement also requires expanded disclosures on valuation techniques and
inputs and specifies the level of aggregation required for all quantitative
disclosures.  The provisions of this pronouncement were effective for
the Company’s quarter ending June 30, 2009. The adoption of this pronouncement
did not have any impact on the Company’s financial statements.
  In
April 2009, the FASB issued several pronouncements which makes the guidance
on other-than-temporary impairments of debt securities more operational and
requires additional disclosures when a company records an other-than-temporary
impairment. These pronouncements were effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted these principles in
the second quarter of 2009, which did not have any impact on the Company’s
financial statements.
  F-14
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  In
April 2009, the FASB issued several statements which require companies to
disclose in interim financial statements the fair value of financial
instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. In addition, the companies are
required to disclose the method or methods and significant assumptions used to
estimate the fair value of financial instruments and a discussion of changes, if
any, in the method or methods and significant assumptions during the period.
This statement shall be applied prospectively and was effective for interim and
annual periods ending after June 15, 2009. To the extent relevant, the
Company adopted the disclosure requirements of this pronouncement for the
quarter ended June 30, 2009.  The adoption of these statements
did not have a material impact on the Company’s financial
statements
  In
May 2009, the FASB issued a statement which sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This
statement was effective for interim or annual periods ending after June 15,
2009, and the Company adopted the provisions of this statement for the quarter
ended June 30, 2009. The adoption of this statement did not have a material
impact on the Company’s financial statements.  The Company has
evaluated all events or transactions that occurred after December 31, 2009 up
through the date we issued these financial statements, and we have disclosed all
events or transactions that have a material impact on the Company’s financial
statements (see Note 18).
  In
August 2009, the FASB issued a new pronouncement to provide clarification
on measuring liabilities at fair value when a quoted price in an active market
is not available. In particular, this pronouncement specifies that a valuation
technique should be applied that uses either the quote of the liability when
traded as an asset, the quoted prices for similar liabilities when traded as
assets, or another valuation technique consistent with existing fair value
measurement guidance. This statement is prospectively effective for financial
statements issued for interim or annual periods ending after October 1,
2009. The adoption of this statement at December 31, 2009 did not impact the
Company’s results of operations or financial condition.
  (4)          Property
and Equipment
  Property
and equipment consists of the following at December 31:
  2009
                                      
                                      
                                      2008Property
      and equipment
                                      
                                      $
                                      35,905
                                      
                                      
                                      $
                                      35,905Less
      accumulated depreciation
                                      
                                      
                                      (32,364
                                      )
                                      
                                      
                                      (26,833
                                      )Net
      property and equipment
                                      
                                      $
                                      3,541
                                      
                                      
                                      $
                                      9,072
  F-15
 MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  (5)          Stockholders’
Equity
  As
described in Note 1 the Company completed a reverse acquisition of privately
held Manhattan Research Development, Inc. on February 21, 2003.  In
July 2003, the Board of Directors adopted a resolution authorizing an amendment
to the certificate of incorporation providing for a 1-for-5 combination of the
Company’s common stock.  The resolution approving the 1-for-5
combination was thereafter consented to in writing by holders of a majority of
the Company’s outstanding common stock and became effective in September
2003.  Accordingly, all share and per share information in these
financial statements has been restated to retroactively reflect the 1-for-5
combination and the effects of the Reverse Merger.
  2001
 
 During
2001, the Company issued 10,167,741 shares of its common stock to investors for
subscriptions receivable of $4,000 or $0.0004 per share. During 2002, the
Company received the $4,000 subscription receivable.
  2002
 
 During
2002, the Company issued 2,541,935 shares of its common stock to Oleoyl-estrone
Developments, S.L. (“OED”) in conjunction with a license agreement (the OED
License Agreement”). We valued these shares at their then estimated fair value
of $1,000.
  During
2002, the Company issued options to purchase 1,292,294 shares of its common
stock in conjunction with several consulting agreements. The fair value of these
options was $60,589.  The Company expensed $22,721 in 2002 and $37,868
in 2003.
  During
2002 and 2003, the Company completed two private placements.  During
2002, the Company issued 3,043,332 shares of its common stock at $0.63 per share
and warrants to purchase 304,333 of its common stock in a private placement.
After deducting commissions and other expenses relating to the private
placement, the Company received net proceeds of $1,704,318.
  2003
 
 During
2003, the Company issued an additional 1,321,806 shares of its common stock at
$0.63 per share and warrants to purchase 132,181 shares of its common stock.
After deducting commissions and other expenses relating to the private
placement, the Company received net proceeds of $743,691. In connection with
these private placements, the Company issued to the placement agent warrants to
purchase 1,658,753 shares of its common stock.
  As
described in Note 1, during 2003, the Company completed a reverse
acquisition.  The Company issued 6,287,582 shares of its common stock
with a value of $2,336,241 in the reverse acquisition.
  In
November 2003, the Company issued 1,000,000 shares of its newly-designated
Series A Convertible Preferred Stock (the “Convertible Preferred”) at a price of
$10 per share in a private placement. After deducting commissions and other
expenses relating to the private placement, the Company received net proceeds of
$9,046,176.  Each share of Convertible Preferred was convertible at
the holder’s election into shares of the Company’s common stock at a conversion
price of $1.10 per share.  The conversion price of the Convertible
Preferred was less than the market value of the Company’s common stock on the
date of issuance.  Accordingly for the year ended December 31, 2003
the Company recorded a separate charge to deficit accumulated during development
stage for the beneficial conversion feature associated with the issuance of
Convertible Preferred of $418,182.  The Convertible Preferred had a
payment-in-kind annual dividend of five percent.  Maxim Group, LLC of
New York, together with Paramount Capital, Inc., a related party, acted as the
placement agents in connection with the private placement.
  F-16
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  2004
 
 During
2004, the Company issued 3,368,952 shares of its common stock at a price of
$1.10 per share in a private placement. After deducting commissions and other
expenses relating to the private placement, the Company received net proceeds of
$3,361,718. In connection with the common stock private placement and the
Convertible Preferred private placement, the Company issued to the placement
agents a warrant to purchase 1,235,589 shares of its common stock.
  During
2004, the Company recorded a dividend on the Convertible Preferred of
$585,799.  24,901 shares of Convertible Preferred were issued in
payment of $282,388 of this in-kind dividend.  Also during 2004,
170,528 shares of Convertible Preferred were converted into 1,550,239 shares of
the Company’s common stock at $1.10 per share.
  During
2004, the Company issued 27,600 shares of common stock upon the exercise of
stock options.
  During
2004, the Company issued warrants to purchase 110,000 shares of its common stock
in conjunction with three consulting agreements. The fair value of these
warrants was $120,968.  The Company expensed $100,800 in 2004 and
$20,168 in 2005.
  2005
 
 In August
2005, the Company issued 11,917,680 shares of its common stock and warrants to
purchase 2,383,508 shares of its common stock in a private placement at $1.11
and $1.15 per share.  After deducting commissions and other expenses
relating to the private placement the Company received net proceeds of
$12,250,209.  Paramount BioCapital, Inc. (“Paramount”), an affiliate
of a significant stockholder of the Company, acted as placement agent and was
paid cash commissions and expenses of $967,968 of which $121,625 was paid to
certain selected dealers engaged by Paramount in the private
placement.  The Company also issued warrants to purchase 595,449
shares of common stock to Paramount and certain select dealers, of which
Paramount received warrants to purchase 517,184 common
shares.  Timothy McInerney and Dr. Michael Weiser, each a director of
the Company, were employees of Paramount BioCapital, Inc. at the time of the
transaction.
  During
2005, the Company recorded a dividend on the Convertible Preferred of
$175,663.  41,781 shares of Convertible Preferred were issued in
payment of this $175,663 in-kind dividend and the unpaid portion of the 2004
in-kind dividend, $303,411.  Also during 2005, the remaining 896,154
shares of Convertible preferred were converted into 8,146,858 shares of the
Company’s common stock.
  During
2005, the Company issued 675,675 shares of its common stock at $1.11 per share
and warrants to purchase 135,135 shares of its common stock to Cato BioVentures,
an affiliate of Cato Research, Inc., in exchange for satisfaction of $750,000 of
accounts payable owed by the Company to Cato Research, Inc.  Since the
value of the shares and warrants issued was approximately $750,000, there is no
impact on the statement of operations for this transaction.
  F-17
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
  During
2005, the Company issued 312,245 shares of common stock upon the exercise of
stock options and warrants.
  As
described in Note 1, in April 2005, the Company completed the Merger with
Tarpan. In accordance with the Agreement, the stockholders of Tarpan received
10,731,052 shares of the Company’s common stock with a value of
$11,052,984.
  2006
 
 During
2006, the Company issued 27,341 shares of common stock upon the exercise of
warrants.
  2007
 
 On March
30, 2007, the Company entered into a series of subscription agreements with
various institutional and other accredited investors for the issuance and sale
in a private placement of an aggregate of 10,185,502 shares of its common stock
for total net proceeds of approximately $7.85 million, after deducting
commissions and other costs of the transaction. Of the total amount of shares
issued, 10,129,947 were sold at a per share price of $0.84, and an additional
55,555 shares were sold to an entity affiliated with a director of the Company,
at a per share price of $0.90, the closing sale price of the common stock on
March 29, 2007. Pursuant to the subscription agreements, the Company also issued
to the investors 5-year warrants to purchase an aggregate of 3,564,897 shares of
common stock at an exercise price of $1.00 per share. The warrants are
exercisable during the period commencing September 30, 2007 and ending March 30,
2012.  Gross and net proceeds from the private placement were
$8,559,155 and $7,852,185, respectively.
  Pursuant
to these subscription agreements the Company filed a registration statement on
Form S-3 covering the resale of the shares issued in the private placement,
including the shares issuable upon exercise of the investor warrants and the
placement agent warrants, with the Securities and Exchange Commission on May 9,
2007, which was declared effective by the Securities and Exchange Commission on
May 18, 2007.
  The
Company engaged Paramount, an affiliate of a significant stockholder of the
Company, as its placement agent in connection with the private placement. In
consideration for its services, the Company paid aggregate cash commissions of
approximately $600,000 and issued to Paramount a 5-year warrant to purchase an
aggregate of 509,275 shares at an exercise price of $1.00 per
share.
  2008
  During
2008, the Company issued warrants to purchase 140,000 shares of its common stock
to directors, officers and an employee in conjunction with the secured 10% notes
(see Note 8).
  During
2008, the Company issued a put for the issuance of 55.6 million shares of its
common stock and a warrant to purchase 11.1 million shares of its common stock
in conjunction with a joint venture transaction (see Notes 6 and
9).
  F-18
  MANHATTAN
PHARMACEUTICALS, INC.
 (a
Development Stage Company)
 NOTES TO
FINANCIAL STATEMENTS
 
 During
2008, the Company issued warrants to purchase 50.4 million shares of its common
stock to the investors and the placement agent in conjunction with the sale of
the secured 12% notes (see Note 10).
  2009
  During
2009, the Company issued warrants to purchase 15.7 million shares of its common
stock to the investors and the placement agent in conjunction with the sale of
the secured 12% notes (see Note 9).
  During
2009, the Company issued warrants to purchase 2.4 million shares of its common
stock to the investors and the placement agent in conjunction with the sale of
the convertible 12% notes (see Note 12).
  (6)          Joint
Venture
  In
February 2008, the Company and Nordic Biotech Advisors ApS through its
investment fund Nordic Biotech Venture Fund II K/S (“Nordic”) entered into a
50/50 joint venture agreement (the “Hedrin JV Agreement”) to develop and
commercialize the Company's North American rights (under license) to its Hedrin
product.
  Pursuant
to the Hedrin JV Agreement, Nordic formed a new Danish limited partnership,
Hedrin Pharmaceuticals K/S, (the "Hedrin JV") and provided it with initial
funding of $2.5 million and the Company assigned and transferred its North
American rights in Hedrin to the Hedrin JV in return for a $2.0 million cash
payment from the Hedrin JV and equity in the Hedrin JV representing 50% of the
nominal equity interests in the Hedrin JV.  At closing the Company
recognized an investment in the Hedrin JV of $250,000 and an exchange obligation
of $2,054,630.  The exchange obligation represents the Company’s
obligation to Nordic to issue the Company’s common stock in exchange for all or
a portion of Nordic’s equity interest in the Hedrin JV upon the exercise by
Nordic of the put issued to Nordic in the Hedrin JV Agreement
transaction.  The put is described below.
  The
original terms of the Hedrin JV Agreement also provided  that should
the Hedrin JV be successful in achieving a payment milestone, namely that by
September 30, 2008, the FDA determines to treat Hedrin as a medical device,
Nordic will purchase an additional $2.5 million of equity in the Hedrin JV,
whereupon the Hedrin JV will pay the Company an additional $1.5 million in cash
and issue additional equity in the JV valued at $2.5 million, thereby
maintaining the Company’s 50% ownership interest in the Hedrin
JV.  These terms have been amended as described below.
  In June
2008, the Hedrin JV Agreement was amended (the "Hedrin JV Amended
Agreement").  Under the amended terms Nordic invested an additional
$1.0 million, for a total of $3.5 million, in the Hedrin JV and made an advance
of $250,000 to the Hedrin JV and the Hedrin JV made an additional $1.0 million
payment, for a total of $3.0 million, to the Company.  The Hedrin JV
also distributed additional ownership equity sufficient for each of the Company
and Nordic to maintain their ownership interest at 50%.  The FDA
classified Hedrin as a Class III medical device in February
2009.  Under the amended terms, upon attaining this classification of
Hedrin by the FDA, Nordic invested an additional $1.25 million, for a total
investment of $5 million, into the Hedrin JV,  the Hedrin JV paid an
additional $0.5 million, for a total of $3.5 million, to the Company and the
$250,000 that Nordic advanced to the Hedrin JV in June became an equity
investment in the Hedrin JV by Nordic. The Hedrin JV was obligated to issue to
the Company and Nordic additional ownership interest in the Hedrin JV, thereby
maintaining each of the Company’s and Nordic’s 50% ownership interest in the
Hedrin JV.
  F-19





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





In
February 2009, the Company’s exchange obligation increased by $1,000,000 and the
Company’s investment in the Hedrin JV increased by $500,000 as a result of the
investment by Nordic of an additional $1.25 million into the Hedrin JV, the
reclassification of the advance made by Nordic in June 2008 to the Hedrin JV of
$250,000 into an equity interest and the payment of $500,000 by the Hedrin JV to
the Company. At December 31, 2009, the Company’s exchange obligation is
$3,949,176.




During
the years ended December 31, 2009 and 2008, the Company recognized $500,000 and
$250,000, respectively, of equity in the losses of the Hedrin JV.  This
reduced the carrying value of its investment in the Hedrin JV to $0 at both
December 31, 2009 and 2008.  As of December 31, 2009, the Company’s share
of the losses is $553,688; equity in losses of Hedrin JV previously recognized
was $250,000 leaving a $250,000 share of the cumulative losses of the Hedrin JV
that was recognized by the Company at December 31, 2009, and a remaining balance
of $53,688 of losses was not recognized at December 31, 2009.




Nordic
has an option to put all or a portion of its equity interest in the Hedrin JV to
the Company in exchange for the Company’s common stock.  The shares of the
Company’s common stock to be issued upon exercise of the put will be calculated
by multiplying the percentage of Nordic’s equity in the Hedrin JV that Nordic
decides to put to the Company multiplied by the dollar amount of Nordic’s
investment in Limited Partnership divided by $0.09, as adjusted from time to
time.  The put option is exercisable immediately and expires at the earlier
of ten years or when Nordic’s distributions from the Limited Hedrin JV exceed
five times the amount Nordic invested in the Hedrin JV.




The
Company has an option to call all or a portion of Nordic’s equity interest in
the Hedrin JV in exchange for the Company’s common stock.  The Company
cannot begin to exercise its call until the price of the Company’s common stock
has closed at or above $1.40 per share for 30 consecutive trading days. 
During the first 30 consecutive trading day period in which the Company’s common
stock closes at or above $1.40 per share the Company can exercise up to 25% of
its call option.  During the second 30 consecutive trading day period in
which the Company’s common stock closes at or above $1.40 per share the Company
can exercise up to 50% of its call option on a cumulative basis. During the
third 30 consecutive trading day period in which the Company’s common stock
closes at or above $1.40 per share the Company can exercise up to 75% of its
call option on a cumulative basis. During the fourth 30 consecutive trading day
period in which the Company’s common stock closes at or above $1.40 per share
the Company can exercise up to 100% of its call option on a cumulative basis.
The shares of the Company’s common stock to be issued upon exercise of the call
will be calculated by multiplying the percentage of Nordic’s equity in the
Limited Partnership that the Company calls, as described above, multiplied by
the dollar amount of Nordic’s investment in the Hedrin JV divided by
$0.09.  Nordic can refuse the Company’s call by either paying the Company
up to $1.5 million or forfeiting all or a portion of their put, calculated on a
pro rata basis for the percentage of the Nordic equity interest called by the
Company.




The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
T&R, the licensor of Hedrin.




F-20


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
Hedrin JV has engaged the Company to provide management services to the Limited
Partnership in exchange for a management fee.  For the years ended December
31, 2009 and 2008, the Company has recognized $333,845 and $446,806,
respectively, of other income from management fees earned from the Hedrin JV
which is included in the Company’s statements of operations for the years ended
December 31, 2009 and 2008 as a component of interest and other
income.




Nordic
paid to the Company a non-refundable fee of $150,000 at the closing for the
right to receive a warrant covering 11.1 million shares of the Company’s common
stock, as adjusted due to the 12% Notes Transaction (Note 9) exercisable for
$0.09 per share..  The warrant is issuable 90 days from closing, provided
Nordic has not exercised all or a part of its put, as described below.  The
Company issued the warrant to Nordic on April 30, 2008.  The per share
exercise price of the warrant was initially based on the volume weighted average
price of the Company’s common stock for the period prior to the signing of the
Hedrin JV Agreement and has been subsequently adjusted due to the 12% Notes
Transaction (see Note 9).  On March 2, 2010, pursuant to a private
placement of its securities, the Company issued the Company’s common stock and
warrants with an exercise price of $0.08 per share, further adjusting the Nordic
warrant, (see note 18).




The
Hedrin JV's Board consists of 4 members, 2 appointed by the Company and 2
appointed by Nordic.  Nordic has appointed one of the directors as chairman
of the Board.  The chairman has certain tie breaking powers.




Nordic
has the right to nominate a person to serve on the Company’s Board of
Directors.  Nordic has nominated a person, however, that person has
declined to stand for appointment to the Company’s Board of
Directors.




The
Company granted Nordic registration rights for the shares to be issued upon
exercise of the warrant, the put or the call.  The Company filed an initial
registration statement on May 1, 2008.  The registration statement was
declared effective on October 15, 2008.  On June 2, 2009, the Company filed
an additional Registration Statement registering the additional 28,769,841
shares of Common Stock that may be issued to Nordic upon exercise of a put
right held by Nordic as a result of Nordic’s additional investment of $1,250,000
in Hedrin JV pursuant to the terms of the Partnership
Agreement and as adjusted pursuant to the anti-dilution provisions of the
put right (the "Put Shares") and the additional 3,968,254 shares issuable
upon exercise of an outstanding warrant held by Nordic.    The
Securities and Exchange Commission (“SEC”) has informed the Company that the
Company may not register the Put Shares for resale until Nordic exercises its
put right and such shares of Common Stock are outstanding.  The Company
believes that it has used commercially reasonable efforts to cause the
registration statement to be declared effective and has satisfied its
obligations under the registration rights agreement with respect to the
registration of the Put Shares.  The Company is awaiting input from Nordic
as to whether Nordic would like the Company to continue to pursue registration
of the additional 3,968,254 shares issuable upon exercise of an outstanding
warrant held by Nordic which were included within the June 2009
registration statement.




The
Company is required to file additional registration statements, if required,
within 45 days of the date the Company first knows that such additional
registration statement was required.  The Company is required to use
commercially reasonable efforts to cause the additional registration statements
to be declared effective by the SEC within 105 calendar days from the filing
date (the "Effective Date").  If the Company fails to file a registration
statement on time or if a registration statement is not declared effective by
the SEC within 105 days of filing the Company will be required to pay to Nordic,
or its assigns, an amount in cash, as partial liquidated damages, equal to 0.5%
per month of the amount invested in the Hedrin JV by Nordic until the
registration statement is declared effective by the SEC.  In no event shall
the aggregate amount payable by the Company exceed 9% of the amount invested in
the Hedrin JV by Nordic.


F-21


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
profits of the Hedrin JV will be shared by the Company and Nordic in accordance
with their respective equity interests in the Limited Partnership, which are
currently 50% to each, except that Nordic will get a minimum distribution from
the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Limited Partnership.  If the Hedrin JV
realizes a profit equal to or greater than a 12% royalty on Hedrin sales, then
profits will be shared by the Company and Nordic in accordance with their
respective equity interests in the Limited Partnership.  However, in the
event of a liquidation of the Limited Partnership, Nordic’s distribution in
liquidation will be at least equal to the amount Nordic invested in the Hedrin
JV ($5 million) plus 10% per year, less the cumulative distributions received by
Nordic from the Hedrin JV.  If the Hedrin JV’s assets in liquidation exceed
the Nordic liquidation preference amount, then any excess shall be distributed
to the Company until its distribution and the Nordic liquidation preference
amount are in the same ratio as the respective equity interests in the Hedrin JV
and the remainder, if any, shall be distributed to Nordic and the Company in the
same ratio as the respective equity interests.  Further, in no event shall
Nordic’s distribution in liquidation be greater than assets available fordistribution
in liquidation.




(7)
            American
      Stock Exchange





In
September 2007, the Company received notice from the staff of The American Stock
Exchange, or AMEX, indicating that the Company was not in compliance with
certain continued listing standards set forth in the AMEX Company Guide. 
Specifically, AMEX notice cited the Company’s failure to comply, as of June 30,
2007, with section 1003(a)(ii) of the AMEX Company Guide as the Company had less
than $4,000,000 of stockholders’ equity and had losses from continuing
operations and /or net losses in three or four of our most recent fiscal years
and with section 1003(a)(iii) which requires the Company to maintain $6,000,000
of stockholders’ equity if the Company has experienced losses from continuing
operations and /or net losses in its five most recent fiscal years.




In order
to maintain our AMEX listing, the Company was required to submit a plan to AMEX
advising the exchange of the actions the Company has taken, or will take, that
would bring the Company into compliance with all the continued listing standards
by April 16, 2008.  The Company submitted such a plan in October
2007.  If the Company is not in compliance with the continued listing
standards at the end of the plan period, or if the Company has not made progress
consistent with the plan during the period, AMEX staff could have initiated
delisting proceedings.




Under the
terms of the Hedrin JV Agreement, the number of potentially issuable shares
represented by the put and call features thereof and the warrant issuable to
Nordic, would exceed 19.9% of the Company’s total outstanding shares and would
be issued at a price below the greater of book or market value.  As a
result, under AMEX regulations, the Company would not have been able to complete
the transaction without first receiving either stockholder approval for the
transaction, or a formal “financial viability” exception from AMEX’s stockholder
approval requirement.  The Company estimated that obtaining stockholder
approval to comply with AMEX regulations would take a minimum of 45 days to
complete.  The Company discussed the financial viability exception with
AMEX for several weeks and had neither received the exception nor been denied
the exception.  The Company determined that our financial condition
required the Company to complete the transaction immediately, and that the
Company’s financial viability depended on the completion of the Hedrin JV
Agreement without further delay.


F-22


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Accordingly,
to maintain the Company’s financial viability, on February 28, 2008, the Company
announced that it had formally notified AMEX that the Company intended to
voluntarily delist its common stock from AMEX.   The delisting became
effective on March 26, 2008.




The
Company’s common stock now trades on the Over the Counter Bulletin Board under
the symbol “MHAN”.  The Company intends to maintain corporate governance,
disclosure and reporting procedures consistent with applicable law.




(8)
              Secured
      10% Notes Payable





In
September 2008, Manhattan entered into a series of Secured 10% Notes (the
“Secured 10% Notes”) with certain of our directors, officers and an employee
(the “Secured 10% Note Holders”) for aggregate of $70,000.   Principal
and interest on the Secured 10% Notes shall be paid in cash on March 10, 2009
unless paid earlier by us.  Pursuant to the Secured 10% Notes, we also
issued to the Secured 10% Note Holders 5-year warrants to purchase an aggregate
of 140,000 shares of our common stock at an exercise price of $0.20 per
share.  Manhattan granted to the Secured 10% Note Holders a continuing
security interest in certain specific refunds, deposits and repayments due
Manhattan and expected to be repaid to Manhattan in the next several
months.  At December 31, 2008 accrued and unpaid interest on the Secured
10% Notes amounted to $1,764 and is reflected in the accompanying balance sheet
as of December 31, 2008 as a component of accrued expenses.  The Secured
10% Notes plus interest were repaid on February 4, 2009.




(9)
              Secured
      12% Notes Payable





On
November 19, 2008, December 23, 2008 and February 3, 2009, the Company completed
the first, second and final closings on a financing transaction (the “Secured
12% Notes Transaction”).  The Company sold $1,725,000 of 12% senior secured
notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase
57.5 million shares of the Company’s common stock at $0.09 per share.  The
warrants expire on December 31, 2013.  Net proceeds of $1.4 million were
realized from the three closings.  In addition, $78,000 of issuance costs
were paid outside of the closings.   Per the terms of the 12% Notes
Transaction the net proceeds were paid into a deposit account  (the
“Deposit Account”) and are to be paid out to the Company in monthly installments
of $113,300 retroactive to October 1, 2008 and a one-time payment of
$200,000.  Per the terms of the 12% Notes Transaction the monthly
installments are to be used exclusively to fund the current operating expenses
of the Company and the one-time payment was to be used for trade payables
incurred prior to October 1, 2008.  The Company received $876,700 of such
monthly installments and the one time payment of $200,000 during the year ended
December 31,  2009.  There was no remaining balance in the Deposit
Account at December 31, 2009.


F-23


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




National
Securities Corporation (“National”) was the placement agent for the 12% Notes
Transaction.  National’s compensation for acting as placement agent is a
cash fee of 10% of the gross proceeds received, a non-accountable expense
allowance of 1.5% of the gross proceeds, reimbursement of certain expenses and a
warrant to purchase such number of shares of the Company’s common stock equal to
15% of the shares underlying the warrants issued to the investors.  The
Company paid National a total of $202,000 in placement agent fees, a
non-accountable expense allowance and reimbursement of certain expenses, of
which $47,000 was paid during the year ended December 31, 2009.  In
addition, the Company issued warrants to purchase 8.6 million shares of the
Company’s common stock at $0.09 per share.  These warrants were valued at
$29,110 and are a component of Secured 12% notes payable issue costs.  The
warrants expire on December 31, 2013.




The
Secured 12% Notes mature two years after issuance.  Interest on the 
Secured 12% Notes is compounded quarterly and payable at maturity.  At
December 31, 2009 and 2008, accrued and unpaid interest on the Secured 12% Notes
amounted to approximately $229,000 and $15,000,  and is reflected in the
accompanying balance sheets at December 31, 2009 and 2008, respectively, as
interest payable on secured 12% notes payable. The Secured 12% Notes are secured
by a pledge of all of the Company’s assets except for its investment in the
Hedrin JV.  In addition, to provide additional security for the Company’s
obligations under the notes, the Company entered into a default agreement, which
provides that upon an event of default under the notes, the Company shall, at
the request of the holders of the notes, use reasonable commercial efforts to
either (i) sell a part or all of the Company’s interests in the Hedrin joint
venture or (ii) transfer all or part of the Company’s interest in the Hedrin JV
to the holders of the notes, as necessary, in order to fulfill the Company’s
obligations under the notes, to the extent required and to the extent permitted
by the applicable Hedrin joint venture agreements.




In
connection with the private placement, the Company, the placement agent and the
investors entered into a registration rights agreement.  Pursuant to the
registration rights agreement, we agreed to file a registration statement to
register the resale of the shares of our common stock issuable upon exercise of
the warrants issued to the investors in the private placement, within 20 days of
the final closing date and to cause the registration statement to be declared
effective within 90 days (or 120 days upon full review by the Securities and
Exchange Commission). During the year ended December 31, 2009 we filed the
registration statement, received a comment letter from the SEC and responded to
the comment letter from the SEC.  The registration statement was declared
effective on April 17, 2009.




The
issuance to the investors of warrants to purchase shares of the Company’s common
stock at $0.09 per share changes the number of shares represented by the Nordic
Put and the number of shares and exercise price of the Nordic Warrant.  The
Nordic Put and Nordic Warrant were issued at a value of $0.14 per share and were
issued with anti-dilution rights. The issuance of any securities at a value of
less than $0.14 per share activates Nordic’s anti-dilution rights.  As a
result of this transaction the exercise price of the Nordic Put and the Nordic
Warrant were reduced to a price of $0.09 per share.  The following table
shows the effect of Nordic’s anti-dilution rights.




Shares Issuable
                      Upon Exercise of
                      Nordic's Put
                    
                    
                    Shares Issuable
                      Upon Exercise of
                      Nordic's Warrant
                    
                    
                    Total Shares
                      Issuable Upon
                      Exercise of Nordic's
                      Put and WarrantBefore
      the 12% Notes Transaction
                    
                    
                    35,714,287
                    
                    
                    
                    7,142,857
                    
                    
                    
                    42,857,144Antidilution
      shares
                    
                    
                    19,841,269
                    
                    
                    
                    3,968,254
                    
                    
                    
                    23,809,523After
      the 12% Notes Transaction
                    
                    
                    55,555,556
                    
                    
                    
                    11,111,111
                    
                    
                    
                    66,666,667


F-24


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




An equity
transaction completed in March 2010 had a further anti-dilutive effect on the
Nordic Put and Warrant (see Note 18).




The
Company incurred a total of approximately $424,000 of costs in the issuance of
the $1,725,000 of Secured 12% Notes sold in 2008 and  2009.  These
costs were capitalized and are being amortized over the life of the Secured 12%
Notes into interest expense.  During the years ended December 31, 2009 and
2008, the amount amortized into interest expense was approximately $206,000 and
$16,000, respectively.  The remaining unamortized balance of approximately
$201,000 and $331,000 is reflected in the accompanying balance sheets as of
December 31, 2009 and 2008, respectively, as Secured 12% Notes payable issue
costs.




The
Company recognized an original issue discount (the “OID”) of approximately
$194,000 on the issuance of the Secured 12% Notes sold for the value of the
warrants issued to the investors.  The OID is being amortized over the life
of the Secured 12% Notes into interest expense.  During the years ended
December 31, 2009 and 2008 the amount amortized into interest expense was
approximately $94,000 and $7,000, respectively.  The remaining unamortized
balance of approximately $93,000 and $141,000 has been netted against the face
amount of the Secured 12% Notes in the accompanying balance sheets as of
December 31, 2009 and 2008, respectively.  As per the terms of the 12%
Notes Transaction the Company’s officers agreed to certain modifications of
their employment agreements.




(10) 
8% Note Payable




On
December 21, 2009, the Company entered into a Future Advance Promissory Note
(the “8% Note”) with Ariston under which the Company may withdraw up to
$67,000.  Principal and interest accrued at 8% shall be due and payable to
Ariston on February 10, 2010.  As of December 31, 2009, the Company has
withdrawn $27,000 from Ariston subject to the terms of the 8% Note, and is
included in the accompanying balance sheet as of December 31, 2009, as a current
liability, 8% note payable.




(11) 
Non-interest Bearing Note Payable




On
October 27, 2009, the Company entered into a Settlement Agreement and Mutual
Release with Swiss Pharma Contract LTD (“Swiss Pharma”) pursuant to which the
Company agreed to pay Swiss Pharma $200,000 and issue to Swiss Pharma an
interest free promissory note in the principal amount of $250,000 in full
satisfaction of the September 5, 2008 arbitration award. The amount of the
Arbitration award was $683,027 at September 30, 2009 and was included as a
component of accrued expenses.




In
connection with the non-interest bearing note, the Company recognized an
original issue discount (“OID”) of  $40,000 of imputed interest on the
note, which is being amortized into interest expense on a straight line basis
over the two-year term of the note.  For the year ended December 31, 2009,
the Company amortized $1,900 of the OID into interest expense.  The
remaining unamortized balance of $38,100 has been netted against the face amount
of the non-interest bearing note payable in the accompanying balance sheets as
of December 31, 2009.


F-25


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(12) 
Convertible 12% Note Payable




In
conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma
described above, on October 28, 2009, the Company entered into a Subscription
Agreement (the “Subscription Agreement”) pursuant to which it sold a 12%
Original Issue Discount Senior Subordinated Convertible Debenture with a stated
value of $400,000 (the “Convertible 12% Note”) and a warrant to purchase
2,222,222 shares of the Company’s common stock, par value $.001 per share 
for a purchase price of $200,000.  The Convertible 12% Note is convertible
into shares of Common Stock at an initial conversion price of $0.09 per share,
subject to adjustment, or, in the event the Company issues new securities in
connection with a financing, the Convertible 12% Note may be converted into such
new securities at a conversion price equal to the purchase price paid by the
purchasers of such new securities.  The Company may also, in its sole
discretion, elect to pay interest due on the Convertible 12% Note quarterly in
shares of the Company’s common stock provided such shares are subject to an
effective registration statement.  The Convertible 12% Note is subordinated
to the Company’s outstanding Secured 12% Notes.  The Warrant is exercisable
at an exercise price of $0.11 per share, subject to adjustment.  Because
the Convertible 12% Note and the Warrant are convertible into shares of the
Company, subject to adjustment, the conversion feature is subject to Derivative
Liability accounting (see Note 13).




National
Securities Corporation (“National”) was the placement agent for the Convertible
12% Note transaction.  In connection with the issuance of the Securities,
the Company issued warrants to purchase an aggregate of 222,222 shares of Common
Stock at an exercise price of $0.11 per share, subject to adjustment, to the
placement agent and certain of its designees.  Because the warrant is
convertible into shares of the Company, subject to adjustment, the warrants are
subject to Derivative Liability accounting (see Note 13). The warrants expire on
October 28, 2014.




The
Convertible 12% Notes mature two years after issuance.  Interest on the
Convertible 12% Note is compounded quarterly and payable at maturity.  At
December 31, 2009, accrued and unpaid interest on the Convertible 12% Note
amounted to approximately $9,000,  and is reflected in the accompanying
balance sheet at December 31, 2009 as interest payable on convertible 12% notes
payable.




The
Company incurred a total of approximately $38,000 of costs in the issuance of
the Convertible 12% Note sold in 2009.  These costs were capitalized and
are being amortized over the life of the  Convertible 12% Note into
interest expense.  During the year ended December 31, 2009, the amount
amortized into interest expense was approximately $3,000.  The remaining
unamortized balance of approximately $35,000 is reflected in the accompanying
balance sheet as of December 31, 2009, as a non-current asset, convertible 12%
note payable issue costs.




The
Company recognized an original issue discount (the “OID”) of approximately
$200,000 on the issuance of the Convertible 12% Notes. The OID is being
amortized over the life of the Convertible 12% Notes into interest
expense.  During the year ended December 31, 2009 the amount amortized into
interest expense was approximately $18,000.  The remaining unamortized
balance of approximately $182,000 has been netted against the face amount of the
Convertible 12% Notes in the accompanying balance sheet as of December 31,
2009.


F-26


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(13) 
Derivative Liability




In April
2008, the FASB issued a pronouncement which provides guidance on determining
what types of instruments or embedded features in an instrument held by a
reporting entity can be considered indexed to its own stock for the purpose of
evaluating the first criteria of the scope exception in the pronouncement on
accounting for derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
adoption of these requirements can affect the accounting for warrants and many
convertible instruments with provisions that protect holders from a decline in
the stock price (or “down-round” provisions). For example, warrants with such
provisions will no longer be recorded in equity. Down-round provisions reduce
the exercise price of a warrant or convertible instrument if a company either
issues equity shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that have a lower
exercise price. We evaluated whether warrants to acquire stock of the Company
contain provisions that protect holders from declines in the stock price or
otherwise could result in modification of the exercise price under the
respective warrant agreements. We determined that the warrant issued to Nordic
in April 2008 (the “Nordic Warrant”) and the warrants issued in connection with
the 2009 sale of the 12% Notes Payable contained such provisions, thereby
concluding they were not indexed to the Company’s own stock and were
reclassified from equity to derivative liabilities.




In
accordance with this pronouncement, the Company estimated the fair value of the
Nordic  Warrant as of January 1, 2009 to be $22,222 by recording a
reduction in additional paid in capital of $150,000 and a decrease in deficit
accumulated during the development stage of $127,778. The effect of this
adjustment is recorded as a cumulative effect of change in accounting principle
in our statements of stockholders’ equity (deficiency).  As of December 31,
2009, the fair value of these derivatives was $483,333 as recorded in the
accompanying balance sheet as of December 31, 2009, as a component of a current
liability, derivative liability. The change of $461,111 in fair value during the
year ended December 31, 2009 is reported as a non-cash charge in our statement
of operations as a component of other (income) expense.  In accordance with
this pronouncement the Company estimated the fair value at the date of issuance
of the conversion feature of the Convertible 12% Note and the fair value of the
related warrants to purchase 2,444,444 shares of the Company’s common stock at
$175,100 and $27,390, respectively.  As of December 31, 2009 the fair value
of these derivatives totaled $301,444 and are recorded in the accompanying
balance sheet as of December 31, 2009 as a component of derivative
liability.  The change in fair value of $98,954 during the period from
issuance to December 31, 2009 is reported as a non-cash charge in our statement
of operations as a component of other (income) expense.


F-27


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(14)
Stock Options




A summary
of the status of the Company’s stock options as of December 31, 2009 and changes
during the period then ended is presented below:




Shares
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term (years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2008
                  
                  
                  10,633,836
                  
                  
                  $
                  0.938Granted
                  
                  
                  -Exercised
                  
                  
                  -Canceled
                  
                  
                  3,007,234
                  
                  
                  $
                  1.485Forfeited
                  
                  
                  166,666
                  
                  
                  $
                  0.950Outstanding
      at December 31, 2009
                  
                  
                  7,459,936
                  
                  
                  $
                  0.718
                  
                  
                  
                  6.160
                  
                  
                  $
                  -Exercisable
      at December 31, 2009
                  
                  
                  6,750,776
                  
                  
                  $
                  0.755
                  
                  
                  
                  5.970
                  
                  
                  $
                  -Vested
      and expected to vest at December 31, 2009
                  
                  
                  7,451,598
                  
                  
                  $
                  0.718
                  
                  
                  
                  6.160
                  
                  
                  $
                  -Weighted-average
      fair value of options granted during the year ended December 31,
      2009
                  
                  None
      issued




As of
December 31, 2009 and 2008, the total compensation cost related to nonvested
option awards not yet recognized is $55,249 and $425,660, respectively. 
The weighted average period over which it is expected to be recognized is
approximately 0.26 and 1.18 years, respectively.




The
following table summarizes the information about stock options outstanding at
December 31, 2009:




Exercise Price
                    
                    Number of
                      Options
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Remaining Life
                    
                    
                    Number of
                      Options
                      Exercisable$0.12
      - $0.17
                    
                    
                    2,950,000
                    
                    
                    
                    8.23
                    
                    
                    
                    2,441,675$0.20
      - $0.28
                    
                    
                    260,750
                    
                    
                    
                    2.05
                    
                    
                    
                    260,750$0.70
      - $1.00
                    
                    
                    2,578,853
                    
                    
                    
                    5.10
                    
                    
                    
                    2,378,018$1.35
      - $1.65
                    
                    
                    1,670,333
                    
                    
                    
                    4.76
                    
                    
                    
                    1,670,333Total
                    
                    
                    7,459,936
                    
                    
                    
                    
                    
                    
                    
                    6,750,776


F-28


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





(15) 
Stock Warrants


The
following table summarizes the information about warrants to purchase shares of
our common stock outstanding at December 31, 2009:




Exercise
                        Price
                      
                      Number of
                        Warrants
                        Outstanding
                      
                      
                      Remaining
                        Contractual
                        Life (years)
                      
                      
                      Number of
                        Warrants
                        Exercisable$
                      1.49
                      
                      
                      276,741
                      
                      
                      
                      0.67
                      
                      
                      
                      276,7411.44
                      
                      
                      2,837,351
                      
                      
                      
                      0.65
                      
                      
                      
                      2,837,3511.00
                      
                      
                      4,074,172
                      
                      
                      
                      2.25
                      
                      
                      
                      4,074,1720.28
                      
                      
                      150,000
                      
                      
                      
                      2.64
                      
                      
                      
                      150,0000.09
                      
                      
                      11,111,111
                      
                      
                      
                      3.29
                      
                      
                      
                      11,111,1110.09
                      
                      
                      39,675,079
                      
                      
                      
                      3.89
                      
                      
                      
                      39,675,0790.09
                      
                      
                      10,733,355
                      
                      
                      
                      3.97
                      
                      
                      
                      10,733,3550.09
                      
                      
                      15,716,698
                      
                      
                      
                      4.09
                      
                      
                      
                      15,716,6980.20
                      
                      
                      140,000
                      
                      
                      
                      3.69
                      
                      
                      
                      140,0000.11
                      
                      
                      2,444,444
                      
                      
                      
                      4.83
                      
                      
                      
                      2,444,444Total
                      
                      
                      87,158,951
                      
                      
                      
                      
                      
                      
                      
                      87,158,951





(16) 
Income Taxes


There was
no current or deferred income tax expense for the years ended December 31,
2009 or 2008 because of the Company’s operating losses.





The
components of deferred tax assets as of December 31, 2009 and 2008 are as
follows:




2009
                      
                      
                      2008Deferred
      tax assets:Tax
      loss carryforwards
                      
                      $
                      23,170,000
                      
                      
                      $
                      23,947,000Research
      and development credit
                      
                      
                      1,799,000
                      
                      
                      
                      1,769,000In-process
      research and development charge
                      
                      
                      4,850,000
                      
                      
                      
                      4,850,000Share-based
      compensation
                      
                      
                      1,603,000
                      
                      
                      
                      1,459,000Other
                      
                      
                      537,000
                      
                      
                      
                      -Gross
      deferred tax assets
                      
                      
                      31,959,000
                      
                      
                      
                      32,025,000Less
      valuation allowance
                      
                      
                      (31,959,000
                      )
                      
                      
                      (32,025,000
                      )Net
      deferred tax assets
                      
                      $
                      -
                      
                      
                      $
                      -


F-29


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
reasons for the difference between actual income tax benefit for the years ended
December 31, 2009 and 2008 and the amount computed by applying the
statutory Federal income tax rate to losses before income tax benefit are as
follows:




2009
                  
                  
                  2008Amount
                  
                  
                  % of
                    Pre-tax
                    loss
                  
                  
                  Amount
                  
                  
                  % of
                    Pre-tax
                    lossFederal
      income tax benefit at statutory rate
                  
                  $
                  (944,000
                  )
                  
                  
                  (34.0
                  )%
                  
                  $
                  (1,451,000
                  )
                  
                  
                  (34.0
                  )%State
      income taxes, net of federal tax
                  
                  
                  (188,000
                  )
                  
                  
                  (6.8
                  )%
                  
                  
                  (290,000
                  )
                  
                  
                  (6.8
                  )%Research
      and development credits
                  
                  
                  (50,000
                  )
                  
                  
                  (3.0
                  )%
                  
                  
                  (130,000
                  )
                  
                  
                  (3.0
                  )%Other
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  1,000
                  
                  
                  
                  0.0
                  %Change
      in valuation allowance
                  
                  
                  1,182,000
                  
                  
                  
                  43.8
                  %
                  
                  
                  1,870,000
                  
                  
                  
                  43.8
                  %$
                  -
                  
                  
                  
                  0.0
                  %
                  
                  $
                  -
                  
                  
                  
                  0.0
                  %




A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.  The net
change in the total valuation allowance for the years ended December 31, 2009
and 2008 was an increase of $1,182,000 and $1,870,000, respectively.  The
tax benefit assumed using the Federal statutory tax rate of 34% has been reduced
to an actual benefit of zero due principally to the aforementioned valuation
allowance.




At
December 31, 2009, the Company had unused Federal and state net operating
loss carryforwards of approximately $58,523,000 and $48,128,000,
respectively.  The net operating loss carryforwards expire in various
amounts through 2029 for Federal and state income tax purposes.  The Tax
Reform Act of 1986 contains provisions which limit the ability to utilize net
operating loss carryforwards in the case of certain events including significant
changes in ownership interests.  Accordingly, a substantial portion of the
Company’s net operating loss carryforwards above will be subject to annual
limitations (currently approximately $100,000) in reducing any future year’s
taxable income. At December 31, 2009, the Company also had research and
development credit carryforwards of approximately $1,799,000 for Federal income
tax purposes which expire in various amounts through 2029.




The
Company files income tax returns in the U.S. Federal, State and Local
jurisdictions.  With certain exceptions, the Company is no longer subject
to U.S. Federal and state income tax examinations by tax authorities for years
prior to 2006.  However, net operating loss carryforwards and tax credits
generated from those prior years could still be adjusted upon audit. 
Effective January 1, 2007, the Company adopted guidance under ASC Topic 740-10
(formerly FIN 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109”) which clarifies the accounting and
disclosure for uncertainty in income taxes.  The adoption of this
interpretation did not have a material impact to the financial statements. 
The Company recognizes interest and penalties to uncertain tax position in
income tax expense in the statement of operations.




The
Company had  no unrecognized tax benefits at December 31, 2009 that would
affect the annual effective tax rate.  Further, the Company is unaware of
any positions for which it is reasonably possible that the total amounts of
unrecognized tax benefits will significantly increase or decrease within the
next twelve months.


F-30


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





(17) 
License and Consulting Agreements





IGI
Agreement for PTH (1-34)


On April
1, 2005, as part of the acquisition of Tarpan Therapeutics, Inc., the Company
acquired a Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April
14, 2004.  Under the IGI Agreement the Company received the exclusive,
world-wide, royalty bearing sublicense to develop and commercialize the licensed
technology (see Note 1).  Under the terms of the IGI Agreement, the Company
was responsible for the cost of the preclinical and clinical development of the
project, including research and development, manufacturing, laboratory and
clinical testing and trials and marketing of licensed products for which the
company will be responsible.




In
consideration for the Company’s rights under the IGI Agreement, a payment of
$300,000 was made upon execution of the agreement, prior to the Company’s
acquisition of Tarpan.  In addition the IGI Agreement required the Company
to make certain milestone payments as follows:  $300,000 payable upon the
commencement of a Phase 2 clinical trial; $500,000 upon the commencement of a
Phase 3 clinical trial; $1,500,000 upon the acceptance of an NDA application by
the FDA; $2,400,000 upon the approval of an NDA by the FDA; $500,000 upon the
commencement of a Phase 3 clinical trial for an indication other than psoriasis;
$1,500,000 upon the acceptance of and NDA application for an indication other
than psoriasis by the FDA; and $2,400,000 upon the approval of an NDA for an
indication other than psoriasis by the FDA.




During
2007, we achieved the milestone of the commencement of Phase 2 clinical
trial.  As a result $300,000 became payable to IGI.  This $300,000 is
included in research and development expense for the year ended December 31,
2007.  Payment was made to IGI in February 2008.




In
addition, the Company was obligated to pay IGI, Inc. an annual royalty of 6%
annual net sales on annual net sales up to $200,000,000.  In any calendar
year in which net sales exceed $200,000,000, the Company was obligated to pay
IGI, Inc. an annual royalty of 9% annual net sales.  In May 2009, the
Company terminated the IGI Agreement.  The Company has no further financial
liability or commitment to IGI, Inc. under the IGI Agreement.




Hedrin
License Agreement


On June
26, 2007, the Company entered into an exclusive license agreement for “Hedrin”
(the “Hedrin License Agreement”) with Thornton & Ross Ltd. (“T&R”) and
Kerris, S.A. (“Kerris”). Pursuant to the Hedrin License Agreement, the Company
has acquired an exclusive North American license to certain patent rights and
other intellectual property relating to Hedrin(TM), a non-insecticide product
candidate for the treatment of head lice. In addition, on June 26, 2007, the
Company entered into a supply agreement with T&R pursuant to which T&R
will be the Company’s exclusive supplier of Hedrin product the “Hedrin Supply
Agreement”.




In
consideration for the license, the Company issued to T&R and Kerris
(jointly, the “Licensor”) a combined total of 150,000 shares of its common stock
valued at $120,000.  In addition, the Company also made a cash payment of
$600,000 to the Licensor.  These amounts are included in research and
development expense.  Further, the Company agreed to make future milestone
payments to the Licensor in the aggregate amount of $2,500,000 upon the
achievement of various clinical, regulatory, and patent issuance milestones, as
well as up to $2,500,000 in a one-time success fee based on aggregate sales of
the product by the Company and its licensees of at least $50,000,000. The
Company also agreed to pay royalties of 8% (or, under certain circumstances, 4%)
on net sales of licensed products. The Company’s exclusivity under the Hedrin
License Agreement is subject to an annual minimum royalty payment of $1,000,000
(or, under certain circumstances, $500,000) in each of the third through seventh
years following the first commercial sale of Hedrin. The Company may sublicense
its rights under the Hedrin Agreement with the consent of Licensor and the
proceeds resulting from such sublicenses will be shared with the
Licensor.


F-31


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Pursuant
to the supply agreement, the Company has agreed that it and its sublicensees
will purchase their respective requirements of the Hedrin product from T&R
at agreed upon prices. Under certain circumstances where T&R is unable to
supply Hedrin products in accordance with the terms and conditions of the Supply
Agreement, the Company may obtain products from an alternative supplier subject
to certain conditions. The term of the Supply Agreement ends upon termination of
the Hedrin Agreement.




In
February 2008 the Company assigned and transferred its rights in Hedrin to a
joint venture (see Note 6).




Altoderm
License Agreement


On April
3, 2007, the Company entered into a license agreement for “Altoderm” (the
“Altoderm Agreement”) with T&R. Pursuant to the Altoderm Agreement, the
Company acquired an exclusive North American license to certain patent rights
and other intellectual property relating to Altoderm, a topical skin lotion
product candidate using sodium cromoglicate for the treatment of atopic
dermatitis.





In
February 2009, the Company terminated the Altoderm Agreement.  The Company
has no further financial liability or commitment to T&R under the Altoderm
Agreement.





Altolyn
License Agreement


On April
3, 2007, the Company and T&R also entered into a license agreement for
“Altolyn” (the “Altolyn Agreement”). Pursuant to the Altolyn Agreement, the
Company acquired an exclusive North American license to certain patent rights
and other intellectual property relating to Altolyn, an oral formulation product
candidate using sodium cromoglicate for the treatment of mastocytosis, food
allergies, and inflammatory bowel disorder.





In
February 2009, the Company terminated the Altolyn Agreement for
convenience.  The Company has no further financial liability or commitment
to T&R under the Altolyn Agreement.





(18)
Subsequent events – Unaudited





8%
Note


On
January 13, 2010, the Company withdrew $20,000 subject to the 8% Note with
Ariston Pharmaceuticals, Inc. (see Note 10 above).  Additionally, on
January 28, 2010, the Company withdrew an additional $20,000 subject to the 8%
Note.  On March 4, 2010, the Company repaid Ariston the $67,000 withdrawn
subject to the 8% Note and accrued interest of $816.


F-32


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





Equity
PIPE


On March
2, 2010, the Company raised aggregate gross proceeds of approximately $2,547,500
pursuant to a private placement of its securities.  The Company entered
into subscription agreements (the "Subscription Agreements") with seventy-seven
accredited investors (the "Investors") pursuant to which the Company sold an
aggregate of 101.9 Units (as defined herein) for a purchase price of $25,000 per
Unit.  Pursuant to the Subscription Agreements, the Company issued to each
Investor units (the "Units") consisting of (i) 357,143 shares of common stock,
$0.001 par value per share (the “Common Stock” or “Shares”) of the Company and
(ii) 535,714 warrants (each a “Warrant” and collectively the “Warrants”), each
of which will entitle the holder to purchase one additional share of Common
Stock for a period of five years (each a “Warrant Share” and collectively the
“Warrant Shares”) at an exercise price of $0.08 per share.




The
Nordic Put and Nordic Warrant were issued at a value of $0.14 per share and were
issued with anti-dilution rights. The issuance of any securities at a value of
less than $0.14 per share activates Nordic’s anti-dilution rights. The Secured
12% Note transaction included warrants with an exercise price of $0.09 per
share, this activated Nordic’s anti-dilution rights as reflected in the table
below under the caption “Before the Equity Pipe Transaction”.  Any
issuances of any securities subsequent to the Secured 12% Note transaction at a
value of less than $0.09 further activates Nordic’s anti-dilution rights. 
The Equity Pipe transaction in March 2010 effectively included the sale of one
share of common stock and a warrant to purchase 1.5 shares of common stock for a
price of $0.07. The JV Agreement between Nordic and Manhattan governs the
antidilution protection to Nordic.  Section 5.1 of that agreement state ”If
shares of Common Stock or Common Stock Equivalents are issued or sold together
with other stock or securities or other assets of MHA (Manhattan) for a
consideration which covers both, the effective price per share shall be computed
with regard to the portion of the consideration so received that may reasonably
be determined in good faith by the Board of Directors, to be allocable to such
Common Stock or Common Stock Equivalent.”  The good faith determination of
the effective price per share was $0.07 for each share of common stock sold and
a de minimus value to the warrants.  The Nordic Put and the Nordic Warrant
are now valued at a price of $0.07 per share.  The following table shows
the effect of Nordic’s anti-dilution rights.





Shares Issuable
                    Upon Exercise of
                    Nordic's Put
                  
                  
                  Shares Issuable
                    Upon Exercise of
                    Nordic's Warrant
                  
                  
                  Total Shares
                    Issuable Upon
                    Exercise of
                    Nordic's Put and
                    WarrantBefore
      the Equity Pipe Transaction
                  
                  
                  55,555,556
                  
                  
                  
                  11,111,111
                  
                  
                  
                  66,666,667Antidilution
      shares
                  
                  
                  15,873,015
                  
                  
                  
                  3,174,603
                  
                  
                  
                  19,047,618After
      the Equity Pipe Transaction
                  
                  
                  71,428,571
                  
                  
                  
                  14,285,714
                  
                  
                  
                  85,714,285





In March
2010, we received correspondence from Nordic that questions how we calculated
the anti-dilution shares, as shown above, and suggesting that we did not employ
a good faith estimate.  We believe our determination was made in good faith
and is appropriate.




All of
the Investors represented that they were “accredited investors,” as that term is
defined in Rule 501(a) of Regulation D under the Securities Act, and the sale of
the Units was made in reliance on exemptions provided by Regulation D and
Section 4(2) of the Securities Act of 1933, as amended.




In
connection with the closing of the private placement, the Company, the placement
agent acting in connection with the private placement (the “Placement Agent”)
and the Investors entered into a Registration Rights Agreement, dated as of
March 2, 2010, and the Company agreed to file a registration statement to
register the resale of the Shares, within 60 days of the final closing date and
to cause the registration statement to be declared effective within 150 days (or
180 days upon review by the SEC).


F-33


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
Company received net proceeds of approximately $2,158,000 after payment of an
aggregate of $305,700 of commissions and expense allowance to the Placement
Agent, and approximately $83,000 of other offering and related costs in
connection with the private placement. In addition, the Company issued a warrant
to purchase 3,639,289 shares of Common Stock at an exercise price of $0.08 per
share to the Placement Agent as additional compensation for its
services.




The
Company did not use any form of advertising or general solicitation in
connection with the sale of the Units. The Shares, the Warrants and the Warrant
Shares are non-transferable in the absence of an effective registration
statement under the Act, or an available exemption therefrom, and all
certificates are imprinted with a restrictive legend to that
effect.




Hedrin
JV


As per
the Limited
Partnership Agreement between the Company and Nordic (the “LPA”) in the event
that a limited partner in the Hedrin JV (a “Limited Partner”) determines, in its
reasonable goods faith discretion, that the Hedrin JV requires additional
capital for the proper conduct of its business that Limited Partner shall
provide each Limited Partner with a written request for contribution of such
Limited Partner’s proportionate share, in accordance to the then respective
equity ownership in the Hedrin JV, of such requested additional capital
amount.





As per
the terms of the LPA, if a Limited Partner declines to so contribute, elects to
contribute but thereafter fails to do so timely, or elects to contribute and
timely does contribute some, but not all of, its proportionate share of the
requested additional capital amount, the other Limited Partner shall have the
option to contribute the remaining balance of such requested additional capital
amount.





As per
the terms of the LPA, the General Partner shall determine the fair market value
of the shares for purposes of determining how to allocate the number of shares
of the Hedrin JV to be issued in consideration for the contribution of
capital.  If the General Partner is unable to determine the fair market
value of the shares, the fair market value for the shares shall be determined in
good faith by the contributing Limited Partner if such amount is equal to or
greater than the most recent valuation of such Hedrin JV shares.





On
December 31, 2009 Nordic Biotech Venture Fund II (“Nordic”) delivered a written
notice to the Company for a $1,000,000 capital increase to the Hedrin JV. 
In January 2010, Nordic made its capital contribution to the Hedrin JV of
$500,000.  The Company did not have sufficient funds to make such a capital
contribution within the required time prescribed in the LPA.





The
General Partner was unable to determine the fair market value of the
shares.  The contributing Limited Partner, Nordic, determined in good faith
that the fair market value of the shares is equal to the most recent
valuation.  The most recent valuation was the February 2009 investment of
$1,500,000 into the Hedrin JV by Nordic at $5,000 per share.  As a result
of Nordic’s investing an additional $500,000 in the Hedrin JV the ownership
percentages of the Hedrin JV have changed from 50% to Nordic and 50% for the
Company to 52.38% to Nordic and 47.62% for the Company.  In the event that
Nordic exercises its option to invest the remaining $500,000 of the $1,000,000
capital increase then the ownership percentage shall change to 54.55% for Nordic
and 45.45% for the Company.


F-34


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





Ariston
Merger


On March 8, 2010, Manhattan
Pharmaceuticals, Inc. (the “Company” or "Manhattan") entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, Ariston
Pharmaceuticals, Inc., a Delaware corporation ("Ariston") and Ariston Merger
Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the
"Merger Sub").  Pursuant to the terms and conditions set forth in the
Merger Agreement, on March 8, 2010, the Merger Sub merged with and into Ariston
(the "Merger"), with Ariston being the surviving corporation of the
Merger.  As a result of the Merger, Ariston became a wholly-owned
subsidiary of the Company.





Under the
terms of the Merger Agreement, the consideration payable by the Company to the
stockholders and note holders of Ariston consists of the issuance of 7,062,423
shares of the Company's common stock, par value $0.001 per share, ("Common Stock") at
Closing (as defined in the Merger Agreement) plusthe right to receive up
to an additional 24,718,481 shares of Common Stock (the “Milestone Shares”) upon
the achievement of certain product-related milestones described below.  In
addition, the Company has reserved 38,630,723 shares of its Common Stock for
possible future issuance in connection with the conversion of $15.45 million of
outstanding Ariston convertible promissory notes.  The note holders will
not have any recourse to the Company for repayment of the notes (their sole
recourse being to Ariston), but the note holders will have the right to convert
the notes into shares of the Company's Common Stock at the rate of $0.40 per
share.  Further, the Company has reserved 5,000,000 shares of its Common
Stock for possible future issuance in connection with the conversion of $1.0
million of outstanding Ariston convertible promissory note issued in
satisfaction of a trade payable.  The note holder will not have any
recourse to the Company for repayment of the note (their sole recourse being to
Ariston), but the note holder will have the right to convert the note into
shares of the Company's Common Stock at the rate of $0.20 per
share.





Upon the
achievement of the milestones described below, the Company would be obligated to
issue portions of the Milestone Shares to the former Ariston stockholders and
noteholders:


·
            Upon
      the affirmative decision of the Company’ Board of Directors, provided that
      such decision is made prior to March 8, 2011, to further develop the
      AST-914 metabolite product candidate, either internally or through a
      corporate partnership, the Company would issue 8,828,029 of the Milestone
      Shares.


·
            Upon
      the acceptance by the FDA of the Company's filing of the first New Drug
      Application for the AST-726 product candidate, the Company would issue
      7,062,423 of the Milestone Shares.


·
            Upon
      the Company receiving FDA approval to market the AST-726 product candidate
      in the United States of America, the Company would issue 8,828,029 of the
      Milestone Shares.





Certain
members of the Company's board of directors and principal stockholders of the
Company owned Ariston securities.  Timothy McInerney, a director of
Manhattan, owned 16,668 shares of Ariston common stock which represented less
than 1% of Ariston’s outstanding common stock as of the closing of the
Merger.  Neil Herskowitz, a director of Manhattan, indirectly owned
convertible promissory notes of Ariston with interest and principal in the
amount of $192,739.  Michael Weiser, a director of Manhattan, owned 117,342
shares of Ariston common stock, which represented approximately 2.1% of
Ariston’s outstanding common stock as of the closing of the Merger. 
Lindsay Rosenwald, a more than 5% beneficial owner of Manhattan common stock, in
his individual capacity and indirectly through trusts and companies he controls
owned 497,911 shares of Ariston common stock, which represented approximately
8.9% of Ariston’s outstanding common stock as of the closing of the Merger and
indirectly owned convertible promissory notes of Ariston in the amount of
$141,438.


F-35


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





The
Company merged with Ariston principally to add new products to our portfolio.
Prior to the Mereger, Ariston was a private, clinical stage specialty
biopharmaceutical company based in Shrewsbury, Massachusetts that in-licenses,
develops and plans to market novel therapeutics for the treatment of serious
disorders of the central and peripheral nervous systems.




The
initial accounting for the Merger was incomplete as of the date of these
financials statements, therefore certain required disclosures for the Merger
could not be made.


F-36




Index to Exhibits Filed with
this Report




Exhibit No.
              
              Description23.1
              
              Consent
      of J.H. Cohn LLP.31.1
              
              Certification
      of Principal Executive Officer.31.2
              
              Certification
      of Principal Financial Officer.32.1
              
              Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.