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,
                  2007
 
 o
              Transition
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the transition period from
                  ___to___
 Commission
        File Number 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.)810
                  Seventh Avenue, 4thFloor, New York, New York
                (Address
                  of Principal Executive Offices)
              10019
                (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 registered**Common
                  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.  o 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. o 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 o No
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
        be contained, to the best of registrant’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-K
        or any amendment to this Form 10-K. o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
 Large
                  accelerated filer o
              Accelerated
                  filer oNon-accelerated
                  filer o (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). o
        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 March 17, 2008 based
        on
        the closing price of the common stock as reported on the American Stock Exchange
        on such date was $7,206,064.
 
 As
        of
        March17, 2008 there were 70,624,232 outstanding shares of common stock, par
        value $.001 per share.
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Portions
        of the registrant’s definitive Proxy Statement for its Annual Meeting of
        Stockholders to be held on June 25, 2008 (the “2008 Proxy Statement”) are
        incorporated by reference into Part III of this Form 10-K, to the extent
        described in Part III. The 2008 Proxy Statement will be filed within 120
        days
        after the fiscal year ended December 31, 2007.
  
  MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  TABLE
        OF CONTENTS
  **Page****PART
                  I**Item
                  1
              Business
              2Item
                  1A
              Risk
                  Factors
              17Item
                  2
              Legal
                  Proceedings
              27Item
                  3
              Properties
              27Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              27**PART
                  II**Item
                  5
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              28Item
                  6
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              29Item
                  7
              Financial
                  Statements and Supplementary Data
              45Item
                  8
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              45Item
                  8A(T)
              Controls
                  and Procedures
              45Item
                  8B
              Other
                  Information
              46**PART
                  III**Item
                  9
              Directors,
                  Executive Officers and Corporate Governance
              46Item
                  10
              Executive
                  Compensation
              47Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              47Item
                  12
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              47**PART
                  IV**Item
                  13
              Exhibits,
                  Financial Statement Schedules
              48Item
                  14
              Principal
                  Accounting Fees and Services
              51Index
                  to Consolidated Financial Statements
              F-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 Section27A of the Securities Act of 1933, as amended, or the
        Securities Act, and Section21E 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:
 
 ·
              the
                  development of our drug candidates;
 ·
              the
                  regulatory approval of our drug 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 payers;
 ·
              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 product candidates;
 ·
              the
                  effect of potential strategic transactions on our business;
 ·
              our
                  ability to obtain adequate financing; 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.
  1
  **PART
        I**
  **ITEM
        1. DESCRIPTION OF BUSINESS**
  **Overview**
  We
        are a
        clinical stage specialty pharmaceutical company focused on developing and
        commercializing innovative pharmaceutical therapies 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. We currently have four product candidates in development:
        HedrinTM, a novel, non-insecticide treatment for pediculosis (head lice); Topical
        PTH (1-34) for the treatment of psoriasis; AltodermTM (topical cromolyn sodium)
        for the treatment of pruritus associated with dermatologic conditions including
        atopic dermatitis; and AltolynTM (oral tablet cromolyn sodium) for the treatment
        of mastocytosis. We have not received regulatory approval for, or generated
        commercial revenues from marketing or selling any drugs.
  Our
        executive offices are located at 810 Seventh Avenue, 4 th floor,
        New York, NY 10019 USA. Our telephone number is (212) 582-3950 and our internet
        website address is www.manhattanpharma.com.
  **Corporate
        History – Merger Transaction(s)**
  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.
  **Our
        Research and Development Programs**
  ***Hedrin*** ***TM***
  In
        June
        2007, Manhattan Pharmaceuticals entered into an exclusive license agreement
        with
        Thornton & Ross Ltd. (“T&R”) and Kerris, S.A. (“Kerris”) for a product
        candidate called Hedrin (the “Hedrin License Agreement”). We acquired an
        exclusive North American license to certain patent rights and other intellectual
        property relating to Hedrin, a non-insecticide product candidate for the
        treatment of head lice. 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”).
  2
  In
        February 2008, Manhattan Pharmaceuticals announced that it had entered into
        a
        joint venture agreement with Nordic Biotech Advisors ApS (“Nordic”) to develop
        and commercialize Hedrin. A 50/50 joint venture entity was formed that now
        owns,
        will develop and will secure a commercialization partner for the Hedrin product
        in North America (the “Hedrin JV”). Manhattan Pharmaceuticals will manage the
        day-to-day operations of the Hedrin JV. The joint venture entity has been
        independently funded and will be 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.
  *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. According to our internal analysis, a majority of the currently
        available prescription and over-the-counter (“OTC”) head lice treatments are
        chemical insecticides.
  *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
        and
        by asphyxiation (smothering), rather than by acting on the central nervous
        system, the insects have not 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
        convenient, non-insecticide treatment alternatives. Both silicones in this
        proprietary formulation of Hedrin are used extensively in cosmetics and
        toiletries.
  *Clinical
        Development*
  To
        date,
        Hedrin has been clinically studied in 326 subjects and is currently marketed
        as
        a medical device in Western Europe and as a pharmaceutical in the United
        Kingdom
        (“U.K.”).
  In
        a
        randomized, controlled, equivalence, clinical study (conducted in Europe),
        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%).
  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 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, and 97% of Hedrin treated
        subjects stated they were significantly more inclined to use the product
        again
        versus 31% of those using malathion.
  3
  In
        the
        U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
        development of Hedrin as a medical device and has submitted an initial
        regulatory package to the U.S. Food and Drug Administration (“FDA”) Center for
        Devices and Radiological Health. The Company expects to be required to complete
        at least one clinical trial with this product candidate.
  *Market
        and Competition*
  In
        Europe, Hedrin has been launched in 21 countries and has achieved annual
        sales
        through its licensees of approximately $45 million at in-market public prices,
        and is the market leader in the U.K. with $11 million in sales (23% market
        share) and France with a 21% market share. These figures do not include sales
        in
        Germany, Spain and Greece where Hedrin was launched in mid-late
        2007.
  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. 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 Kwell (lindane) and
        Ovide
        (malathion), and the most frequently purchased OTC brands are Rid (pyrethrin),
        Nix (permethrin), and Pronto (pyrethrin). Lindane has been banned in 52
        countries worldwide and has now been banned in the state of California due
        to
        its toxicity. European formulations of Malathion have experienced widespread
        resistance. Resistance to U.S. formulations of malathion have not been widely
        reported, but experts believe it may eventually develop with continued use.
        Head
        lice resistance to pyrethrin 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.”**
  ***Topical
        PTH (1-34)***
  As
        a
        result of our merger with Tarpan Therapeutics in 2005, we hold 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”). Topical PTH (1-34) has been
        tested in a Phase 1/2 clinical study conducted under a physician investigational
        new drug application (“P-IND”).
  4
  *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 skin
        irritation and disability.
  *Mechanism
        of Action*
  It
        is
        believed that Topical PTH (1-34) is an agonist that mimics a natural protein
        responsible for regulating the growth of skin cells. The presence of this
        natural protein, PTHrp, is significantly reduced in the skin of psoriasis
        patients leading to skin cell hyperproliferation, poor differentiation of
        skin
        cells, and ultimately, the accumulation of dry thick patches of skin (plaques).
        Acting in place of the absent PTHrp, it is also believed that Topical PTH
        (1-34)
        is able to help restore skin cells’ normal rate of development, migration and
        turnover, reducing cell accumulation and the formation of plaques.
  *Clinical
        Development*
  In
        2003,
        researchers, led by Michael Holick, MD, PhD, Professor of Medicine, Physiology,
        and Biophysics at Boston University Medical Center, reported positive results
        from a US Phase 1 and 2 clinical trial conducted under a P-IND evaluating
        the
        safety and efficacy of Topical PTH (1-34) as a topical treatment for psoriasis.
        This double-blind, placebo controlled trial in 15 patients compared Topical
        PTH
        (1-34) formulated in the Novasome® Technology versus the Novasome® vehicle
        alone. Following 8 weeks of treatment, the topical application of Topical
        PTH
        (1-34) resulted in complete clearing of the treated lesion in 60% of patients
        and partial clearing in 85% of patients. Additionally, there was a statistically
        significant improvement in the global severity score. Ten patients continued
        receiving Topical PTH (1-34) in an open label extension study in which the
        Psoriasis Area and Severity Index (PASI) was measured; PASI improvement across
        all 10 patients achieved statistically significant improvement compared to
        baseline. This study showed Topical PTH (1-34) to be well tolerated and
        efficacious for the treatment of plaque psoriasis with no patients experiencing
        any clinically significant adverse events.
  Due
        to
        the high response rate seen in patients in the initial trial with Topical
        PTH
        (1-34), we believe that it may have an important clinical advantage over
        current
        topical psoriasis treatments. A Phase 2a clinical study testing Topical PTH
        (1-34) under a P-IND was initiated in December 2005 under the auspices of
        Boston
        University. In April 2006, and prior to dosing subjects, we reported a delay
        in
        our Phase 2a clinical study of Topical PTH (1-34) due to a formulation issue.
        We
        believe we have resolved this issue through a new gel formulation of Topical
        PTH
        (1-34) and have filed new patent applications in the U.S. for this new
        proprietary formulation.
  In
        September 2007, the U.S. FDA accepted our corporate 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
        is designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
        for the treatment of psoriasis. Approximately 54 subjects will be enrolled
        and
        randomized to receive one of two dose levels of Topical PTH (1-34), or vehicle,
        for an 8 week treatment period. In this study the vehicle is the topical
        formulation without the active ingredient, PTH (1-34). We expect to announce
        the
        results of this study in Summer 2008.
  5
  *Market
        and Competition*
  According
        to the National Psoriasis Foundation nearly 2% of the worldwide population,
        including approximately 4.5 million Americans, suffers from psoriasis. In
        the
        U.S. psoriasis patients are responsible for nearly 2.4 million visits to
        dermatologists each year at an annual cost of nearly $3 billion. Manhattan
        Pharmaceuticals estimates the U.S. topical psoriasis therapeutics market
        to be
        approximately $400-500 million, with the market throughout the rest of the
        world
        in the same range.
  The
        efficacy and safety profile of Topical PTH (1-34) potentially make it an
        attractive alternative to existing topical treatments, photo therapies and
        systemic treatments such as methotrexate and biologics for the treatment
        of
        psoriasis. We are developing Topical PTH (1-34) as a monotherapy and for
        use in
        combination with currently available therapies. Some of Topical PTH (1-34)’s
        competitors would include, but are not limited to over-the-counter, or “OTC,”
prescription topical treatments, and laser treatment. Treatments such as
        phototherapy, methotrexate, cyclosporine, Remicade ® (Johnson
& Johnson), Enbrel ® (Amgen),
        Amiveve ® (Astellas), and Raptiva ® (Genentech) are generally used for more severe patients due to their harsh
        side
        effect profiles.
  There
        are
        a number of treatments available today for psoriasis, including topicals
        and
        steroids. Topical treatments include numerous OTC ointments that help to
        reduce
        inflammation, soothe skin and enhance the efficacy of other therapies. Steroids
        are also prescribed as an adjunct therapy for pain and anti-inflammation.
        One of
        the most frequently prescribed topical treatments is Dovonex ® (calcipotriene), which is an active vitamin D3 analogue. Approximately 60%
        of
        patients show some response to Dovonex ® in the
        first few months of treatment, however, 60% of these patients become resistant
        to treatment in 6-12 months. Dovonex ® sales in
        the US in 2006 were $147 million
  **See
        also “Management’s Discussion and Analysis of Financial Condition and Results of
        Operations - Liquidity and Capital Resources - Research and Development Projects
        – Topical PTH (1-34).”**
  ***Altoderm*** ***TM***
  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. Altoderm **** is
        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).
  *Atopic
        Dermatitis (Eczema)*
  Atopic
        dermatitis, also know as eczema, is a chronic disease of the skin that is
        believed to be caused by a combination of hereditary and environmental factors.
        The main symptoms of atopic dermatitis include dry, itchy skin leading to
        rashes
        on the face, hands, feet, along with inside the elbows and behind the knees.
        Scratching results in redness, swelling, cracking, “weeping” clear fluid, and
        crusting or scaling.
  *Mechanism
        of Action*
  Altoderm
        is a topical formulation of cromolyn sodium, a non-steroidal, anti-inflammatory
        agent that is categorized as a mast cell stabilizer. Cromolyn sodium has
        been
        shown to block allergic reactions by inhibiting the release of inflammatory
        mediators, including histamine and leukotrienes. Elevated levels of these
        agents
        result in local and systemic inflammation that, in turn, leads to conditions
        such as atopic dermatitis. By reducing the release of inflammatory agents
        by
        mast cells, Manhattan Pharmaceuticals believes that Altoderm may effectively
        treat patients suffering from pruritus associated with atopic dermatitis,
        and
        possibly other dermatologic conditions. Cromolyn sodium has been used worldwide
        for over 35 years to treat a number of allergic conditions includin asthma,
        allergic rhinitis (nasal allergies), allergic conjunctivitis (eye allergies),
        and internal allergic conditions such as mastocytosis.
  6
  *Clinical
        Development*
  In
        a
        Phase 3, randomized, double-blind, placebo-controlled, parallel-group, clinical
        study (conducted in Europe by T&R.) the compound was administered for 12
        weeks to 114 subjects with moderately severe atopic dermatitis. The placebo
        (vehicle) used in this study was the Altoderm product without the active
        ingredient. In the study results, published in the British Journal of
        Dermatology in February 2005, Altoderm demonstrated a statistically significant
        reduction (36%) in atopic dermatitis symptoms. During the study, subjects
        were
        permitted to continue with their existing treatment, in most cases this
        consisted of emollients and topical steroids. A positive secondary outcome
        of
        the study was a 35% reduction in the use of topical steroids for the Altoderm
        treated subjects. Further analysis of the clinical data, performed by Manhattan
        Pharmaceuticals, showed that Altoderm treated subjects also experienced a
        57%
        reduction in pruritus.
  Altoderm
        is currently being tested in a second, ongoing Phase 3, randomized,
        double-blind, vehicle-controlled clinical study (also conducted in Europe
        by
        T&R). Analysis of the preliminary data from the initial 12 week, blinded
        portion of this clinical trial has been completed. The vehicle used in this
        study was the Altoderm product without the active ingredient, cromolyn sodium.
        The preliminary data indicate 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. The Company believes these
        outcomes were due to suboptimal study design where subjects were unrestricted
        in
        their use of concomitant therapies such as topical steroids and
        immunomodulators. In this study subjects treated with vehicle alone in the
        blinded portion of the study were switched to Altoderm for the open label
        portion of the study. Analysis of the preliminary open label data beginning
        at
        week 13 of the study, show vehicle treated subjects demonstrating further
        improvement when switched to Altoderm. Given the promising clinical data
        obtained from the first European Phase 3 study, and the symptom improvements
        reported in the ongoing European Phase 3 study, both Manhattan Pharmaceuticals
        and T&R believe there is significant potential for Altoderm and will
        continue development of this product candidate.
  On
        March
        6, 2008, Manhattan Pharmaceuticals announced it had successfully completed
        a
        pre-IND meeting with the FDA. Based on a review of the submitted package
        for
        Altoderm, including data from the two previously reported Phase 3 clinical
        studies, the FDA determined that following completion of certain nonclinical
        studies, and the acceptance of an IND, Phase 2 clinical studies may be initiated
        in the U.S. The FDA also concurred that the proposed indication of pruritus
        associated with dermatologic conditions including atopic dermatitis can be
        pursued.
  *Market
        and Competition*
  According
        to the National Institutes of Health, an estimated 10-20% of all infants
        and
        young children and 1-3% of adults have atopic dermatitis (eczema). This
        translates to approximately 15 million Americans suffering from the disease.
        Insurance companies spend more than $1 billion annually on the condition.
  7
  Topical
        steroids, topical immunomodulators, systemic antihistamines, and moisturizing
        agents are currently the primary pharmaceutical treatments for atopic
        dermatitis. However, these products are not meeting the needs of patients
        due to
        unwanted side effects including skin thinning, acne, hypopigmentation, and
        secondary infection, among others, and limited evidence to support their
        long
        term safety. Based on these limitations of current atopic dermatitis treatments,
        there is a significant market opportunity for new, effective
        therapies.
  **See
        also “Management’s Discussion and Analysis of Financial Condition and Results of
        Operations- Liquidity and Capital Resources- Research and Development Projects-
        Altoderm.”**
  ***Altolyn*** ***TM***
  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.
        Altolyn **** is
        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.
  *Mastocytosis*
  Mastocytosis
        is a rare disorder that occurs in both children and adults. It is caused
        by the
        presence of too many mast cells in the body. Mast cells are found in skin,
        linings of the stomach and intestine, and connective tissue (such as cartilage
        and tendons). Mast cells play an important role in helping the immune systems
        defend these tissues from disease. They release chemical “alarms” such as
        histamine and cytokines to attract other key players of the immune defense
        system to sites in the body where they might be needed. People with mastocytosis
        experience abdominal discomfort, nausea and vomiting, ulcers, diarrhea, and
        skin
        lesions.
  *Mechanism
        of Action*
  Altolyn
        is a novel oral tablet formulation of cromolyn sodium that has been formulated
        using site specific drug delivery technology. This unique formulation targets
        release of the drug in the upper region of the small intestine. Cromolyn
        sodium,
        which has been used for more than 35 years to treat a variety of allergic
        conditions, is a mast cell stabilizer that reduces mast cell activation and
        decreases the release of inflammatory mediators.
  *Nonclinical
        Development*
  On
        March
        6, 2008, Manhattan Pharmaceuticals announced it had successfully completed
        a
        pre-IND meeting with the FDA. Based on a review of the submitted package
        for
        Altolyn, the FDA concurred that the proposed indication of mastocytosis can
        be
        pursued and that the 505(b)(2) NDA would be an acceptable approach provided
        a
        clinical bridge is established between Altolyn and Gastrocrom®, the oral liquid
        formulation of cromolyn sodium currently approved in the U.S. to treat
        mastocytosis. Section 505(b)(2) of the Food, Drug and Cosmetic Act 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.The FDA also
        affirmed that a single, Phase 3 study demonstrating the efficacy of Altolyn
        over
        placebo, may be sufficient to support a product approval in the U.S. In
        addition, the FDA also concurs that no additional nonclinical studies will
        be
        required to support an IND application. The Company is working with T&R and
        the current U.K. manufacturer of Altolyn to develop a Good Manufacturing
        Process
        (“cGMP”) compliant manufacturing process.
  8
  Early
        clinical experience with Altolyn in the U.K. suggests promising activity
        in
        patients with various allergic disorders, including food allergy and
        inflammatory bowel conditions. The Company may pursue these as additional
        indications.
  **See
        also “Management’s Discussion and Analysis of Financial Condition and Results of
        Operations- Liquidity and Capital Resources- Research and Development Projects-
        Altolyn.”**
  ***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.
  **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.
        none 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 the Hedrin agreement
        with T&R and 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 pediculosis (“head
        lice”):
 
 1.
              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 September14,
                  2020.
 
 9
  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.
  In
        addition, on June 26, 2007, the Company entered into the Hedrin Supply Agreement
        with T&R pursuant to which T&R will be the Company’s exclusive supplier
        of the Hedrin product.
  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. Further, the Company agreed to make future milestone
        payments to the Licensor comprised of various combinations of cash and common
        stock in respective aggregate amounts of $2,500,000 upon the achievement
        of
        various clinical and regulatory milestones as follows: $250,000 upon acceptance
        by the FDA of an IND; $1,000,000 upon the achievement of a successful outcome
        of
        a Phase 3 clinical trial; $700,000 upon the final approval of a New Drug
        Application (“NDA”), or its equivalent, by the FDA; $300,000 upon the issuance
        of a U.S. patent on Hedrin: and $250,000 upon receipt of marketing authorization
        in Canada.
  Through
        December 31, 2007, none of the milestones have been reached and sales have
        not
        commenced, therefore, we have not paid any such milestones or
        royalties.
  The
        Company also agreed to pay royalties to the Licensor of 8% (or, under certain
        circumstances, 4%) on net sales of licensed products. The Company’s exclusivity
        under the Hedrin 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.
  Pursuant
        to the Hedrin 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 product from an alternative
        supplier subject to certain conditions. The term of the Supply Agreement
        ends
        upon termination of the Hedrin Agreement.
  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.
  **Topical
        PTH (1-34) License Agreement** .
  In
        connection with our April 2005 acquisition of Tarpan Therapeutics, Inc.,
        we
        acquired Tarpan’s rights under an April 2004 Sublicense Agreement with IGI, Inc.
        (the “IGI Agreement”). Pursuant to this agreement we now have worldwide,
        exclusive license rights to the U.S. and foreign patents and patent applications
        for all topical uses of Topical PTH(1-34) for the treatment of
        hyperproliferative skin disorders including psoriasis:
  1.
              U.S.
                  Patent No. 5,527,772, entitled “Regulation of cell proliferation and
                  differentiation using peptides.” M.F. Holick, Inventor. Application filed
                  July, 28, 1994. Patent issued June 18, 1996. This patent expires
                  June 18,
                  2013.
  10
  2.
              U.S.
                  Patent No. 5,840,690, entitled “Regulation of cell proliferation and
                  differentation using peptides.” M.F. Holick, Inventor. Application filed
                  June 6, 1995. Patent issued November 24, 1998. This patent expires
                  June
                  18, 2013.
  3.
              U.S.
                  Provisional application No. US60/940,509, entitled “Topical Compositions
                  comprising a macromolecule and methods of using same.” Application was
                  filed on May 29, 2007.
  These
        patents have numerous, detailed and specific claims relating to the topical
        use
        of Topical PTH (1-34)
  The
        IGI
        sublicense agreement requires us 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 Investigational New Drug Application (“NDA”) 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 a 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. At December 31, 2008 this $300,000 liability
        is reflected in accounts payable.
  In
        addition, we are obligated to pay IGI, Inc. an annual royalty of 6% on annual
        net sales up to $200,000,000. In any calendar year in which net sales exceed
        $200,000,000, we are obligated to pay IGI, Inc. an annual royalty of 9% annual
        net sales. Through December 31, 2007 sales have not commenced, therefore
        we have
        not paid any such royalties.
  IGI,
        Inc.
        may terminate the agreement (i) upon 60 days’ notice if we fail to make any
        required milestone or royalty payments, or (ii) if we become bankrupt or
        if a
        petition in bankruptcy is filed, or if we are placed in the hands of a receiver
        or trustee for the benefit of creditors. IGI, Inc. may terminate the agreement
        upon 60 days’ written notice and an opportunity to cure in the event we commit a
        material breach or default. We may terminate the agreement in whole or as
        to any
        portion of the PTH patent rights upon 90 days’ notice to IGI, Inc.
  **Altoderm**
  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 with the active ingredient cromolyn sodium (also known
        as
        sodium cromoglicate) for the treatment of pruritis (itch) associated with
        dermatologic conditions including atopic dermatitis:
  1.
              U.S.
                  Patent No. 7,109,246, entitled “Pharmaceutical compositions comprising an
                  amphoteric surfactant an alkoxylated cetyl alcohol and a polar
                  drug.”
                  Brian Hawtin, Inventor. Application filed May 20, 1999. Patent
                  issued
                  September 19, 2006. This patent expires on May 20,
                  2019.
  2.
              U.S.
                  Application Publication No. 2007/0036860, entitled “Treatment of allergic
                  conditions.” Alexander James Wigmore, Inventor. Any patent that issues
                  will expire on November 9, 2019. This patent covers both Altoderm
                  and
                  Altolyn.
  11
 
 These
        patents have numerous, detailed and specific claims related to the use of
        Altoderm (composition of topically administered cromolyn sodium) for treating
        atopic dermatitis (eczema).
  In
        accordance with the terms of the Altoderm Agreement, the Company issued 125,000
        shares of its common stock, valued at $112,500, and made a cash payment of
        $475,000 to T&R upon the execution of the agreement. Further, the Company
        agreed to make future milestone payments to T&R comprised of various
        combinations of cash and common stock in respective aggregate amounts of
        $5,675,000 and 875,000 shares of our common stock upon the achievement of
        various clinical and regulatory milestones. as follows: $450,000 upon acceptance
        by FDA of an IND; 125,000 shares of our common stock upon the first dosing
        of a
        patient in the first Phase 2 clinical trial; 250,000 shares of our common
        stock
        and $625,000 upon the first dosing of a patient in the first Phase 3 clinical
        trial; $1,000,000 upon the achievement of a successful outcome of a Phase
        3
        clinical trial; $1,100,000 upon the acceptance for filing of a NDA application
        by the FDA; 500,000 shares of our common stock and $2,000,000 upon the final
        approval of an NDA by the FDA; and $500,000 upon receipt of marketing
        authorization in Canada.
  In
        addition, we are obligated to pay T&R an annual royalty of 10% on annual net
        sales of up to $100,000,000; 15% of the amount of annual net sales in excess
        of
        $100,000,000 and 20% of annual net sales in excess of $200,000,000. There
        is a
        minimum royalty of $1,000,000 per year. There is a one-time success fee of
        $10,000,000 upon the achievement of cumulative net sales of $100,000,000.
        Through December 31, 2007, none of the milestones have been reached and sales
        have not commenced, therefore, we have not paid any such milestones or
        royalties.
  **Altolyn**
  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 tablet formulation
        product candidate using sodium cromolyn for the treatment of mastocytosis,
        food
        allergies, and inflammatory bowel disorder.
 
 1.
              U.S.
                  Patent No. 7,258,872, entitled “Chromone enteric release formulation.”
                  Alexander James Wigmore, Inventor. Application filed November 9,
                  1999,
                  claiming the benefit of a GB application filed November 11, 1998.
                  Patent
                  issued August 21, 2007. The expected date of expiration, which
                  was
                  November 9, 2019, has been extended by 793 days (expiration date
                  Jan 10,
                  2022).
 
 2.
              U.S.
                  Application Publication No. 2007/0036860, entitled “Treatment of allergic
                  conditions.” Alexander James Wigmore, Inventor. Application filed October
                  13, 2006, claiming the benefit of a prior U.S. application, which
                  claimed
                  the benefit of a PCT application filed November 9, 1999. This application
                  has not yet issued as a patent. Any patent that issues is expected
                  to
                  expire on November 9, 2019. This patent covers both Altoderm and
                  Altolyn.
 
 These
        patents have numerous, detailed and specific claims related to Altolyn (as
        an
        oral tablet drug delivery composition), and the pending application discloses
        and may be used to claim the use of Altolyn (composition of orally administered
        sodium cromolyn) for the treatment of allergic conditions, specifically food
        allergies.
  In
        accordance with the terms of the Altolyn Agreement, the Company made a cash
        payment of $475,000 to T&R upon the execution of the agreement. Further, the
        Company agreed to make future milestone payments to T&R comprised of various
        combinations of cash and common stock in respective aggregate amounts of
        $5,675,000 upon the achievement of various clinical and regulatory milestones.
        as follows: $450,000 upon acceptance filing by the FDA of an IND; $625,000
        upon
        the first dosing of a patient in the first Phase 3 clinical trial; $1,000,000
        upon the achievement of a successful outcome of a Phase 3 clinical trial;
        $1,100,000 upon the acceptance for filing of a NDA application by the FDA;
        $2,000,000 upon the final approval of an NDA by the FDA; and $500,000 upon
        receipt of marketing authorization in Canada.
  12
  In
        addition, we are obligated to pay T&R an annual royalty of 10% on annual net
        sales of up to $100,000,000; 15% of the amount of annual net sales in excess
        of
        $100,000,000 and 20% of annual net sales in excess of $200,000,000. There
        is a
        minimum royalty of $1,000,000 per year. There is a one-time success fee of
        $10,000,000 upon the achievement of cumulative net sales of $100,000,000.
        Through December 31, 2007, none of the milestones have been reached and sales
        have not commenced, therefore, we have not paid any such milestones or
        royalties.
  **Oleoyl-estrone**
  On
        July
        9, 2007 the Company announced the results of its two Phase 2a clinical trials
        of
        oral 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.
  **Manufacturing**
  We
        do not
        have any manufacturing capabilities. We are in contact with several contract
        cGMP manufacturers for the supply of Topical PTH(1-34), Hedrin, Altoderm
        and
        Altolyn that will be necessary to conduct human clinical trials.
  **Government
        Regulation**
  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,
  13
  ·
              submission
                  to the FDA of an IND 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 an NDA,
  ·
              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.
  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, which must become effective before human clinical trials may begin.
        An IND 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. In such a case, the
        IND
        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
        will result in the FDA allowing clinical trials to begin.
  Clinical
        trials involve the administration of the investigational drug 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.
  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 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 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.
  14
  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 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.
  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 Altolyn.
  Before
        approving an NDA, 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 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. 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 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 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, including
        withdrawal of the product from the market.
  15
  ***Orphan
        Drug.*** The FDA
        may grant orphan drug designation to drugs intended to treat a “rare disease or
        condition,” which generally is a disease or condition that affects fewer than
        200,000 individuals in the United States. Orphan drug designation must be
        requested before submitting an NDA. If the FDA grants orphan drug designation,
        which it may not, the identity of the therapeutic agent and its potential
        orphan
        use are publicly disclosed by the FDA. Orphan drug designation does not convey
        an advantage in, or shorten the duration of, the review and approval process.
        If
        a product that has an orphan drug designation subsequently receives the first
        FDA approval for the indication for which it has such designation, the product
        is entitled to orphan exclusivity, meaning that the FDA may not approve any
        other applications to market the same drug for the same indication, except
        in
        certain very limited circumstances, for a period of seven years. Orphan drug
        designation does not prevent competitors from developing or marketing different
        drugs for that indication.
  ***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.
  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”) members
        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.
  **Employees**
  We
        currently have 1 part time and 6 full time employees, including 1 person
        devoted
        to research and development and 6 persons in business development,
        administration and finance, including our senior management. None of our
        employees is covered by a collective bargaining unit. We believe our relations
        with our employees is satisfactory.
  16
  **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 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 drug development programs.**
  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 our 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,
        2007, we had $649,686 of cash and cash equivalents. **** We
        received additional funding of approximately $2 million net from a joint
        venture
        agreement in February 2008. We will still have to raise substantial additional
        funds to complete the development of our drug 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.
  Additional
        financing may not be available on acceptable terms, if 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.
  **We
        are not currently profitable and may never become
        profitable.**
  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, 2007 and for the period from
        August 6, 2001 (inception) through December 31, 2007, we incurred net losses
        applicable to common shares of $12,032,252, and $54,999,070 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.
  **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
        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 three products, Hedrin, Altoderm, and Altolyn, 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 four product
        candidates to market and, accordingly, cannot estimate the time when development
        of these product candidates will be completed.
  18
  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:
  ·
              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 one or more
        of
        our 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.
  19
  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.
  **Physicians
        and patients may not accept and use our drugs.**
  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
        drug-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.
  20
  **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.
  ·
              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.
  21
  **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
  ·
              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.
  22
  We
        currently do not directly own the rights to any issued patents. We license
        the
        exclusive rights to a total of four issued patents relating to our current
        product candidates, which expire from 2013 to 2022. 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.
  **If
        we infringe the rights of third parties we could be prevented from selling
        products, forced to pay damages, and defend against litigation.**
  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.
  23
  **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.
  **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.
  **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.
  **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.
  24
  **We
        are controlled by current officers, directors and principal
        stockholders.**
  Our
        directors, executive officers and principal stockholders beneficially own
        approximately 27 percent of our outstanding voting stock and, including shares
        underlying outstanding options and warrants. Accordingly, these persons and
        their respective affiliates will have the ability to exert substantial influence
        over the election of our Board of Directors and the outcome of issues submitted
        to our stockholders.
  **Risks
        Related to Our Securities**
  **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 $0.09 in
        the
        fourth quarter of 2007 to a high of $1.64 in the first quarter of 2006. 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:
  ·
              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.
  25
  **We
        have** **delisted** **from the American Stock Exchange** **.**
  As
        a
        result of our delisting ,
        the
        liquidity of our common stock may be reduced, 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. This may result in lower prices for our common stock than
        might
        otherwise be obtained and could also result in a larger spread between the
        bid
        and asked prices for our common stock.
  **We
        have never paid dividends.**
  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.
  26
  **ITEM
        2. LEGAL PROCEEDINGS**
  Swiss
        Pharma Contract LTD (“Swiss Pharma”), a clinical site that the Company used in
        one of its obesity trials, gave notice to the Company that Swiss Pharma believes
        it is entitled to receive an additional payment of $322,776 for services
        in
        connection with that clinical trial. While the contract between the Company
        and
        Swiss Pharma provides for additional payments if certain conditions are met,
        Swiss Parma has not specified which conditions they believe have been achieved
        and the Company does not believe that Swiss Pharma is entitled to additional
        payments and has not accrued any of these costs as of December 31, 2007.
        The
        contract between the Company and Swiss Pharma provides for arbitration in
        the
        event of a dispute, such as this claim for an additional payment. Swiss Pharma
        has filed for arbitration. As the Company does not believe that Swiss Pharma
        is
        entitled to additional payments, it intends to defend its position in
        arbitration. The arbitration process is currently in its initial
        stage.
  **ITEM
        3. DESCRIPTION OF PROPERTY**
  Our
        executive offices are located at 810 Seventh Avenue, 4th Floor, New York,
        New
        York 10019. We currently occupy this space pursuant to a written lease that
        expires on September 30, 2008 under which we pay rent of approximately $11,800
        per month.
  We
        believe that our existing facilities are adequate to meet our current
        requirements. We do not own any real property.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**
  We
        held
        our Annual Meeting of Stockholders at the American Stock Exchange, 86 Trinity
        Place, New York, New York on May 24, 2007. The stockholders took the following
        actions:
  (i)
        The
        stockholders elected seven 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 Withheld**Douglas
                  Abel
              
              
              35,536,892
              
              
              65,132Neil
                  Herskowitz
              
              
              35,376,093
              
              
              225,931Malcolm
                  Hoenlein
              
              
              35,518,495
              
              
              83,529Timothy
                  McInerney
              
              
              35,538,692
              
              
              63,332Joan
                  Pons Gimbert
              
              
              35,154,378
              
              
              447,646Richard
                  I. Steinhart
              
              
              35,529,736
              
              
              72,288Michael
                  Weiser
              
              
              34,493,245
              
              
              1,108,779
 
 (ii)
        The
        stockholders ratified the amendment to our 2003 Stock Option Plan increasing
        the
        number of shares available for issuance thereunder from 7,400,000 to 10,400,000.
        34,440,971 votes were cast for the proposal; 1,107,853 votes were cast against
        the proposal, shares representing 53,200 votes abstained; and there were
        no
        broker non-votes.
  (iii)
        The
        stockholders ratified the appointment of J.H. Cohn LLP as our independent
        registered public accounting firm for fiscal 2007. 35,519,099 votes were
        cast
        for the proposal; 8,205 votes were cast against the proposal, shares
        representing 74,720 votes abstained; and there were no broker
        non-votes.
  27
  **PART
        II**
  **ITEM
        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS**
  **Market
        for Common Stock**
  Our
        common stock traded on
        the
        American Stock Exchange “AMEX”under the symbol “MHA” during the years ended
        December 31, 2006 and 2007. The
        following table lists the high and low price for our common stock as quoted,
        in
        U.S. dollars, on the American Stock Exchange during each quarter within the
        last
        two fiscal years:
  **Price
                  Range****2007**
              
              **2006****Quarter
                  Ended**
              
              **High**
              
              **Low**
              
              **High**
              
              **Low**March
                  31
              
              $
              0.96
              
              $
              0.70
              
              $
              1.640
              
              $
              1.160June
                  30
              
              
              1.10
              
              
              0.69
              
              
              1.360
              
              
              0.075September
                  30
              
              
              0.78
              
              
              0.22
              
              
              0.880
              
              
              0.620December
                  31
              
              
              0.23
              
              
              0.09
              
              
              0.920
              
              
              0.620
 
 On
        March
        26, 2008 our common stock was voluntarily delisted from the AMEX and began
        trading on the Over the Counter Bulletin Board (“OCTBB”) under the symbol
“MHAN”.
  **Record
        Holders**
  The
        number of holders of record of our common stock as of March17, 2008 was
        460.
  **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.
  **Stock
        Repurchases**
  We
        did
        not make any repurchases of our common stock during 2007.
  **Securities
        authorized for issuance under equity compensation plans.**
  See
        Note
        6 to Consolidated Financial Statements .
  28


**ITEM 6.**
            **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
      clinical-stage specialty pharmaceutical company focused on developing and
      commercializing innovative pharmaceutical therapies 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. We currently have four product candidates in development: Hedrin,
      a novel, non-insecticide treatment of pediculitis (head lice); topical PTH
      (1-34) for the treatment of psoriasis; Altoderm for the treatment of pruritis
      (itch) associated with dermatologic conditions including atopin dermatitis;
      and
      Altolyn for the treatment of mastocystosis. We have not received regulatory
      approval for, or generated commercial revenues from marketing or selling any
      drugs.




You
      should read the following discussion of our results of operations and financial
      condition in conjunction with the consolidated 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**




***2007
      versus 2006***





During
      each of the years ended December 31, 2007 and 2006, 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, 2008.




29




**Years ended December 31,****2007**
            
            **2006**
            
            **Increase (decrease)**
            
            **% Increase (decrease)****Costs
                and expenses*****Research
                and development***Share-based
                compensation
            
            $
            539,000
            
            $
            529,000
            
            $
            10,000
            
            
            1.89
            %In-license,
                milestone and related fees
            
            
            2,245,000
            
            
            250,000
            
            
            1,995,000
            
            
            798.00
            %Other
                research and development expenses
            
            
            5,752,000
            
            
            5,394,000
            
            
            358,000
            
            
            6.64
            %Total
                research and development expenses
            
            
            8,536,000
            
            
            6,173,000
            
            
            2,363,000
            
            
            38.28
            %***General
                and administrative***Share-based
                compensation
            
            
            902,000
            
            
            1,147,000
            
            
            (245,000
            )
            
            -21.36
            %Other
                general and administrative expenses
            
            
            2,706,000
            
            
            2,680,000
            
            
            26,000
            
            
            0.97
            %Total
                general and administrative expenses
            
            
            3,608,000
            
            
            3,827,000
            
            
            (219,000
            )
            
            -5.72
            %**Other
                income**
            
            
            112,000
            
            
            305,000
            
            
            (193,000
            )
            
            -63.28
            %**Net
                loss**
            
            $
            12,032,000
            
            $
            9,695,000
            
            $
            2,337,000
            
            
            24.11
            %





For
      the
      year ended December 31, 2007 research and development expense was $8,536,000
      as
      compared to $6,173,000 for the year ended December 31, 2006. This increase
      of
      $2,363,000, or 38.3%, is primarily comprised of an increase in in-license,
      milestone and related fees of $1,995,000, an increase in other research and
      development expenses of $358,000 and an increase in stock based compensation
      of
      $10,000.




For
      the
      year ended December 31, 2007 general and administrative expense was $3,608,000
      as compared to $3,827,000 for the year ended December 31, 2006. This decrease
      of
      $219,000, or 5.7%, is primarily comprised of a decrease in stock based
      compensation of $245,000 partially offset by an increase in other general and
      administrative expense of $26,000.




For
      the
      year ended December 31, 2007 other income was $112,000 as compared to $305,000
      for the year ended December 31, 2006. This decrease of $193,000, or 63.3%,
      is
      primarily due to a decrease in interest income which resulted from lower average
      balances in interest bearing and short-term investment accounts.




Net
      loss
      for the year ended December 31, 2007 was $12,032,000 as compared to $9,695,000
      for the year ended December 31, 2006. This increase of $2,337,000, or 24.11%,
      is
      primarily due to an increase in in-license, milestone and related fees of
      $1,995,000, an increase in other research and development expenses of $358,000
      and a decrease of $193,000 in other income partially offset by a decrease in
      stock based compensation of $235,000.




**Liquidity
      and Capital Resources**




From
      inception to December 31, 2007, we incurred a deficit during the development
      stage of $54,999,000 primarily as a result of our net losses, and we expect
      to
      continue to incur additional losses through at least December 31, 2008 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 financing.
      During the year ended December 31, 2007, we had a net decrease in cash and
      cash
      equivalents of $2,379,000. This decrease resulted largely from net cash used
      in
      operating activities of $10,230,000 partially offset by net cash provided by
      financing activities of $7,859,000. Total liquid resources as of December 31,
      2007 were $650,000 compared to $3,029,000.




30




Our
      current liabilities as of December 31, 2007 were $1,872,000 compared to
      $1,943,000 at December 31, 2006, a decrease of $71,000. As of December 31,
      2007,
      we had working capital deficit of $1,006,000 compared to working capital of
      $1,350,000 at December 31, 2006.




In
      February 2008, we completed a joint venture transaction. We received net
      proceeds of approximately $2.0 million from this joint venture
      transaction.




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, 2007, 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. Based on the resources
      available to us at December 31, 2007 and the net proceeds from the February
      2008
      joint venture transaction, management believes we do not have sufficient capital
      to fund our operations through the end of 2008. Management believes that we
      will
      need additional equity or debt financing or will need to generate revenues
      through licensing our products or entering into strategic alliances during
      2008
      to be able to sustain our operations during 2008 and we will need additional
      financing thereafter until we can achieve profitability, if ever.




We
      have
      reported net losses of $12,032,000 and $9,695,000 for the years ended December
      31, 2007 and 2006, respectively. The net loss attributable to common shares
      from
      date of inception, including preferred stock dividends, August 6, 2001 to
      December 31, 2007, amounts to $54,999,000. Management believes that we will
      continue to incur net losses through at least December 31, 2008.




**Joint
      Venture Agreement**




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”) 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
      (the
      "Hedrin JV") and provided it with initial funding of $2.5 million. The Company
      assigned and transferred its North American rights in Hedrin to the Hedrin
      JV in
      return for a $2.0 million cash payment and equity in the Hedrin JV representing
      50% of the nominal equity interests in the Hedrin JV .




31




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 to the Company an additional $2.5 million in equity in the Hedrin
      JV,
      thereby maintaining the Company’s 50% ownership interest in the Hedrin
      JV.




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 T&R, the licensor of Hedrin.




The
      Hedrin JV will engage the Company to provide management services to the Limited
      Partnership in exchange for an annualized management fee, which for 2008, on
      an
      annualized basis, is $527,000.




Nordic
      paid to the Company a non-refundable fee of $150,000 at the closing for the
      right to receive a warrant covering 7.1 million shares of the Company’s common
      stock, exercisable for $0.14 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 per share exercise price of the warrant was 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.




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 p that Nordic
      decides to put to the Company multiplied by the dollar amount of Nordic’s
      investment in Limited Partnership divided by $0.14, 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 $0.14. 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.




32




The
      Hedrin JV 's Board will consist of 4 members, 2 appointed by the Company and
      2
      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 payment milestone described above is not achieved by June 30,
      2008, then the Hedrin JV 's Board will increase to 5 members, 2 appointed by
      the
      Company and 3 appointed by Nordic.




After
      the
      closing, at Nordic's request, the Company will nominate a person identified
      by
      Nordic to serve on the Company’s Board of Directors.




The
      Company will grant Nordic registration rights for the shares to be issued upon
      exercise of the warrant, the put or the call. The Company is required to file
      an
      initial registration statement within 10 calendar days of filing its Form 10-K
      for the year ended December 31, 2007. 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
      registration statement to be declared effective by the Securities and Exchange
      Commission (“SEC”) within 105 calendar days from the filing 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.




The
      profits of the Hedrin JV will be shared by the Company and Nordic in accordance
      with their respective equity interests in Limited Partnership, which are
      currently 50% to each, except that Nordic will get a minimum guaranteed return
      from the Hedrin JV equal to 5% 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 10% 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 if the payment
      milestone described above is met, $2.5 million if it is not met) plus 10% per
      year, less the cumulative distributions received by Nordic from the Hedrin
      JV.
      Further, in no event shall Nordic’s distribution in liquidation be greater than
      assets available for distribution in liquidation.




**American
      Stock Exchange**




In
      September 2007, we received notice from the staff of AMEX, indicating that
      we
      were not in compliance with certain continued listing standards set forth in
      the
      American Stock Exchange Company guide. Specifically, the American Stock Exchange
      notice cited our failure to comply, as of June 30, 2007, with section
      1003(a)(ii) of the AMEX Company Guide as we 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 us to maintain $6,000,000 of stockholders’ equity if
      we have experienced losses from continuing operations and /or net losses in
      its
      five most recent fiscal years.




In
      order
      to maintain our AMEX listing, we were required to submit a plan to AMEX advising
      the exchange of the actions we have taken, or will take, that would bring us
      into compliance with all the continued listing standards by April 16, 2008.
      We
      submitted such a plan in October 2007. If we are not in compliance with the
      continued listing standards at the end of the plan period, or if we do not
      make
      progress consistent with the plan during the period, AMEX staff may initiate
      delisting proceedings.




33




Under
      the
      terms of the Joint Venture Agreement, the number of potentially issuable shares
      represented by the put and call features of the Hedrin agreement, and the
      warrant issuable to Nordic, would exceed 19.9% of our total outstanding shares
      and would be issued at a price below the greater of book or market value. As
      a
      result, under AMEX regulations, we 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. We estimated that obtaining stockholder approval to comply
      with AMEX regulations would take a minimum of 45 days to complete. We discussed
      the financial viability exception with AMEX for several weeks and had neither
      received the exception nor been denied the exception. We determined that our
      financial condition required us to complete the transaction immediately, and
      that the Company’s financial viability depended on its completion of the
      transaction without further delay.




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




Our
      common stock now trades on the Over the Counter Bulletin Board (“OCTBB”) under
      the symbol “MHAN”. We intend to maintain corporate governance, disclosure and
      reporting procedures consistent with applicable law.





**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.




Expenses
      associated with the clinical trials in common obesity and morbid obesity, which
      were concluded during 2007, were recognized on this activity based basis. At
      December 31, 2007 we recognized accrued expenses of $74,000 related to these
      clinical trials. There are no remaining financial commitments for these clinical
      trials.




The
      Company is developing Topical PTH (1-34) as a topical treatment for psoriasis.
      Expenses associated with the manufacture of clinical and non-clinical supplies
      of Topical PTH (1-34) are recognized on this activity based method. At December
      31, 2007 we recognized prepaid expense of $30,000 related to the manufacture
      of
      Topical PTH (1-34). The remaining financial commitment related to the
      manufacture of Topical PTH (1-34) is negligible.




During
      2007 we entered into an agreement with Therapeutics, Inc. for the conduct of
      a
      Phase 2a clinical trial of Topical PTH (1-34). The amount of the agreement
      is
      approximately $845,000. At December 31, 2007 we recognized research and
      development expense of $483,000 related to the conduct of this clinical trial.
      At December 31, 2007 we recognized prepaid expense of $19,000 related to this
      clinical trial. The remaining financial commitment related to the conduct of
      the
      clinical trial is approximately $340,000. This clinical trial is expected to
      conclude in the second quarter of 2008.




34




Swiss
      Pharma Contract LTD (“Swiss Pharma”), a clinical site that the Company used in
      one of its obesity trials, gave notice to the Company that Swiss Pharma believes
      it is entitled to receive an additional payment of $322,776 for services in
      connection with that clinical trial. While the contract between the Company
      and
      Swiss Pharma provides for additional payments if certain conditions are met,
      Swiss Parma has not specified which conditions they believe have been achieved
      and the Company does not believe that Swiss Pharma is entitled to additional
      payments and has not accrued any of these costs as of December 31, 2007. The
      contract between the Company and Swiss Pharma provides for arbitration in the
      event of a dispute, such as this claim for an additional payment. Swiss Pharma
      has filed for arbitration. As the Company does not believe that Swiss Pharma
      is
      entitled to additional payments, it intends to defend its position in
      arbitration. The arbitration process is currently in its initial
      stage.




In
      February 2007, a former employee of the Company alleged an ownership interest
      in
      two of the Company’s provisional patent applications covering our discontinued
      product development program for Oleoyl-estrone. Also, without articulating
      precise legal claims, the former employee contends that the Company wrongfully
      characterized the former employee’s separation from employment as a resignation
      instead of a dismissal in an effort to harm the former employee’s immigration
      sponsorship efforts, and, further, to wrongfully deprive the former employee
      of
      the former employee’s alleged rights in two of the Company’s provisional patent
      applications. The former employee is seeking an unspecified amount in damages.
      The Company refutes the former employee’s contentions and intends to vigorously
      defend itself should the former employee file claims against the Company. There
      have been no further developments with respect to these
      contentions.




***Development
      Commitments***




**Hedrin**




On
      June
      26, 2007, the Company entered into an exclusive license agreement for Hedrin
      (the “Hedrin Agreement”) with T&R and Kerris, S.A. (“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
      Hedrin TM a
      non-insecticide product candidate for the treatment of pediculosis (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.




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 T&R comprised of
      various combinations of cash and common stock in respective aggregate amounts
      of
      $2,500,000 upon the achievement of various clinical and regulatory milestones
      as
      follows: $250,000 upon acceptance by the U. S. Food and Drug Administration
      (“FDA”) of an Investigational New Drug application (“IND”); $1,000,000 upon the
      achievement of a successful outcome of a Phase 3 clinical trial; $700,000 upon
      the final approval of an NDA by the FDA; $300,000 upon the issuance of a U.S.
      patent on Hedrin: and $250,000 upon receipt of marketing authorization in
      Canada.




35




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
      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.




Through
      December 31, 2007, none of the milestones have been reached and sales have
      not
      commenced, therefore, we have not paid any such milestones or
      royalties.




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 product 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.




**Topical** **PTH
      (1-34)**




Through
      our April 2005 acquisition of Tarpan Therapeutics, Inc., we acquired a
      Sublicense Agreement with IGI, Inc. dated April 14, 2004. Under the IGI
      sublicense agreement we hold the exclusive, world-wide, royalty bearing
      sublicense to develop and commercialize the licensed technology. Under the
      terms
      of the IGI sublicense agreement, we are responsible for the cost of the
      nonclinical and clinical development of the project, including research and
      development, manufacturing, laboratory and clinical testing and trials and
      marketing of licensed products.




The
      IGI
      sublicense agreement requires us 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. At December 31, 2007 this $300,000 liability
      is reflected in accounts payable.




In
      addition, we are obligated to pay IGI, Inc. an annual royalty of 6% on annual
      net sales up to $200,000,000. In any calendar year in which net sales exceed
      $200,000,000, we are obligated to pay IGI, Inc. an annual royalty of 9% on
      such
      excess. Through December 31, 2007, sales have not commenced, therefore, we
      have
      not paid any such royalties.




IGI,
      Inc.
      may terminate the agreement (i) upon 60 days’ notice if we fail to make any
      required milestone or royalty payments, or (ii) if we become bankrupt or if
      a
      petition in bankruptcy is filed, or if we are placed in the hands of a receiver
      or trustee for the benefit of creditors. IGI, Inc. may terminate the agreement
      upon 60 days’ written notice and an opportunity to cure in the event we commit a
      material breach or default. Eighteen months from the date of the IGI sublicense
      agreement, we may terminate the agreement in whole or as to any portion of
      the
      PTH patent rights upon 90 days’ notice to IGI, Inc.




36




**Altoder** **m**




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 with the active ingredient cromolyn sodium (also known as
      sodium cromoglicate) for the treatment of atopic dermatitis. In accordance
      with
      the terms of the Altoderm Agreement, the Company issued 125,000 shares of its
      common stock, valued at $112,500, and made a cash payment of $475,000 to T&R
      upon the execution of the agreement. These amounts have been included in
      research and development expense.




Further,
      the Company agreed to make future milestone payments to T&R comprised of
      various combinations of cash and common stock in respective aggregate amounts
      of
      $5,675,000 and 875,000 shares of our common stock upon the achievement of
      various clinical and regulatory milestones. as follows: $450,000 upon acceptance
      by the U. S. Food and Drug Administration (“FDA”) of an Investigational New Drug
      application (“IND”); 125,000 shares of our common stock upon the first dosing of
      a patient in the first Phase 2 clinical trial; 250,000 shares of our common
      stock and $625,000 upon the first dosing of a patient in the first Phase 3
      clinical trial; $1,000,000 upon the achievement of a successful outcome of
      a
      Phase 3 clinical trial; $1,100,000 upon the acceptance for filing of a New
      Drug
      Application (“NDA”) application by the FDA; 500,000 shares of our common stock
      and $2,000,000 upon the final approval of an NDA by the FDA; and $500,000 upon
      receipt of marketing authorization in Canada.




In
      addition, we are obligated to pay T&R an annual royalty of 10% on annual net
      sales of up to $100,000,000; 15% of the amount of annual net sales in excess
      of
      $100,000,000 and 20% of annual net sales in excess of $200,000,000. There is
      a
      minimum royalty of $1,000,000 per year. There is a one-time success fee of
      $10,000,000 upon the achievement of of cumulative net sales of $100,000,000.
      Through December 31, 2007, none of the milestones have been reached and sales
      have not commenced, therefore, we have not paid any such milestones or
      royalties.




Through
      December 31, 2007, none of the milestones have been reached and sales have
      not
      commenced, therefore, we have not paid any such milestones or
      royalties.




**Altolyn**




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 cromolyn sodium for the treatment of mastocytosis, food
      allergies, and inflammatory bowel disorder. In accordance with the terms of
      the
      Altolyn Agreement, the Company made a cash payment of $475,000 to T&R upon
      the execution of the agreement. This amount is included in research and
      development expense.




Further,
      the Company agreed to make future milestone payments to T&R comprised of
      various combinations of cash and common stock in respective aggregate amounts
      of
      $5,675,000 upon the achievement of various clinical and regulatory milestones.
      as follows: $450,000 upon acceptance for filing by the FDA of an IND; $625,000
      upon the first dosing of a patient in the first Phase 3 clinical trial;
      $1,000,000 upon the achievement of a successful outcome of a Phase 3 clinical
      trial; $1,100,000 upon the acceptance for filing of a New Drug Application
      (“NDA”) application by the FDA; $2,000,000 upon the final approval of an NDA by
      the FDA; and $500,000 upon receipt of marketing authorization in
      Canada.




37




In
      addition, we are obligated to pay T&R an annual royalty of 10% on annual net
      sales of up to $100,000,000; 15% of the amount of annual net sales in excess
      of
      $100,000,000 and 20% of annual net sales in excess of $200,000,000. There is
      a
      minimum royalty of $1,000,000 per year. There is a one-time success fee of
      $10,000,000 upon the achievement of cumulative net sales of
      $100,000,000.




Through
      December 31, 2007, none of the milestones have been reached and sales have
      not
      commenced, therefore, we have not paid any such milestones or
      royalties.





**Oleoyl-estrone**




On
      July
      9, 2007, the Company announced the results of its two Phase 2a clinical trials
      of oral 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 Oleoyl-estrone programs in both common obesity and morbid
      obesity.




**Propofol
      Lingual Spray**




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




**Research
      and Development Projects**




***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.




38




In
      the
      United States, Manhattan Pharmaceuticals is pursuing the development of Hedrin
      as a medical device and has submitted a regulatory package to the FDA’s Center
      for Devices and Radiological Health. The Company expects to be required to
      complete at least one clinical trial with this product candidate.




To
      date,
      we have incurred $1,070,000 of project costs for the development of Hedrin.
      All
      of such costs were incurred during 2007.




***Topical*** ***PTH
      (1-34).*** ******




We
      are
      developing Topical PTH (1-34) as a topical treatment for psoriasis. In August
      2003, researchers, led by Michael Holick, Ph.D., MD, Professor of Medicine,
      Physiology, and Biophysics at Boston University Medical Center, reported
      positive results from a US Phase 1/2 clinical trial evaluating the safety and
      efficacy of Topical PTH (1-34) as a topical treatment for psoriasis. This
      double-blind, placebo controlled trial in 15 patients compared Topical PTH
      (1-34) formulated in the Novasome® Technology versus the Novasome® vehicle
      alone. Following 8 weeks of treatment, the topical application of Topical PTH
      (1-34) resulted in complete clearing of the treated lesion in 60% of patients
      and partial clearing in 85% of patients. Additionally, there was a statistically
      significant improvement in the global severity score. Ten patients continued
      into an open label extension study in which the Psoriasis Area and Severity
      Index, or PASI, was measured; PASI improvement across all 10 patients achieved
      statistically significant improvement compared to baseline. This study showed
      Topical PTH (1-34) to be a safe and effective treatment for plaque psoriasis
      with no patients experiencing any clinically significant adverse
      events.




Due
      to
      the high response rate seen in patients in the initial trial with Topical PTH
      (1-34) we believe that it may have an important clinical advantage over current
      topical psoriasis treatments. A follow on physician IND Phase 2a trial involving
      Topical PTH (1-34) was initiated in December 2005 under the auspices of Boston
      University. In April 2006, we reported a delay in its planned Phase 2a clinical
      study of Topical PTH (1-34) due to a formulation issue. We believe that we
      have
      resolved this issue through a new gel formulation of Topical PTH (1-34) and
      have
      filed new patent applications in the U.S. for this new proprietary
      formulation.




In
      September 2007, the U.S. FDA accepted our corporate 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
      is desiged to evaluate safety and preliminary efficacy of Topical PTH (1-34)
      for
      the treatment of psoriasis. Approximately 54 subjects will be enrolled and
      randomized to receive one of two dose levels of Topical PTH (1-34), or vehicle,
      for an 8 week treatment period. In this study the vehicle is the topical
      formulation without the active ingredient, PTH (1-34).




To
      date,
      we have incurred $5,122,000 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. During 2007, $2,426,000 of
      these costs were incurred.




As
      with
      the development of our other product candidates, we do not currently have
      sufficient capital to fund our planned development activities of Topical PTH
      (1-34) beyond the ongoing phase 2a trial. We will, therefore, need to raise
      additional capital in order to complete our planned R&D activities for
      Topical PTH (1-34) . To the extent additional capital is not available when
      we
      need it, we may be forced to sublicense our rights to Topical PTH (1-34) or
      abandon our development efforts altogether, either of which would have a
      material adverse effect on the prospects of our business.




39




Since
      PTH
      (1-34) is already available in the injectable form, we should be able to utilize
      much of the data that is publicly available in planning our future studies.
      However, since PTH (1-34) will be used topically, bridging studies will need
      to
      be performed and we are not able to realistically predict the size and the
      design of those studies at this time.




***Altoderm***




We
      are
      developing Altoderm for the pruritis (itch) associated with dermatologic
      conditions including atopic dermatitis. In a Phase 3, randomized, double-blind,
      placebo-controlled, parallel-group, clinical study (conducted in Europe by
      T&R.) the compound was administered for 12 weeks to 114 subjects with
      moderately severe atopic dermatitis. The placebo (vehicle) used in this study
      was the Altoderm product without the active ingredient. In the study results,
      published in the British Journal of Dermatology in February 2005, Altoderm
      demonstrated a statistically significant reduction (36%) in atopic dermatitis
      symptoms. During the study, subjects were permitted to continue with their
      existing treatment, in most cases this consisted of emollients and topical
      steroids. A positive secondary outcome of the study was a 35% reduction in
      the
      use of topical steroids for the Altoderm treated subjects. Further analysis
      of
      the clinical data, performed by Manhattan Pharmaceuticals showed that Altoderm
      treated subjects also experienced a 57% reduction in pruritus.




Altoderm
      is currently being tested in a second, ongoing Phase 3, randomized,
      double-blind, vehicle-controlled clinical study (also conducted in Europe by
      T&R). Analysis of the preliminary data from the initial 12 week, blinded
      portion of this clinical trial has been completed. The vehicle used in this
      study was the Altoderm product without the active ingredient, cromolyn sodium.
      The preliminary data indicate 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. The Company believes these
      outcomes were due to suboptimal study design where subjects were unrestricted
      in
      their use of concomitant therapies such as topical steroids and
      immunomodulators. The placebo (vehicle) used in this study was the Altoderm
      product without the active ingredient, cromolyn sodium. Analysis of the
      preliminary open label data beginning at week 13 of the study, show vehicle
      treated subjects demonstrating further improvement when switched to Altoderm.
      Given the promising clinical data obtained from the first European Phase 3
      study, and the symptom improvements reported in the ongoing European Phase
      3
      study, both Manhattan Pharmaceuticals and Thornton & Ross Limited believe
      there is significant potential for Altoderm and will continue development of
      this product candidate.




On
      March
      6, 2008, Manhattan Pharmaceuticals announced it had successfully completed
      a
      pre-IND meeting with the FDA. Based on a review of the submitted package for
      Altoderm, including data from the two previously reported Phase 3 clinical
      studies, the FDA determined that following completion of certain nonclinical
      studies, and the acceptance of an IND, Phase 2 clinical studies may be initiated
      in the U.S. The FDA also concurred that the proposed indication of pruritus
      associated with dermatologic conditions including atopic dermatitis can be
      pursued.




To
      date
      we have incurred $1,012,000 for the development of Altoderm. All of such costs
      were incurred in 2007.




40




***Altolyn***




We
      are
      developing Altolyn for the treatment of mastocystosis. On March 6, 2008,
      Manhattan Pharmaceuticals announced it had successfully completed a pre-IND
      meeting with the FDA. Based on a review of the submitted package for Altolyn,
      the FDA concurred that the proposed indication of mastocytosis can be pursued
      and that the 505(b)(2) NDA would be an acceptable approach provided a clinical
      bridge is established between Altolyn and Gastrocrom ® ,
      the
      oral liquid formulation of cromolyn sodium currently approved in the U.S. to
      treat mastocytosis. The FDA also affirmed that a single, Phase 3 study
      demonstrating the efficacy of Altolyn over placebo, may be sufficient to support
      a product approval in the U.S. In addition, the FDA also concurs that no
      additional nonclinical studies will be required to support an IND application.
      The Company is working with T&R and the current U.K. manufacturer of Altolyn
      to develop a GMP compliant manufacturing process.




Early
      clinical experience with Altolyn in the U.K. suggests promising activity in
      patients with various allergic disorders, including food allergy and
      inflammatory bowel conditions. The Company may pursue these as additional
      indications.




To
      date
      we have incurred $790,000 for the development of Altolyn. All of such costs
      were
      incurred in 2007.




***Oleoyl-estrone***




On
      July
      9, 2007, the Company announced the results of its two Phase 2a clinical trials
      of oral 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 Oleoyl-estrone programs in both common obesity and morbid
      obesity.




To
      date,
      we have incurred $15,510,000 for the development of OE, $3,209,000 of which
      was
      incurred during 2007.




***Propofol
      Lingual Spray***




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




To
      date,
      we have incurred $2,984,000 for the development of Propofol Lingual Spray,
      $27,000 of which was incurred during 2007.




**Summary
      of Contractual Commitments**




***Employment
      Agreements***




We
      have
      employment agreements with two employees for the payment of aggregate annual
      base salaries of $530,000 as well as performance based bonuses. All of these
      agreements have terms of three years and have a remaining obligation of $394,000
      as of December 31, 2007.




41




**Leases**




Rent
      expense for the years ended December 31, 2007 and 2006 was $141,012 and
      $141,012, respectively. Future minimum rental payments subsequent to December
      31, 2007 under an operating lease for the Company’s office facility are as
      follows:




Years
                Ending December 31,
            
            Commitment2008
            
            $100,0002009
                and subsequent
            
            $0




**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.




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.




42




***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 under the
      recognition and measurement provisions of Accounting Principles Board (“APB”)
      Opinion No.25, “Accounting for Stock Issued to Employees” and related
      interpretations, as permitted by Statement of Financial Accounting Standards
      (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based Compensation.”




Effective
      January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” (“Statement
      123(R)”) for employee options using the modified prospective transition method.
      Statement 123(R) revised Statement 123 to eliminate the option to use the
      intrinsic value method and required 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 31,2007
      and
      2006 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 of
      Statement 123; 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 Statement 123(R). In accordance with the modified
      prospective method, we have not restated prior period results.




***New
      Accounting Pronouncements*** ****


In
        September 2006, the FASB issued SFAS No. 157, ** “Fair
        Value Measurements” (“SFAS 157”), which defines fair value, establishes a
        framework for measuring fair value in accordance with generally accepted
        accounting principles (“GAAP”) in the United States of America, and expands
        disclosures about fair value measurements. SFAS 157 does not require any
        new
        fair value measurements under GAAP and is effective for fiscal years beginning
        after November 15, 2007. The Company will adopt SFAS 157 as of January 1,
        2008.
        The effects of adoption will be determined by the types of instruments carried
        at fair value in our financial statements at the time of adoption, as well
        as
        the method utilized to determine their fair values prior to adoption. Based
        on
        the Company’s current use of fair value measurements, SFAS 157 is not expected
        to have a material effect on its results of operations or financial
        position.
  In
        February 2007, the FASB issued SFAS No. 159, ** “The
        Fair
        Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”),
        which provides companies with an option to report selected financial assets
        and
        liabilities at fair value. SFAS 159 establishes presentation and disclosure
        requirements designed to facilitate comparisons between companies that choose
        different measurement attributes for similar types of assets and liabilities
        and
        highlights the effect of a company’s choice to use fair value on its earnings.
        It also requires a company to display the fair value of those assets and
        liabilities for which it has chosen to use fair value on the face of the
        balance
        sheet. SFAS 159 will be effective beginning January 1, 2008 and is not expected
        to have a material impact on the Company’s consolidated financial
        statements.
  In
        June
        2007, the FASB issued EITF No. 07-3, ** “Accounting
        for Nonrefundable Advance Payments for Goods or Services Received for use
        in
        Future Research and Development Activities” (“EITF No. 07-3”). EITF No. 07-3
        states that nonrefundable advance payments for goods or services that will
        be
        used or rendered for future research and development activities should be
        deferred and capitalized. Such amounts should be recognized as an expense
        as the
        related goods are delivered or the related services are performed. Entities
        should continue to evaluate whether they expect the goods to be delivered
        or
        services to be rendered. If an entity does not expect the goods to be delivered
        or services to be rendered, the capitalized advance payment should be charged
        to
        expense. The provisions of EITF No. 07-3 will be effective for the Company
        on a
        prospective basis beginning January 1, 2008, evaluated on a contract by contract
        basis and is not expected to have a material impact on the Company’s
        consolidated financial statements.




43


In
        December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS
        No.
        141, ** “Business
        Combinations.” The revision is intended to simplify existing guidance and
        converge rulemaking under U.S. generally accepted accounting principles with
        international accounting standards. This statement applies prospectively
        to
        business combinations where the acquisition date is on or after the beginning
        of
        the first annual reporting period beginning on or after December 15, 2008.
        An
        entity may not apply it before that date. The Company is currently evaluating
        the impact of the provisions of the revision on its consolidated results
        of
        operations and financial condition.
  In
        December 2007, the FASB issued SFAS No. 160, *“* Noncontrolling
        Interests in Consolidated Financial Statements” (SFAS 160), which will require
        noncontrolling interests (previously referred to as minority interests) to
        be
        treated as a separate component of equity, not as a liability or other item
        outside of permanent equity. This statement applies to the accounting for
        noncontrolling interests and transactions with noncontrolling interest holders
        in consolidated financial statements. SFAS 160 will be applied prospectively
        to
        all noncontrolling interests, including any that arose before the effective
        date
        except that comparative period information must be recast to classify
        noncontrolling interests in equity, attribute net income and other comprehensive
        income to noncontrolling interests, and provide other disclosures required
        by
        Statement 160. SFAS 160 is effective for periods beginning on or after December
        15, 2008. We are currently evaluating the impact that SFAS 160 will have
        on our
        consolidated financial statements.
  The
        FASB
        and the Securities and Exchange Commission had issued certain other accounting
        pronouncements as of December 31, 2007 that will become effective in subsequent
        periods; however, the Company does not believe that any of those pronouncements
        would have significantly affected its financial accounting measures or
        disclosures had they been in effect during the years ended December 31, 2007
        and
        2006 and for the period from August 6, 2001 (inception) to December 31, 2007
        or
        that will have a significant effect at the time they become
        effective.




44


**ITEM
      7. CONSOLIDATED FINANCIAL STATEMENTS**




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




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




None.




**ITEM
      8A(T).**  **CONTROLS
      AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 2007, we carried out an evaluation, under the supervision and
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934, as amended). Based upon that evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were effective as of that date in alerting them on
      a
      timely basis to material information required to be disclosed our reports to
      the
      Securities and Exchange Commission. There were no changes in our internal
      controls over financial reporting during the quarter ended December 31, 2007
      that have materially affected, or are likely to materially affect, our internal
      controls over financial reporting.




Our
      management, including our Chief Executive Officer and its Chief Financial
      Officer, does not expect that disclosure controls or internal controls 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 no 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 limitations in all control systems, no evaluation
      of controls can provide absolute assurance that all control issues and instances
      of fraud, if any, within the Company have been detected.




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.




*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.




45




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, 2007, 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, 2007.




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




**ITEM
      8B.**  **OTHER
      INFORMATION**




On
      March
      28, 2008 the employment agreement between the Company and Douglas Abel, the
      Company’s president and chief executive officer, was extended by mutual
      agreement for a period of one year, through April 1, 2009.




**ITEM
      9.** **DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE**




Information
      in response to this Item is incorporated herein by reference to our 2008 Proxy
      Statement to be filed pursuant to Regulation14A within 120days after the end
      of
      the fiscal year covered by this Form 10-K.


46


**PART
      III**





**ITEM
      10. EXECUTIVE COMPENSATION**




Information
      in response to this Item is incorporated herein by reference to our 2008 Proxy
      Statement to be filed pursuant to Regulation14A within 120 days after the end
      of
      the fiscal year covered by this Form 10-K.




**ITEM
      11.** **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
      MATTERS**




Information
      in response to this Item is incorporated herein by reference to our 2008 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after the
      end
      of the fiscal year covered by this Form 10-K.




**ITEM
      12.** **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**




Information
      in response to this Item is incorporated herein by reference to our 2008 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after the
      end
      of the fiscal year covered by this Form 10-K.


47


**ITEM
      13. EXHIBITS LIST** **–
      REVIEW WITH ANTHONY**




The
      following documents are included or referenced 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).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
                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).10.1
            
            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)).




48




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,
                200710.12
            
            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.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.




49




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 Phaarmaceuticals, Inc. to
                develop
                and commercialize “Hedrin” dated January 31, 2008.10.21
            
            Assignment
                and Contribution Agreement between Hedrin Pharmaceuticals K/S and
                Manhattan Pharmaceuticals, Inc. dated February 25,
                2008.10.22
            
            Registration
                Rights Agreement between Nordic Biotech Venture Fund II K/S and Manhattan
                Pharmaceuticals, Inc. dated February 25, 2008.10.23
            
            Amendment
                to Employment Agreement by and between Manhattan Pharmaceuticals,
                Inc. and
                Douglas Abel23.1
            
            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.







++
            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.


50


**ITEM
      14.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES** **.**




**Fees
      Billed to the Company by Its Independent Auditors – MIKE TO
      UPDATE**




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, 2007 and 2006:




**J.H.
                Cohn LLP****Fee
                Category**
            
            **Fiscal
                2007 Fees**
            
            **Fiscal
                2006 Fees**Audit
                Fees
            
            $
            103,940
            
            $
            100,111Audit-Related
                Fees (1)
            
            
            11,520
            
            
            22,943Tax
                Fees (2)
            
            
            18,708
            
            
            21,165All
                Other Fees (3)
            
            
            -
            
            
            -Total
                Fees
            
            $
            134,168
            
            $
            144,219





(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 2007 was obtained in reliance on the waiver of the pre-approval
      requirement afforded in SEC regulations.


51




**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, 2008.




Manhattan
                Pharmaceuticals, Inc.By:
            /s/
                Douglas AbelDouglas
                AbelChief
                Executive Officer and President





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/
                Douglas Abel
            
            Chief
                Executive Officer, President and
            
            March
                31, 2008Douglas
                Abel
            
            Director
              (principal executive officer)/s/
                Michael G. McGuinness
            
            Secretary
                and Chief Financial Officer
            
            March
                31, 2008Michael
                G. McGuinness
            
            (principal
              accounting and financial officer)/s/
                Neil Herskowitz
            
            Director
            
            March
                31, 2008Neil
                Herskowitz/s/
                Malcolm Hoenlein
            
            Director
            
            March
                31, 2008Malcolm
                Hoenlein/s/
                Timothy McInerney
            
            Director
            
            March
                31, 2008Timothy
                McInerney/s/
                Richard Steinhart
            
            Director
            
            March
                31, 2008Richard
                Steinhart/s/
                Michael Weiser
            
            Director
            
            March
                31, 2008Michael
                Weiser




52




**Index
      to Consolidated Financial Statements**




**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2007 and
                2006
                and the cumulative period from August 6, 2001 (inception) to December
                31,
                2007
            F-4Consolidated
                Statement of Stockholders’ Equity (Deficiency) for the Years EndedDecember
                31, 2007 and 2006 and the cumulative period from August 6, 2001
                (inception) to December 31, 2007
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
                and the cumulative period from August 6, 2001 (inception) to December
                31,
                2007
            F-7Notes
                to Consolidated 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 consolidated balance sheets of Manhattan
      Pharmaceuticals, Inc. and Subsidiaries (a development stage company) as of
      December 31, 2007 and 2006, and the related consolidated 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, 2007. These consolidated financial statements are the responsibility of
      the
      Company's management. Our responsibility is to express an opinion on these
      consolidated 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 consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Manhattan
      Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2007 and 2006, and
      their consolidated 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,
      2007,
      in conformity with accounting principles generally accepted in the United States
      of America.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company has incurred net losses and
      negative cash flows from operating activities from its inception through
      December 31, 2007 and has an accumulated deficit and negative working capital
      as
      of December 31, 2007. These matters raise substantial doubt about the Company’s
      ability to continue as a going concern. Management’s plan regarding these
      matters are also described in Note 2. The accompanying consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




As
      discussed in Note 3 to the consolidated financial statements, the Company
      changed the manner in which it accounts for share-based compensation in fiscal
      2006.





/s/
      J.H.
      Cohn LLP





Roseland,
      New Jersey


March
      28,
      2008


F-2





**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)





Consolidated
      Balance Sheets





**December
                31, 2007**
            
            **December
                31, 2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            649,686
            
            $
            3,029,118Prepaid
                expenses
            
            
            215,852
            
            
            264,586Total
                current assets
            
            
            865,538
            
            
            3,293,704Property
                and equipment, net
            
            
            44,533
            
            
            83,743Other
                assets
            
            
            70,506
            
            
            70,506Total
                assets
            
            $
            980,577
            
            $
            3,447,953**Liabilities
                and Stockholders’ Equity (Deficiency)**Current
                liabilities:Accounts
                payable
            
            $
            1,279,485
            
            $
            1,393,296Accrued
                expenses
            
            
            592,177
            
            
            550,029Total
                liabilities
            
            
            1,871,662
            
            
            1,943,325Commitments
                and contingenciesStockholders’
                equity (deficiency):Preferred
                stock, $.001 par value. Authorized 1,500,000 shares; no shares issued
                and
                outstanding at December 31, 2007 and 2006Common
                stock, $.001 par value. Authorized 150,000,000 shares; 70,624,232
                and
                60,120,038 shares issued and outstanding at December 31, 2007 and
                December 31, 2006, respectively
            
            
            70,624
            
            
            60,120Additional
                paid-in capital
            
            
            54,037,361
            
            
            44,411,326Deficit
                accumulated during the development stage
            
            
            (54,999,070
            )
            
            (42,966,818
            )Total
                stockholders’ equity (deficiency)
            
            
            (891,085
            )
            
            1,504,628Total
                liabilities and stockholders' equity (deficiency)
            
            $
            980,577
            
            $
            3,447,953





See
      accompanying notes to consolidated financial statements.


F-3


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)





Consolidated
      Statements of Operations





**Years ended December 31,**
            
            **Cumulative**
              **period from**
              **August 6, 2001**
              **(inception) to**
              **December 31,****2007**
            
            **2006**
            
            **2007**Revenue
            
            $
            —
            
            $
            —
            
            $
            —Costs
                and expenses:Research
                and development
            
            
            8,535,687
            
            
            6,172,845
            
            
            26,489,043General
                and administrative
            
            
            3,608,270
            
            
            3,827,482
            
            
            13,852,363In-process
                research and development charge
            
            
            —
            
            
            —
            
            
            11,887,807Impairment
                of intangible assets
            
            
            —
            
            
            —
            
            
            1,248,230Loss
                on disposition of intangible assets
            
            
            —
            
            
            —
            
            
            1,213,878Total
                operating expenses
            
            
            12,143,957
            
            
            10,000,327
            
            
            54,691,321Operating
                loss
            
            
            (12,143,957
            )
            
            (10,000,327
            )
            
            (54,691,321
            )Other
                (income) expense:Interest
                and other income
            
            
            (112,181
            )
            
            (307,871
            )
            
            (821,897
            )Interest
                expense
            
            
            476
            
            
            1,665
            
            
            26,034Realized
                (gain)/loss on sale of marketable equity securities
            
            
            —
            
            
            1,002
            
            
            (76,032
            )Total
                other income
            
            
            (111,705
            )
            
            (305,204
            )
            
            (871,895
            )Net
                loss
            
            
            (12,032,252
            )
            
            (9,695,123
            )
            
            (53,819,426
            )Preferred
                stock dividends (including imputed amounts)
            
            
            —
            
            
            —
            
            
            (1,179,644
            )Net
                loss applicable to common shares
            
            $
            (12,032,252
            )
            $
            (9,695,123
            )
            $
            (54,999,070
            )Net
                loss per common share:Basic
                and diluted
            
            $
            (0.18
            )
            $
            (0.16
            )Weighted
                average shares of common stock outstanding:Basic
                and diluted
            
            
            68,015,075
            
            
            60,112,333





See
      accompanying notes to consolidated financial statements.


F-4


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)





Consolidated
      Statement of Stockholders’ Equity (Deficiency)




**Series
                A convertible preferred stock**
            
            **Series
                A convertible preferred stock**
            
            **Common
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in capital**
            
            **Subscription
                receivable**
            
            **Deficit
                accumulated during development stage**
            
            **Dividends**
              **payable in**
              **Series A**
              **preferred**
              **stock**
            
            **Accumulated**
              **other**
              **comprehensive**
              **income (loss)**
            
            **Unearned
                consulting services**
            
            **Total
                stockholders’ equity (deficiency)****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**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
            )
            
            (4,000
            )
            
            (56,796
            )
            
            —
            
            
            —
            
            
            —
            
            
            (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
            
            
            1,000,000
            
            
            1,000
            
            
            —
            
            
            —
            
            
            9,045,176
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            9,046,176Imputed
                preferred stock dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            418,182
            
            
            —
            
            
            (418,182
            )
            
            —
            
            
            
            
            
            
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,960,907
            )
            
            —
            
            
            —
            
            
            —
            
            
            (5,960,907
            )Balance
                at December 31, 2003
            
            
            1,000,000
            
            
            1,000
            
            
            23,362,396
            
            
            23,362
            
            
            14,289,535
            
            
            —
            
            
            (7,473,205
            )
            
            —
            
            
            (7,760
            )
            
            —
            
            
            6,832,932Exercise
                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
            
            
            24,901
            
            
            25
            
            
            —
            
            
            —
            
            
            281,073
            
            
            —
            
            
            —
            
            
            (282,388
            )
            
            —
            
            
            —
            
            
            (1,290
            )Conversion
                of preferred stock to common stock at $1.10 per share
            
            
            (170,528
            
            
            (171
            
            
            1,550,239
            
            
            1,551
            
            
            (1,380
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —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
            
            
            854,373
            
            
            854
            
            
            28,309,187
            
            
            28,309
            
            
            18,083,208
            
            
            —
            
            
            (13,955,035
            )
            
            303,411
            
            
            13,237
            
            
            (20,168
            )
            
            4,453,816


F-5





**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)





Consolidated
      Statement of Stockholders’ Equity (Deficiency)





**Series
                A convertible preferred stock**
            
            **Series
                A convertible preferred stock**
            
            **Common
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in capital**
            
            **Subscription
                receivable**
            
            **Deficit
                accumulated during development stage**
            
            **Dividends
                payable in Series A preferred stock**
            
            **Accumulated
                other comprehensive income (loss)**
            
            **Unearned
                consulting services**
            
            **Total
                stockholders’ equity (deficiency)****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**
            
            **Amount**Common
                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
            
            
            41,781
            
            
            42
            
            
            —
            
            
            —
            
            
            477,736
            
            
            —
            
            
            —
            
            
            (479,074
            )
            
            —
            
            
            —
            
            
            (1,296
            )Conversion
                of preferred stock to common stock at $1.10 per share
            
            
            (896,154
            )
            
            (896
            )
            
            8,146,858
            
            
            8,147
            
            
            (7,251
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —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
            )
            
            —
            
            
            —
            
            
            —
            
            
            1,504,628Common
                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
            )





See
      accompanying notes to consolidated financial statements.


F-6


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)





Consolidated
      Statements of Cash Flows





**Years ended December 31,**
            
            **Cumulative**
              **period from**
              **August 6, 2001**
              **(inception) to**
              **December 31,****2007**
            
            **2006**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (12,032,252
            )
            $
            (9,695,123
            )
            $
            (53,819,426
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Share-based
                compensation
            
            
            1,440,956
            
            
            1,675,499
            
            
            3,364,983Shares
                issued in connection with in-licensing agreement
            
            
            232,500
            
            
            —
            
            
            232,500Warrants
                issued to consultant
            
            
            83,670
            
            
            —
            
            
            83,670Amortization
                of intangible assets
            
            
            —
            
            
            —
            
            
            145,162(Gain)/loss
                on sale of marketable equity securities
            
            
            —
            
            
            1,002
            
            
            (76,032
            )Depreciation
            
            
            48,345
            
            
            60,186
            
            
            195,825Non
                cash portion of in-process research and development charge
            
            
            —
            
            
            —
            
            
            11,721,623Loss
                on impairment and disposition of intangible assets
            
            
            —
            
            
            —
            
            
            2,462,108Other
            
            
            —
            
            
            —
            
            
            5,590Changes
                in operating assets and liabilities, net of acquisitions:Decrease
                (increase) in prepaid expenses and other current assets
            
            
            48,734
            
            
            (69,810
            )
            
            (157,607
            )Increase
                in other assets
            
            
            —
            
            
            —
            
            
            (70,506
            )Increase
                (decrease) in accounts payable
            
            
            (93,812
            )
            
            (224,193
            )
            
            1,699,698Increase
                in accrued expenses
            
            
            42,148
            
            
            501,701
            
            
            51,856Net
                cash used in operating activities
            
            
            (10,229,711
            )
            
            (7,750,738
            )
            
            (34,160,556
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (9,134
            )
            
            (37,052
            )
            
            (230,635
            )Cash
                paid in connection with acquisitions
            
            
            —
            
            
            —
            
            
            (26,031
            )Net
                cash provided from the purchase and sale of short-term
                investments
            
            
            —
            
            
            1,005,829
            
            
            435,938Proceeds
                from sale of license
            
            
            —
            
            
            —
            
            
            200,001Net
                cash (used in) provided by investing activities
            
            
            (9,134
            )
            
            968,777
            
            
            379,273Cash
                flows from financing activities:Repayments
                of notes payable to stockholders
            
            
            —
            
            
            —
            
            
            (884,902
            )Proceeds
                (costs) related to sale of common stock, net
            
            
            7,852,185
            
            
            (15,257
            )
            
            25,896,262Proceeds
                from sale of preferred stock, net
            
            
            —
            
            
            —
            
            
            9,046,176Proceeds
                from exercise of warrants and stock options
            
            
            7,228
            
            
            —
            
            
            138,219Other,
                net
            
            
            —
            
            
            —
            
            
            235,214Net
                cash provided by (used in) financing activities
            
            
            7,859,413
            
            
            (15,257
            )
            
            34,430,969Net
                (decrease) increase in cash and cash equivalents
            
            
            (2,379,432
            )
            
            6,797,218
            
            
            649,686Cash
                and cash equivalents at beginning of period
            
            
            3,029,118
            
            
            9,826,336
            
            
            —Cash
                and cash equivalents at end of period
            
            $
            649,686
            
            $
            3,029,118
            
            $
            649,686Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            475
            
            $
            1,665
            
            $
            26,033Supplemental
                disclosure of noncash investing and financing activities:Common
                stock issued in satisfaction of accounts payable
            
            $
            20,000
            
            $
            —
            
            $
            770,000Imputed
                preferred stock dividend
            
            
            —
            
            
            —
            
            
            418,182Preferred
                stock dividends accrued
            
            
            —
            
            
            —
            
            
            761,462Conversion
                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
            
            
            232,500
            
            
            
            
            
            232,500Marketable
                equity securities received in connection with sale of
                license
            
            
            —
            
            
            —
            
            
            359,907Warrants
                issued to consultant
            
            
            83,670
            
            
            —
            
            
            83,670Net
                liabilities assumed over assets acquired in business
                combination
            
            
            —
            
            
            —
            
            
            (675,416
            )Cashless
                exercise of warrants
            
            
            6
            
            
            27
            
            
            33





See
      accompanying notes to consolidated financial statements.


F-7


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED 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 clinical stage 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 four product candidates in development:
      HedrinTM, a novel, non-insecticide treatment of pediculitis (head lice); Topical
      PTH (1-34) for the treatment of psoriasis; AltodermTM (topical cromolyn sodium)
      for the treatment of pruritus associated with dermatologic conditions including
      atopic dermatitis; and AltolynTM (oral tablet cromolyn sodium) for the treatment
      of mastocytosis. During 2007, the Company discontinued development of
      Oleoyl-estrone and Propofol Lingual Spray.




***Acquisition
      of Tarpan Therapeutics, Inc.***




On
      April
      1, 2005, the Company entered into an Agreement and Plan of Merger (the
“Agreement”) with Tarpan Therapeutics, Inc., a Delaware corporation (“Tarpan”),
      and Tarpan Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
      of the Company (“TAC”). Under the Agreement TAC merged with and into Tarpan,
      with Tarpan remaining as the surviving corporation and a wholly-owned subsidiary
      of the Company (the “Merger”). The Merger was completed April 1, 2005. In
      consideration for their shares of Tarpan capital stock and in accordance with
      the Agreement, the stockholders of Tarpan received 10,731,052 shares of the
      Company’s common stock such that, upon the effective time of the Merger, the
      Tarpan stockholders collectively receivedapproximately 20 percent of the
      Company’s then outstanding common stock on a fully-diluted basis. Based on the
      five day average price of the Company’s common stock of $1.03 per share, the
      value of the shares issued totaled $11,052,984. In addition, there were $166,184
      of acquisition costs. At the time of the Merger, Tarpan had outstanding
      indebtedness of $651,000 (inclusive of 5% accrued interest) resulting from
      a
      series of promissory notes issued to Paramount BioCapital Investments, LLC
      and
      Horizon BioMedical Ventures, LLC, both of which are owned or controlled by
      Dr.
      Lindsay Rosenwald. The notes were repaid in full by the Company in two
      installments on April 15, 2005 and September 6, 2005.


F-8


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




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




Several
      of Tarpan’s former stockholders were directors or significant stockholders of
      the Company at the time of the transaction. Dr. Rosenwald and various trusts
      established for the benefit of Dr. Rosenwald and members of his immediate family
      collectively beneficially owned approximately 46 percent of Tarpan’s common
      stock and beneficially owned approximately 26 percent of the Company’s common
      stock at the time of the transaction. In addition, Joshua Kazam, David Tanen,
      Dr. Michael Weiser and Timothy McInerney, all of whom were members of the
      Company’s board of directors at the time of the transaction, collectively owned
      approximately 13.4 percent of Tarpan’s outstanding common stock. At the time of
      the transaction, Dr. Weiser and Mr. McInerney were employed by Paramount
      BioCapital, Inc., an entity owned and controlled by Dr. Rosenwald. As a result
      of such relationships between the Company and Tarpan, the Company’s board of
      directors established a special committee to consider and approve the Agreement.
      The members of the special committee did not have any prior relationship with
      Tarpan.




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 Financial Accounting Standards Board (“FASB”)
      Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business
      combinations Accounted for by the Purchase Method” (“FIN 4”), 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. Tarpan was a
      biopharmaceutical company engaged in the development of the Phase II
      pharmaceutical product candidate, PTH (1-34).




**(2)** **Liquidity
      and Basis of Presentation**




***Liquidity***




The
      Company incurred a net loss of $12,032,252 and negative cash flows from
      operating activities of $10,229,711 for the year ended December 31, 2007 and
      a
      net loss of $9,695,123 and negative cash flows from operating activities of
      $7,750,738 for the year ended December 31, 2006. The net loss applicable to
      common shares from date of inception, August 6, 2001, to December 31, 2007
      amounts to $54,999,070.




The
      Company received approximately $7.9 million net from a private placement of
      common stock and warrants in March 2007. This private placement is more fully
      described in Note 5.


F-9


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




The
      Company received approximately $2.0 million from a joint venture agreement
      in
      February 2008. This joint venture agreement is more fully described in Note
      12.




Management
      believes that the Company will continue to incur net losses through at least
      December 31, 2008 and for the foreseeable future thereafter. Based on the
      resources of the Company available at December 31, 2007 and the net proceeds
      received from the February 2008 joint venture agreement management does not
      believe that the Company has sufficient capital to fund its operations through
      2008. Management believes that the Company will need additional equity or debt
      financing or will need to generate revenues through licensing of its products
      or
      entering into strategic alliances to be able to sustain its operations through
      2008. 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.




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




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.




**(3) 
      Summary of Significant Accounting Policies**




***Basis
      of Presentation***




The
      Company has not generated any revenue from its operations and, accordingly,
      the
      consolidated financial statements have been prepared in accordance with the
      provisions of SFAS No.7, “Accounting and Reporting by Development Stage
      Enterprises.”




***Principles
      of Consolidation***




The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries. All intercompany balances and transactions have
      been
      eliminated in consolidation. All of the Company’s subsidiaries were dissolved as
      of December 31, 2006.




***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.


F-10


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**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.




***Acquired
      in-process research and development***




Costs
      to
      acquire in-process research and development projects and technologies which
      have
      no alternative future use at the date of acquisition are 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.




***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
      16,903,292 and 13,383,229 shares at December 31, 2007 and 2006,
      respectively.


F-11


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**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 under
      the recognition and measurement provisions of Accounting Principles Board
      (“APB”) Opinion No.25, “Accounting for Stock Issued to Employees” and related
      interpretations, as permitted by Statement of Financial Accounting Standards
      (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based Compensation.”




Effective
      January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
      transition method. Statement 123(R) revised Statement 123 to eliminate the
      option to use the intrinsic value method and required the Company to expense
      the
      fair value of all employee options over the vesting period. Under the modified
      prospective transition method, the Company recognized compensation cost for
      the
      years ended December 31, 2007 and 2006 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 of Statement 123; 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 Statement 123(R). 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,
      2007 and 2006, the Company recognized share-based employee compensation cost
      of
      $1,447,560 and $1,670,661, respectively, in accordance with Statement 123(R).
      $890,124 of the $1,447,560 of expense recognized in 2007 resulted from the
      grant
      of stock options to officers, directors, and employees of the Company on or
      prior to December 31, 2005. $1,500,690 of the $1,670,661 of the expense
      recognized in 2006 resulted from the grants of stock options to officers,
      directors and employees of the Company on or prior to December 31, 2005. The
      balances for the years ended December 31, 2007 and 2006 of $557,436 and
      $169,971, respectively, relate to the granting of stock options to employees
      and
      officers on or after January 1, 2006. The Company did not capitalize any
      share-based compensation cost.




Options
      granted to consultants and other non-employees are accounted for in accordance
      with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
      than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services". Accordingly, such options are recorded at fair value at the date
      of
      grant and subsequently adjusted to fair valueat the end of each reporting
      perioduntil such options vest, and the fair value of the options, as adjusted,
      is amortized to consulting expenseover the related vesting period. As a result
      of adjusting consultant and other non-employee options to fair value as of
      December 31, 2007 and 2006 respectively, net of amortization, the Company
      recognized an increase to general and administrative and research and
      development expenses of $6,604 for the year ended December 31, 2007 and a
      reduction to general and administrative and research and development expenses
      of
      $4,838 for the year ended December 31, 2006.


F-12


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




The
      Company has allocated share-based compensation costs to general and
      administrative and research and development expenses as follows:




**2007**
            
            **2006**General
                and administrative expense:Share-based
                employee compensation cost
            
            $
            891,897
            
            $
            1,176,618Share-based
                consultant and non-employee cost
            
            
            10,550
            
            
            (29,842
            )$
            902,447
            
            $
            1,146,776Research
                and development expenseShare-based
                employee compensation cost
            
            $
            555,663
            
            $
            494,043Share-based
                consultant and non-employee cost
            
            
            (17,154
            )
            
            34,680$
            538,509
            
            $
            528,723Total
                share-based cost
            
            $
            1,440,956
            
            $
            1,675,499




As
      a
      result of adopting Statement 123(R), net loss for the year ended December 31,
      2006 was greater than if the Company had continued to account for share-based
      compensation under APB 25 by approximately $1,671,000. The effect of adopting
      Statement 123(R) on basic and diluted earnings per share for the year ended
      December 31, 2006 was $0.03 per share.




To
      compute compensation expense in 2007 and 2006 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 for the application of Statement
      123
      (R). 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 as prescribed in Staff Accounting
      Bulletin No. 107. 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 2007 and 2006:




**2007**
            
            **2006**Expected
                volatility
            
            
            93%
            
            
            84%
                - 98%Dividend
                yield
            
            
            —
            
            
            —Expected
                term (in years)
            
            
            5
                - 10
            
            
            5
                - 10Risk-free
                interest rate
            
            
            3.6%
                - 4.9%
            
            
            4.45%
                - 5.1%Forfeiture
                rate
            
            
            7%
            
            
            4%


F-13


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





***Financial
      Instruments***




At
      December 31, 2007 and 2006, the fair values of cash and cash equivalents and
      accounts payable approximate their carrying values due to the short-term nature
      of these instruments.




***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.




***Short-term
      Investments***




Short-term
      investments are carried at market value since they are marketable and considered
      available-for-sale. The Company did not have any short-term investments at
      December 31, 2007 or 2006.




***New
      Accounting Pronouncements***


In
        September 2006, the FASB issued SFAS No. 157, ** “Fair
        Value Measurements” (“SFAS 157”), which defines fair value, establishes a
        framework for measuring fair value in accordance with generally accepted
        accounting principles (“GAAP”) in the United States of America, and expands
        disclosures about fair value measurements. SFAS 157 does not require any
        new
        fair value measurements under GAAP and is effective for fiscal years beginning
        after November 15, 2007. The Company will adopt SFAS 157 as of January 1,
        2008.
        The effects of adoption will be determined by the types of instruments carried
        at fair value in our financial statements at the time of adoption, as well
        as
        the method utilized to determine their fair values prior to adoption. Based
        on
        the Company’s current use of fair value measurements, SFAS 157 is not expected
        to have a material effect on its results of operations or financial
        position.
  In
        February 2007, the FASB issued SFAS No. 159, ** “The
        Fair
        Value Option for Financial Assets and Financial Liabilities,” (SFAS 159), which
        provides companies with an option to report selected financial assets and
        liabilities at fair value. SFAS 159 establishes presentation and disclosure
        requirements designed to facilitate comparisons between companies that choose
        different measurement attributes for similar types of assets and liabilities
        and
        highlights the effect of a company’s choice to use fair value on its earnings.
        It also requires a company to display the fair value of those assets and
        liabilities for which it has chosen to use fair value on the face of the
        balance
        sheet. SFAS 159 will be effective beginning January 1, 2008 and is not expected
        to have a material impact on the Company’s consolidated financial
        statements.


F-14


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


In
        June
        2007, the FASB issued EITF No. 07-3, ** “Accounting
        for Nonrefundable Advance Payments for Goods or Services Received for use
        in
        Future Research and Development Activities” (“EITF No. 07-3”). EITF No. 07-3
        states that nonrefundable advance payments for goods or services that will
        be
        used or rendered for future research and development activities should be
        deferred and capitalized. Such amounts should be recognized as an expense
        as the
        related goods are delivered or the related services are performed. Entities
        should continue to evaluate whether they expect the goods to be delivered
        or
        services to be rendered. If an entity does not expect the goods to be delivered
        or services to be rendered, the capitalized advance payment should be charged
        to
        expense. The provisions of EITF No. 07-3 will be effective for the Company
        on a
        prospective basis beginning January 1, 2008, evaluated on a contract by contract
        basis and is not expected to have a material impact on the Company’s
        consolidated financial statements.
  In
        December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS
        No.
        141, *“* Business
        Combinations.” The revision is intended to simplify existing guidance and
        converge rulemaking under U.S. generally accepted accounting principles with
        international accounting standards. This statement applies prospectively
        to
        business combinations where the acquisition date is on or after the beginning
        of
        the first annual reporting period beginning on or after December 15, 2008.
        An
        entity may not apply it before that date. The Company is currently evaluating
        the impact of the provisions of the revision on its consolidated results
        of
        operations and financial condition.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements” (“SFAS 160”), which will require
        noncontrolling interests (previously referred to as minority interests) to
        be
        treated as a separate component of equity, not as a liability or other item
        outside of permanent equity. This statement applies to the accounting for
        noncontrolling interests and transactions with noncontrolling interest holders
        in consolidated financial statements. SFAS 160 will be applied prospectively
        to
        all noncontrolling interests, including any that arose before the effective
        date
        except that comparative period information must be recast to classify
        noncontrolling interests in equity, attribute net income and other comprehensive
        income to noncontrolling interests, and provide other disclosures required
        by
        SFAS 160. SFAS 160 is effective for periods beginning on or after December
        15,
        2008. We are currently evaluating the impact that SFAS 160 will have on our
        consolidated financial statements.
  The
        FASB
        and the Securities and Exchange Commission had issued certain other accounting
        pronouncements as of December 31, 2007 that will become effective in subsequent
        periods; however, the Company does not believe that any of those pronouncements
        would have significantly affected its financial accounting measures or
        disclosures had they been in effect during the years ended December 31, 2007
        and
        2006 and for the period from August 6, 2001 (inception) to December 31, 2007
        or
        that will have a significant effect at the time they become
        effective.




**(** **4)
      Property and Equipment**




Property
      and equipment consists of the following at December 31:




**2007**
            
            **2006**Property
                and equipment
            
            $
            226,010
            
            $
            244,040Less
                accumulated depreciation
            
            
            (181,477
            )
            
            (160,297
            )Net
                property and equipment
            
            $
            44,533
            
            $
            83,743


F-15


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED 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 consolidated 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”), as more fully described in Note 8. 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. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED 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 warrant 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. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED 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.




**(6) 
      Stock Options**




***2003
      Stock Option Plan***




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. At December 31, 2006, 7,400,000 shares
      were authorized for issuance. In May 2007, the Company increased the number
      of
      shares of common stock reserves for issuance under the 2003 Plan by 3,000,000
      shares. At December 31, 2007, 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. Under the 2003 Plan, the Company
      granted employees options to purchase an aggregate of 870,000 shares of common
      stock at an exercise price of $0.95, 75,000 shares of common stock at an
      exercise price of $0.82 and 397,500 shares of common stock at an exercise price
      of $0.72 during the year ended December 31, 2007. In addition, 27,776 shares
      of
      common stock were issued during 2007 under the 2003 Plan.


F-18


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




At
      December 31, 2007 there were 3,475,626 shares reserved for future grants under
      the 2003 Plan.




***1995
      Stock Option Plan***




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 shares reserved
      for stock option grants. In June 2005 the 1995 Plan expired and no further
      options can be granted. At December 31, 2007 options to purchase 1,137,240
      shares were outstanding and no shares were reserved for future stock option
      grants under the 1995 Plan.




A
      summary
      of the status of the Company’s stock options as of December 31, 2007 and changes
      during the year then ended is presented below:




**2007****Shares**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at beginning of year
            
            
            7,000,504
            
            $
            1.310Granted
            
            
            1,342,500
            
            $
            0.875Exercised
            
            
            -Cancelled
            
            
            (309,166
            )
            $
            0.336Outstanding
                at end of year
            
            
            8,033,838
            
            $
            1.253
            
            
            6.887
            
            $Options
                exercisable at year-end
            
            
            5,601,714
            
            $
            1.263
            
            
            6.625
            
            $Weighted-average
                    fair value of options granted during the year
            
            $
            0.63




As
      of
      December 31, 2007 and 2006, the total compensation cost related to non-vested
      option awards not yet recognized is $539,046 and $1,365,581, respectively.
      The
      weighted average period over which it is expected to be recognized is
      approximately 0.5 and 0.9 years, respectively.


F-19


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




The
      following table summarizes the information about stock options outstanding
      at
      December 31, 2007:




**Number**
            
            **Remaining**
            
            **Number
                of****Exercise**
            
            **of
                Options**
            
            **Contractual**
            
            **Options****Price**
            
            **Outstanding**
            
            **Life
                (years)**
            
            **Exercisable**$
            0.40
            
            
            876,090
            
            
            5.16
            
            
            876,0900.43
            
            
            400
            
            
            5.15
            
            
            4000.70
            
            
            220,000
            
            
            8.53
            
            
            73,3330.72
            
            
            365,000
            
            
            9.09
            
            
            32,5000.82
            
            
            75,000
            
            
            9.08
            
            
            -0.89
            
            
            16,667
            
            
            8.38
            
            
            16,6670.95
            
            
            670,000
            
            
            9.32
            
            
            100,0000.97
            
            
            440,000
            
            
            6.75
            
            
            440,0001.00
            
            
            65,000
            
            
            4.24
            
            
            65,0001.00
            
            
            290,698
            
            
            7.04
            
            
            290,6981.25
            
            
            12,000
            
            
            4.08
            
            
            12,0001.25
            
            
            163,750
            
            
            4.14
            
            
            163,7501.35
            
            
            108,333
            
            
            8.08
            
            
            64,9991.35
            
            
            300,000
            
            
            8.09
            
            
            300,0001.35
            
            
            60,000
            
            
            8.53
            
            
            20,0001.50
            
            
            2,923,900
            
            
            7.25
            
            
            1,949,2771.50
            
            
            250,000
            
            
            2.58
            
            
            25,0001.60
            
            
            100,000
            
            
            7.46
            
            
            75,0001.65
            
            
            1,077,000
            
            
            6.08
            
            
            1,077,0004.38
            
            
            10,000
            
            
            3.14
            
            
            10,00020.94
            
            
            10,000
            
            
            2.28
            
            
            10,000Total
            
            
            8,033,838
            
            
            
            
            
            5,601,714






**(7)
      Stock Warrants**




The
      following table summarizes the information about warrants to purchase shares
      of
      our common stock outstanding at December 31, 2007:




**Number
                of**
            
            **Remaining**
            
            **Number
                of****Exercise**
              **price**
            
            **Warrants**
              **outstanding**
            
            **contractual**
              **life
                (years)**
            
            **warrants**
              **exercisable**$
            0.28
            
            
            150,000
            
            
            4.64
            
            
            150,0000.78
            
            
            10,000
            
            
            1.98
            
            
            10,0001.00
            
            
            3,564,897
            
            
            4.25
            
            
            3,564,8971.00
            
            
            509,275
            
            
            4.25
            
            
            509,2751.10
            
            
            909,090
            
            
            .85
            
            
            909,0901.10
            
            
            326,499
            
            
            1.04
            
            
            326,4991.44
            
            
            2,161,767
            
            
            2.65
            
            
            2,161,7671.44
            
            
            540,449
            
            
            2.65
            
            
            540,4491.44
            
            
            135,135
            
            
            2.65
            
            
            135,1351.49
            
            
            221,741
            
            
            2.67
            
            
            221,7411.49
            
            
            55,000
            
            
            2.67
            
            
            55,0001.90
            
            
            10,000
            
            
            1.21
            
            
            10,0001.90
            
            
            90,000
            
            
            1.21
            
            
            90,0006.69
            
            
            185,601
            
            
            .10
            
            
            185,601Total
            
            
            8,869,454
            
            
            
            
            
            8,869,454




F-20


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**(8)
       Related-Party Transactions**




**Oleoylestrone
      Developments, SL**




The
      Company entered into a consulting agreement with OED. The agreement became
      effective in February 2002, at a fee of $6,250 per month. The agreement was
      terminated in November 2007. The fees associated with the consulting agreement
      are expensed as incurred. OED currently owns approximately 5.7 percent of the
      Company’s outstanding common stock. Additionally, Mr. Pons, chief executive
      officer of OED, was a member of the Company’s board of directors until his
      resignation in July 2007.




Total
      milestone payments under the license agreement of $0, $250,000 and $675,000
      and
      consulting fees of $68,750, $75,000 and $431,250 are included in the
      accompanying consolidated statements of operations for the years ended December
      31, 2007, 2006 and for the cumulative period from August 6, 2001 to December
      31,
      2007.




**Paramount
      BioCapital, Inc.**




One
      member of the Company’s board of directors, Timothy McInerney, was an employee
      of Paramount or one of its affiliates until April 2007. Another member of the
      Company’s board of directors, Michael Weiser, was an employee of Paramount until
      December 2006. In addition, two former members of the Company’s board of
      directors, Joshua Kazam and David Tanen, were employed by Paramount through
      August 2004 and were directors of the Company until September 2005. The sole
      shareholder of Paramount is Lindsay A. Rosenwald, M.D. Dr. Rosenwald
      beneficially owns more than 5 percent of the Company’s common stock as of
      December 31, 2007 and various trusts established for Dr. Rosenwald’s or his
      family’s benefit, held in excess of 12% of the Company’s common stock as of
      December 31, 2007. In November 2003, the Company paid to Paramount approximately
      $460,000 as commissions earned in consideration for placement agent services
      rendered in connection with the private placement of the Company’s Series A
      Convertible Preferred Stock, which amount represented 7 percent of the value
      of
      the shares sold by Paramount in the offering. In addition, in January 2004,
      the
      Company paid approximately $260,000 as commissions earned in consideration
      for
      placement agent services rendered by Paramount in connection with a private
      placement of the Company’s common stock, which amount represented 7 percent of
      the value of the shares sold by Paramount in the private placement. In
      connection with both private placements and as a result of their employment
      with
      Paramount, Mr. Kazam, Mr. McInerney and Dr. Weiser were allocated 5-year
      placement agent warrants to purchase 60,174, 58,642 and 103,655 shares of the
      Company’s common stock, respectively, at a price of $1.10 per
      share.




Paramount
      also served as the Company’s placement agent in connection with the August 2005
      private placement. As placement agent, the Company paid to Paramount total
      cash
      commissions of $839,816 relating to the August 26, 2005 closing, of which
      $121,625 was paid to certain selected dealers engaged by Paramount in connection
      with the private placement and issued five-year warrants to purchase an
      aggregate of 540,449 shares of common stock exercisable at a price of $1.44
      per
      share, of which Paramount received warrants to purchase 462,184 common shares.
      In connection with the August 30 closing, the Company paid cash commissions
      to
      Paramount of $88,550 and issued an additional five-year warrant to purchase
      55,000 common shares exercisable at a price of $1.49 per share.


F-21


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Paramount
      also served as the Company’s placement agent in connection with the March 2007
      private placement. As placement agent, the Company paid to Paramount aggregate
      cash commissions of approximately $600,000 and issued to Paramount a 5-year
      warrant to purchase an aggregate of 509,275 shares of common stock at an
      exercise price of $1.00 per share.




**(9)
      Income Taxes**




There
      was
      no current or deferred tax expense for the years ended December31, 2007 or
      2006
      because of the Company’s operating losses.




The
      components of deferred tax assets as of December31, 2007 and 2006 are as
      follows:




**2007**
            
            **2006**Deferred
                tax assets:Tax
                loss carryforwards
            
            $
            22,513,000
            
            $
            18,265,000Research
                and development credit
            
            
            1,769,000
            
            
            1,374,000In-process
                research and development charge
            
            
            4,850,000
            
            
            4,850,000Stock
                based compensation
            
            
            1,270,000
            
            
            682,000Other
            
            
            85,000
            
            
            29,000Gross
                deferred tax assets
            
            
            30,487,000
            
            
            25,200,000Less
                valuation allowance
            
            
            (30,487,000
            )
            
            (25,200,000
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —




The
      reasons for the difference between actual income tax benefit for the years
      ended
      December31, 2007 and 2006 and the amount computed by applying the statutory
      federal income tax rate to losses before income tax benefit are as
      follows:




**2007**
              
              **2006****%
                  of**
              
              
              
              **%
                  of****pretax**
              
              
              
              **pretax****Amount**
              
              **loss**
              
              **Amount**
              
              **loss**Federal
                      income tax benefit at statutory rate
              
              $
              (4,102,000
              )
              
              (34.0
              )%
              $
              (3,296,000
              )
              
              (34.0
              )%State
                      income taxes, net of federal tax
              
              
              (820,000
              )
              
              (6.8
              )%
              
              (659,000
              )
              
              (6.8
              )%Research
                      and development credits
              
              
              (366,000
              )
              
              (3.0
              )%
              
              (200,000
              )
              
              (1.7
              )%Other
              
              
              1,000
              
              
              0.0
              %
              
              (166,000
              )
              
              (2.1
              )%Change
                  in valuationallowance
              
              
              5,287,000
              
              
              43.8
              %
              
              4,321,000
              
              
              44.6
              %—
              
              
              —
              %
              
              —
              
              
              —
              %


F-22


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


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, 2007 and
        2006
        was an increase of $5,287,000 and $4,321,000, 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, 2007, the Company had unused federal and state net operating
        loss
        carryforwards of approximately $56,963,000 and $46,261,000, respectively.
        The
        net operating loss carryforwards expire in various amounts through 2027 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, 2007, the Company also had research and development credit
        carryforwards of approximately $1,769,000 for federal income tax purposes
        which
        expire in various amounts through 2027.
  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
        2004. The Company adopted the provisions of FIN 48, “Accounting for Uncertainty
        in Income Taxes - an interpretation of FASB Statement No. 109” on January 1,
        2007 with no material impact to the consolidated financial statements. The
        Company had no unrecognized tax benefits during 2007 that would affect the
        annual effective tax rate and no unrecognized tax benefits as of January
        1, 2007
        and December 31, 2007. 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.




**(10)  
      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
      is
      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 requires 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.


F-23


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




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. At December 31, 2007 this $300,000 liability
      is reflected in accounts payable.




In
      addition, the Company is 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 is obligated to pay IGI, Inc.
      an annual royalty of 9% annual net sales. Through December 31, 2007, the Company
      has not paid any such royalties.




IGI,
      Inc.
      may terminate the agreement (i) upon 60 days’ notice if the Company fails to
      make any required milestone or royalty payments, or (ii) if the Company becomes
      bankrupt or if a petition in bankruptcy is filed, or if the Company is placed
      in
      the hands of a receiver or trustee for the benefit of creditors. IGI, Inc.
      may
      terminate the agreement upon 60 days’ written notice and an opportunity to cure
      in the event the Company commits a material breach or default. Eighteen months
      from the date of the IGI Agreement, the Company may terminate the agreement
      in
      whole or as to any portion of the PTH patent rights upon 90 days’ notice to IGI,
      Inc.




**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.




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.


F-24


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




In
      February 2008 the Company assigned and transferred its rights in Hedrin to
      joint
      venture, see note 12- Subsequent Events, Joint Venture with Nordic.




**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 accordance with the terms of the Altoderm Agreement, the Company
      issued 125,000 shares of its common stock, valued at $112,500, and made a cash
      payment of $475,000 to T&R upon the execution of the agreement. These
      amounts have been included in research and development expense. Further, the
      Company agreed to make future milestone payments to T&R comprised of various
      combinations of cash and common stock in respective aggregate amounts of
      $5,675,000 and 875,000 shares of common stock upon the achievement of various
      clinical and regulatory milestones. The Company also agreed to pay royalties
      on
      net sales of products using the licensed patent rights at rates ranging from
      10%
      to 20%, depending on the level of annual net sales, and subject to an annual
      minimum royalty payment of $1 million in each year following the first
      commercial sale of Altoderm. The Company may sublicense the patent rights.
      The
      Company agreed to pay T&R 30% of the royalties received by the Company under
      such sublicense agreements.




**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 accordance with the terms of
      the
      Altolyn Agreement, the Company made a cash payment of $475,000 to T&R upon
      the execution of the agreement. This amount is included in research and
      development expense. Further, the Company agreed to make future cash milestone
      payments to T&R in an aggregate amount of $5,675,000 upon the achievement of
      various clinical and regulatory milestones. The Company also agreed to pay
      royalties on net sales of products using the licensed patent rights at rates
      ranging from 10% to 20%, depending on the level of annual net sales, and subject
      to an annual minimum royalty payment of $1 million in each year following the
      first commercial sale of Altolyn. The Company may sublicense the patent rights.
      The Company agreed to pay T&R 30% of the royalties received by the Company
      under such sublicense agreements.




**OED
      License Agreement for Oleoyl-estrone**


On
      February 15, 2002, the Company entered into a License Agreement (the "License
      Agreement") with OED. Under the terms of the License Agreement, OED granted
      to
      the Company a world-wide license to make, use, lease and sell the products
      incorporating the licensed technology (see Note 1). OED also granted to the
      Company the right to sublicense to third parties the licensed technology or
      aspects of the licensed technology with the prior written consent of OED. OED
      retains an irrevocable, nonexclusive, royalty-free right to use the licensed
      technology solely for its internal, noncommercial use. The License Agreement
      shall terminate automatically upon the date of the last to expire patent
      contained in the licensed technology or upon the Company's bankruptcy. OED
      may
      terminate the License Agreement in the event of a material breach by the Company
      that is not cured within the notice period. The Company may terminate the
      License Agreement for any reason upon 60 days notice. The Company terminated
      this agreement in November 2007.


F-25


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




In
      addition to the License Agreement, the Company entered into a consulting
      agreement with OED. The agreement became effective in February 2002, at a fee
      of
      $6,250 per month, and terminated when the License Agreement terminated. The
      fees
      associated with the consulting agreement are expensed as incurred.




Under
      the
      License Agreement, the Company agreed to pay to OED certain licensing fees
      which
      are being expensed as they are incurred. The Company paid $175,000 in up front
      licensing fees which is included in 2002 research and development expense.
      In
      addition, pursuant to the License Agreement, the Company issued 1,000,000 shares
      of its common stock to OED. The Company valued these shares at their then
      estimated fair value of $1,000.




In
      connection with the License Agreement, the Company has agreed to milestone
      payments to OED as follows:




(i)
      $250,000 upon the treatment of the first patient in a Phase I clinical trial
      under a Company-sponsored investigational new drug application ("IND"), which
      was paid in 2005; (ii) $250,000 upon the treatment of the first patient in
      a
      Phase II clinical trial under a Company-sponsored IND, which was paid in 2006;
      (iii) $750,000 upon the first successful completion of a Company-sponsored
      Phase
      II clinical trial under a Company-sponsored IND; (iv) $2,000,000 upon the first
      successful completion of a Company-sponsored Phase III clinical trial under
      a
      Company sponsored IND; and (v) $6,000,000 upon the first final approval of
      the
      first new drug application for the first licensed product by the United States
      Food and Drug Administration (“FDA”). Through December 31, 2007, the Company
      paid a total of $675,000 in licensing fees and milestone payments. The Company
      has no further financial liability or commitment to OED under the License
      Agreement.




**NovaDel
      Agreement for Propofol Lingual Spray**


In
      April
      2003, the Company entered into a license and development agreement with NovaDel,
      under which the Company received certain worldwide, exclusive rights to develop
      and commercialize products related to NovaDel’s proprietary lingual spray
      technology for delivering propofol for pre-procedural sedation. Under the terms
      of this agreement, the Company agreed to use its commercially reasonable efforts
      to develop and commercialize the licensed products, to obtain necessary
      regulatory approvals and to thereafter exploit the licensed products. The
      agreement also provides that NovaDel will undertake to perform, at the Company’s
      expense, a substantial portion of the development activities, including, without
      limitation, preparation and filing of various applications with applicable
      regulatory authorities.




In
      consideration for the Company’s rights under the NovaDel license agreement, the
      Company paid NovaDel an initial license fee of $500,000 in 2003. In addition,
      the license agreement requires the Company to make certain milestone payments
      as
      follows: $1,000,000 payable following the date that the first NDA for lingual
      spray propofol is accepted for review by the FDA; $1,000,000 following the
      date
      that the first European Marketing Application is accepted for review by any
      European Union country; $2,000,000 following the date when the first filed
      NDA
      for lingual spray propofol is approved by the FDA; $2,000,000 following the
      date
      when the first filed European Marketing Application for lingual spray propofol
      is accepted for review; $1,000,000 following the date on which an application
      for commercial approval of lingual spray propofol is approved by the appropriate
      regulatory authority in each of Australia, Canada, Japan and South Africa;
      and
      $50,000 following the date on which an application for commercial approval
      for
      lingual spray propofol is approved in any other country (other than the U.S.,
      a
      member of the European Union, Australia, Canada, Japan or South Africa).


F-26


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




In
      addition, the Company is obligated to pay to NovaDel an annual royalty based
      on
      a fixed rate of net sales of licensed products, or if greater, the annual
      royalty is based on the Company’s net profits from the sale of licensed products
      at a rate that is twice the net sales rate. In the event the Company sublicenses
      the licensed product to a third party, the Company is obligated to pay royalties
      based on a fixed rate of fees or royalties received from the sublicensee until
      such time as the Company recovers its out-of-pocket costs, and thereafter the
      royalty rate doubles. Because of the continuing development efforts required
      of
      NovaDel under the agreement, the royalty rates are substantially higher than
      customary for the industry. Through December 31, 2007, the Company has incurred,
      and paid a total of $500,000 under the NovaDel license agreement, the initial
      license fee paid in 2003. The Company terminated this agreement during 2007
      and
      has no continuing obligations under this agreement.




**** **(** **11) 
      Commitments and Contingencies**




***Swiss
      Pharma***


Swiss
      Pharma Contract LTD (“Swiss Pharma”), a clinical site that the Company used in
      one of its obesity trials, gave notice to the Company that Swiss Pharma believes
      it is entitled to receive an additional payment of $322,776 for services in
      connection with that clinical trial. While the contract between the Company
      and
      Swiss Pharma provides for additional payments if certain conditions are met,
      Swiss Parma has not specified which conditions they believe have been achieved
      and the Company does not believe that Swiss Pharma is entitled to additional
      payments and has not accrued any of these costs as of December 31, 2007. The
      contract between the Company and Swiss Pharma provides for arbitration in the
      event of a dispute, such as this claim for an additional payment. Swiss Pharma
      has filed a demand for arbitration. As the Company does not believe that Swiss
      Pharma is entitled to additional payments, it intends to defend its position
      in
      arbitration. The arbitration is currently in its initial stages. ******




***Therapeutics,
      Inc.***


During
      2007, we entered into an agreement with Therapeutics, Inc. for the conduct
      of a
      Phase 2a clinical trial of PTH (1-34). The amount of the agreement is
      approximately $845,000. At December 31, 2007, we recognized research and
      development expense of $483,000 related to the conduct of this clinical trial.
      At December 31, 2007, we recognized prepaid expense of $19,000 related to this
      clinical trial. The remaining financial commitment related to the conduct of
      the
      clinical trial is approximately $340,000. This clinical trial is expected to
      conclude in the second quarter of 2008.




***Contentions
      of a Former Employee***


In
      February 2007, a former employee of the Company alleged an ownership interest
      in
      two of the Company’s provisional patent applications. Also, without articulating
      precise legal claims, the former employee contends that the Company wrongfully
      characterized the former employee’s separation from employment as a resignation
      instead of a dismissal in an effort to harm the former employee’s immigration
      sponsorship efforts, and, further, to wrongfully deprive the former employee
      of
      the former employee’s alleged rights in two of the Company’s provisional patent
      applications. The former employee is seeking an unspecified amount in damages.
      The Company refutes the former employee’s contentions and intends to vigorously
      defend itself should the former employee file claims against the Company. There
      have been no further developments with respect to these
      contentions.


F-27


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**Employment
      Agreement**


The
      Company has employment agreements with two employees for the payment of
      aggregate annual base salary of $530,000 as well as performance based bonuses.
      These agreements have three year terms and have a remaining obligation of
      $394,000 as of December 31, 2007.




***Leases***


The
      Company leases office space under a non-cancellable lease terminating in
      September 2008. Rent expense was $141,012 for each of the years ended December
      31, 2007 and 2006.




Future
      minimum rental payments subsequent to December 31, 2007 under an operating
      lease
      for the Company’s office facility are as follows:




Years
                Ending December 31,
            
            Commitment2008
            
            $
            100,0002009
                and subsequent
            
            $
            0




**12. 
      Subsequent events**




***Joint
      Venture with Nordic***


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”) 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
      (the
      "Hedrin JV") and provided it with initial funding of $2.5 million. The Company
      assigned and transfered its North American rights in Hedrin to the Hedrin JV
      in
      return for a $2.0 million cash payment and equity in the Hedrin JV representing
      50% of the nominal equity interests in the Hedrin JV .




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 to the Company an additional $2.5 million in equity in the Hedrin
      JV,
      thereby maintaining the Company’s 50% ownership interest in the Hedrin
      JV.




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 T&R, the licensor of Hedrin.




The
      Hedrin JV will engage the Company to provide management services to the Limited
      Partnership in exchange for an annualized management fee, which for 2008, on
      an
      annualized basis, is $527,000.


F-28


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Nordic
      paid to the Company a non-refundable fee of $150,000 at the closing for the
      right to receive a warrant covering 7.1 million shares of the Company’s common
      stock, exercisable for $0.14 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 per share exercise price of the warrant was 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.




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 p that Nordic
      decides to put to the Company multiplied by the dollar amount of Nordic’s
      investment in Limited Partnership divided by $0.14, 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 $0.14. 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 's Board will consist of 4 members, 2 appointed by the Company and
      2
      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 payment milestone described above is not achieved by June 30,
      2008, then the Hedrin JV 's Board will increase to 5 members, 2 appointed by
      the
      Company and 3 appointed by Nordic.




After
      the
      closing, at Nordic's request, the Company will nominate a person identified
      by
      Nordic to serve on the Company’s Board of Directors.


F-29


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




The
      Company will grant Nordic registration rights for the shares to be issued upon
      exercise of the warrant, the put or the call. The Company is required to file
      an
      initial registration statement within 10 calendar days of filing its Form 10-K
      for the year ended December 31, 2007. 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
      registration statement to be declared effective by the Securities and Exchange
      Commission (“SEC”) within 105 calendar days from the filing 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.




The
      profits of the Hedrin JV will be shared by the Company and Nordic in accordance
      with their respective equity interests in Limited Partnership, which are
      currently 50% to each, except that Nordic will get a minimum guaranteed return
      from the Hedrin JV equal to 5% 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 10% 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 if the payment
      milestone described above is met, $2.5 million if it is not met) plus 10% per
      year, less the cumulative distributions received by Nordic from the Hedrin
      JV.
      Further, in no event shall Nordic’s distribution in liquidation be greater than
      assets available for distribution in liquidation.




***American
      Stock Exchange***


In
      September 2007, we received notice from the staff of AMEX, indicating that
      we
      were not in compliance with certain continued listing standards set forth in the
      American Stock Exchange Company guide. Specifically, the American Stock Exchange
      notice cited our failure to comply, as of June 30, 2007, with section
      1003(a)(ii) of the AMEX Company Guide as we 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 us to maintain $6,000,000 of stockholders’ equity if
      we have experienced losses from continuing operations and /or net losses in
      its
      five most recent fiscal years.




In
      order
      to maintain our AMEX listing, we were required to submit a plan to AMEX advising
      the exchange of the actions we have taken, or will take, that would bring us
      into compliance with all the continued listing standards by April 16, 2008.
      We
      submitted such a plan in October 2007. If we are not in compliance with the
      continued listing standards at the end of the plan period, or if we do not
      make
      progress consistent with the plan during the period, AMEX staff may initiate
      delisting proceedings.




Under
      the
      terms of the Joint Venture Agreement, the number of potentially issuable shares
      represented by the put and call features of the Hedrin agreement, and the
      warrant issuable to Nordic, would exceed 19.9% of our total outstanding shares
      and would be issued at a price below the greater of book or market value. As
      a
      result, under AMEX regulations, we would not be 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. We estimate that obtaining stockholder approval to comply with
      AMEX
      regulations would take a minimum of 45 days to complete. We have discussed
      the
      financial viability exception with AMEX for several weeks and have neither
      received the exception nor been denied the exception. We determined that our
      financial condition required us to complete the transaction immediately, and
      that the Company’s financial viability depends on its completion of the
      transaction without further delay.


F-30


MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




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




Our
      common stock now trades on the Over the Counter Bulletin Board (“OCTBB”) under
      the symbol “MHAN”. We intend to maintain corporate governance, disclosure and
      reporting procedures consistent with applicable law.


F-31


**Index
      to Exhibits Filed with this Report**




Exhibit
                No.
            
            Description10.11
            
            Separation
                Agreement between the Registrant and Alan G. Harris dated December
                21,
                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, 2008.10.21
            
            Assignment
                and Contribution Agreement between Hedrin Pharmaceuticals K/S and
                Manhattan Pharmaceuticals, Inc. dated February 25,
                2008.10.22
            
            Registration
                Rights Agreement between Nordic Biotech Venture Fund II K/S and Manhattan
                Pharmaceuticals, Inc. dated February 25, 2008.10.23
            
            Amendment
                to Employment Agreement by and between Manhattan Pharmaceuticals,
                Inc. and
                Douglas Abel23.1
            
            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.