UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-KSB




x
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the fiscal year ended December 31,
                2006




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 issuer as specified in its charter)




Delaware
            
            36-3898269(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)810
                Seventh Avenue, 4thFloor, New York, New York
              (Address
                of Principal Executive Offices)
            
            10019
              (Zip
                Code)




(212)
      582-3950


(Issuer’s
      telephone number)




**** (Former
      Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report)





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


**Title
                  of each class**
              
              **Name
                  of each exchange on which registered**Common
                  Stock, $0.001 par value
              
              American
                  Stock Exchange


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





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the issuer was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B is not contained herein, and no disclosure will 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-KSB or any amendment
      to
      this Form 10-KSB. o




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




The
      issuer’s revenues for the fiscal year ended December 31, 2006 were **** $0.




The
      aggregate market value of the common stock of the issuer held by non-affiliates
      of the issuer on March 20, 2007 based on the closing price of the common stock
      as reported on the American Stock Exchange on such date was
      $41,204,541.




As
      of
      March 16, 2007 there were 60,120,038 outstanding shares of common stock,
      par value $.001 per share.




Traditional
      Small Business Disclosure Format: Yes o
      No x




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the issuer’s definitive Proxy Statement for its Annual Meeting of
      Stockholders to be held on May 24, 2007 (the “2007 Proxy Statement”) are
      incorporated by reference into Part III of this Form 10-KSB, to the extent
      described in Part III. The 2007 Proxy Statement will be filed within 120 days
      after the fiscal year ended December 31, 2006.







TABLE
      OF CONTENTS




**Page****PART
                I**Item
                1
            
            Description
                of Business
            
            2Item
                2
            
            Legal
                Proceedings
            
            25Item
                3
            
            Description
                of Property
            
            25Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            
            25**PART
                II**Item
                5
            
            Market
                for Common Equity and Related Stockholder Matters
            
            26Item
                6
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                or Plan of Operations
            
            27Item
                7
            
            Consolidated
                Financial Statements
            
            38Item
                8
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            39Item
                8A
            
            Controls
                and Procedures
            
            39Item
                8B
            
            Other
                Information**PART
                III**Item
                9
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            
            40Item
                10
            
            Executive
                Compensation
            
            40Item
                11
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholders Matters
            
            40Item
                12
            
            Certain
                Relationships and Related Transactions
            
            40Item
                13
            
            Exhibits
                List
            
            41Item
                14
            
            Principal
                Accountant Fees and Services
            
            44Index
                to Consolidated Financial Statements
            
            F-1





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





·
            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 biopharmaceutical 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 three product candidates in development:
      Oleoyl-estrone, an orally administered small molecule for the treatment of
      obesity; topical PTH (1-34) for the treatment of psoriasis; and Lingual Spray
      Propofol for sedation prior to diagnostic, therapeutic or endoscopic procedures.
      In addition to the development of our current products, we are actively working
      to expand our product candidate pipeline. 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
      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**





***Oleoyl-estrone***





We
      hold
      an exclusive, worldwide license to develop and commercialize oral Oleoyl-estrone
      pursuant to a 2002 license agreement with Oleoylestrone Developments, SL,
      (“OED”) a Spanish corporation. We are currently conducting clinical studies of
      Oleoyl-estrone in two distinct patient populations. One clinical study is a
      multi-center, international Phase IIa in common obesity clinical trial being
      conducted at one clinical site in Europe and two clinical sites in the United
      States and the other study is a multi-center Phase IIa in morbid obesity being
      lead by St. Luke’s-Roosevelt Hospital Center, University Hospital of Columbia
      University in New York City.




2





Oral
      Oleoyl-estrone is a novel small molecule that has been shown to cause
      significant weight loss in preclinical animal studies. Oleoyl-estrone is a
      naturally occurring hormone. It was discovered and initially
      developed by researchers at the University of Barcelona (“UB”) in
      Spain.





*Mechanism
      of Action*





We
      have
      seen evidence in pre-clinical studies that Oleoyl-estrone has both central
      and
      peripheral mechanisms of action. Centrally, it is believed to act on the
      hypothalamus, resetting the body’s ponderostat, the "food control center" in the
      brain that detects and integrates signals that control both appetite and
      metabolic behavior. Peripherally, it is believed to decrease the activity of
      Lipoprotein Lipase (LPL) in white adipose tissue (WAT) and increases its
      activity in the skeletal muscle. This causes reduced storage of fat in the
      WAT
      and allows skeletal muscle to use fat as a preferential energy
      source.





*Preclinical
      and Clinical Development*





Extensive
      preclinical studies of Oleoyl-estrone have shown evidence of weight loss,
      sustained weight loss after dosing stops, and reduced food intake. These studies
      have also shown evidence of beneficial changes in blood glucose and cholesterol
      levels. This work is supported by 38 peer-reviewed journal publications over
      the
      past ten years.





In
      January 2005, the FDA accepted our investigational new drug application, or
      “IND” for the human clinical testing of Oleoyl-estrone. We completed Phase Ia
      and Ib clinical trials in 2005 and released data on both studies in October
      2005. The objective of both dose-escalation studies was to determine the safety
      and tolerability of defined doses of orally administered Oleoyl-estrone in
      obese
      adult subjects.





The
      Phase
      Ia study involved 36 obese volunteers. Twelve of the 36 patients received
      placebo and 24 received a single dose in one of six strengths ranging from
      1 mg
      to 150 mg. Oleoyl-estrone was shown to be well tolerated with no serious adverse
      events noted in this study.




The
      Phase
      Ib study was a seven day repeat dose study involving 24 obese volunteers in
      four
      cohorts of 6 patients each who received either placebo or Oleoyl-estrone in
      doses ranging from 10 mg to 150 mg once daily for seven consecutive days. The
      results indicated that Oleoyl-estrone was generally well tolerated at all doses
      and no serious adverse events were reported. There were also no clinically
      significant changes in the physical exams, vital signs, ECGs, coagulation and
      liver function tests. The study demonstrated evidence of greater weight loss
      among some of the Oleoyl-estrone treated groups compared with the placebo group
      as well as evidence of reduction in desire to eat, hunger levels, fasting
      glucose and LDL cholesterol. Important clinical laboratories findings included
      reversible, dose-dependent elevations in estrone and estradiol levels, as well
      as reductions in testosterone levels.





In
      March
      2006, we commenced a Phase IIa clinical study of oral Oleoyl-estrone for the
      treatment of obesity. This randomized, double-blind, placebo-controlled,
      parallel group study is designed to evaluate the safety and preliminary efficacy
      of oral Oleoyl-estrone in 100 common obese male and female subjects. Enrollment
      in this study was completed in February 2007. We expect the last patient to
      complete the study in mid-June 2007, and we plan to complete data analysis
      in
      mid-July 2007.





This
      ongoing Phase IIa study is evaluating common obese adult subjects with a body
      mass index (BMI) of 27-38.9. Each subject has been randomized into one of four
      treatment groups to evaluate safety, preliminary efficacy, and pharmacokinetics of two
      14-day dosing cycles of 5mg, 10mg, or 20mg of oral OE compared to placebo given
      once daily during each dosing cycle. Each 14-day dosing cycle is followed by
      a
      28-day treatment free evaluation period. In addition to safety and tolerability,
      this Phase IIa study is also designed to further evaluate weight loss,
      maintenance of weight loss, and other therapeutic outcomes.




3





In
      the
      fourth quarter of 2006, we also commenced a Phase IIa clinical study of oral
      Oleoyl-estrone in morbidly obese male subjects. This study is being led by
      St.Luke’s-Roosevelt Hospital Center, University Hospital of Columbia University
      College of Physicians and Surgeons. F. Xavier Pi-Sunyer, MD, is serving as
      Principal Investigator. The study is expected to conclude mid-year
      2007.





This
      Phase IIa randomized, double-blind, placebo-controlled, parallel group study
      is
      designed to evaluate oral Oleoyl-estrone in approximately 24 morbidly obese
      male
      subjects with a body mass index (BMI) of 40-55. These subjects will be
      randomized into three treatment groups to evaluate the safety and efficacy
      of
      10mg or 30mg of oral OE compared to placebo given once daily for 30 days.
      Subjects will be evaluated at Days 1, 15, and 30. A final follow-up visit will
      also occur at Day 60, 30 days after the final dose.





We
      consider oral Oleoyl-estrone as a potential out-licensing candidate. We plan
      to
      complete enough development work to ensure that, should the product candidate
      be
      out licensed, it will continue to be successful and maintain urgency in a larger
      partner’s hands.





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





*Market
      and Competition*





*Obesity*





Being
      overweight is defined as having a Body Mass Index (BMI) that is equal to or
      greater than 25; obesity is defined as having a BMI equal to or greater than
      30.
      Morbid obesity is defined as having a BMI equal to or greater than 40 (usually
      equaling 100+ lbs over ideal weight).





The
      US
      Centers for Disease Control and Prevention (CDC) estimate there are
      approximately 70 million obese Americans, and according to the World Health
      Organization (WHO), there are nearly 300 million obese adults worldwide. Obesity
      is a major health risk and a burden on the US healthcare system. It increases
      the risk of type 2 diabetes, heart disease, hypertension, gall bladder disease,
      stroke, sleep apnea, some forms of cancer, and many other conditions. The US
      Department of Health and Human Services (DHHS) estimated the economic cost
      of
      obesity in the US was estimated to be over $117 billion in 2000, a significant
      portion of that cost was paid by Medicare and Medicaid.





Market
      research specialist, Decision Resources, estimates the worldwide anti-obesity
      drug market will be $13 billion by 2013. The currently available therapies
      such
      as Xenical ® (orlistat), Meridia ® (sibutramine) and phentermine have experienced limited sales, most likely due
      to
      tolerability issues, side effects and limited efficacy. We believe that the
      disease currently lacks a treatment that is safe and effective for most patient
      groups. We are developing Oleoyl-estrone to potentially address these unmeet
      needs.





Competition
      in the pharmaceutical industry, and the anti-obesity drug market in particular,
      is intense. In addition to Abbott Laboratories, Inc. and Roche Holdings AG,
      the
      makers of Meridia ® and
      Xenical ® respectively, some of the largest drug companies in the world have anti-obesity
      drugs currently in development, including Merck, Pfizer, Bayer, and Amgen,
      Inc.
      These companies are all substantially larger and more established than we are
      and have significantly greater financial and other resources than we
      do.




4





*Morbid
      Obesity*





Morbid
      obesity (also referred to as clinically severe obesity or extreme obesity)
      is
      defined as having a BMI equal to or greater than 40 (usually equaling 100+
      pounds over ideal body weight). According to The American Obesity Association
      and US Centers for Disease Control and Prevention the morbid obese population
      in
      the US is estimated to be 14 million people (or 4.7% of the US population).
      We
      believe that there are currently no pharmaceutical agents specifically approved
      to treat morbid obesity.





According
      to the American Obesity Association, the morbidity and mortality risk from
      being
      overweight is proportional to its degree. Individuals with morbid obesity,
      therefore, have the highest risk for developing numerous illnesses that often
      reduce mobility and quality of life due to their excess weight. In particular,
      cardiovascular disease, type 2 diabetes, gallbladder disease, osteoarthritis
      and
      sleep apnea have been found to increase concurrently with higher BMI. Premature
      death has also been found in individuals with morbid obesity.





Morbidly
      obese males are considered to be the most at risk segment of the obese
      population. Published studies have indicated that morbidly obese males have
      a
      mortality rate higher than the general, non-obese population and a higher
      mortality rate than morbidly obese women. Morbidly obese males are also at
      significantly higher risk for other life threatening conditions including
      cardiovascular disease, coronary heart disease, and unexplained cardiac arrest. In
      addition, the trend toward developing morbid obesity has dramatically risen
      in
      recent years. A 2003 study published in the Archives of Internal Medicine shows
      a 500-percent increase in the number of morbidly obese adults since
      1986.





Bariatric
      surgery is one of the few options available to those who are morbidly obese.
      There are several different approaches to bariatric surgery including gastric
      bypass, vertical banded gastroplasty, and laparoscopic gastric banding (or
      LAP-BAND®). While these procedures have shown to be an effective way to decrease
      body weight they carry significant risk. According to the Journal of the
      American Medical Association (JAMA) nearly 40 percent of patients who undergo
      bariatric surgery for weight loss are re-hospitalized within 2 years following
      surgery. Further, the average cost for weight loss surgery is $25,000 per
      patient, and the cost can increase substantially with complications or
      re-hospitalization. The American Society of Bariatric Surgeons (ASBS) estimates
      that, of the 14 million morbidly obese adults in the US, only 200,000 underwent
      bariatric surgery procedures in 2006.





***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. Topical PTH (1-34) has completed
      a
      physician IND conducted Phase 1 and II clinical study.




In
      2003,
      researchers, led by Michael Holick, PhD, MD, Professor of Medicine, Physiology,
      and Biophysics at Boston University Medical Center, reported positive results
      from a US Phase I and II clinical trial evaluating the safety and efficacy
      of
      PTH (1-34) as a topical treatment for psoriasis. This double-blind, controlled
      trial in 15 patients compared PTH (1-34) formulated in the Novasome® Technology
      versus the Novasome® vehicle alone. Following 8 weeks of treatment, the topical
      application of 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 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 PTH (1-34) to be well
      tolerated and efficacious for the treatment of plaque psoriasis with no patients
      experiencing any clinically significant adverse events.




5





Due
      to
      the high response rate seen in patients in the initial trial with PTH (1-34),
      we
      believe that it may have an important clinical advantage over current topical
      psoriasis treatments. A
      follow
      on physician IND Phase IIa trial involving PTH (1-34) was initiated in December
      2005 under the auspices of Boston University. In April 2006, we reported a
      delay
      in our planned Phase IIa clinical study of topical PTH (1-34) due to a
      formulation issue. We believe we have identified and resolved this issue. In
      conjunction with formulation experts, we have produced several alternative
      formulations of PTH (1-34) that have successfully completed preliminary testing
      and have shown high levels of activity in preclinical models. These formulations
      will now advance into the final stages of testing after which we intend to
      resume clinical testing of the product candidate. Based on discoveries made
      during this formulation effort, we are preparing several patent
      applications.





See
      also
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Liquidity and Capital Resources - Research and Development Projects
      - PTH (1-34).”





*Market
      and Competition*





The
      efficacy and safety profile of 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 PTH (1-34) as a monotherapy and for use in combination with
      currently available therapies. Some of 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 genrally 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 2005 were $136 million.





***Lingual
      Spray Propofol***





Pursuant
      to a 2003 license agreement with NovaDel Pharma, Inc., we hold exclusive,
      worldwide rights to deliver propofol using NovaDel’s proprietary lingual spray
      technology for pre-procedural sedation prior to diagnostic, therapeutic or
      endoscopic procedures.




6





Propofol
      is currently delivered intravenously as an oily emulsion for induction and
      maintenance of general anesthesia or “monitored anesthesia care” in operating
      rooms, or deep sedation in intensive care units. Propofol has not previously
      been available for dosing via a convenient route of administration for
      pre-procedural sedation prior to diagnostic, therapeutic or endoscopic
      procedures. A patent application for this new method of use has been filed.
      Other patent applications are being prepared related to our novel
      formulation.





We
      believe that delivering propofol via this proprietary delivery system provides
      many advantages over currently formulated sedatives. In addition to the
      convenience and ease of administration, we believe the lingual spray route
      will
      eliminate delayed onset and poor coordination of timing associated with
      administering oral sedatives, and allow for rapid clinical responses typical
      of
      intravenous delivery (i.e., less than 5 minutes). Lingual spray propofol is
      intended to allow patients to tolerate unpleasant procedures, by relieving
      anxiety and producing a pleasant, short-term amnesia. Particularly in children
      and adults unable to cooperate, mild sedation expedites the conduct of numerous
      ambulatory procedures that are not particularly painful, but which require
      the
      patient to remain still for the best technical result.





NovaDel’s
      delivery systems (both patented and patent-pending) are lingual sprays, enabling
      drug absorption through the oral mucosa and more rapid absorption into the
      bloodstream than presently available oral delivery systems. We are working
      with
      NovaDel to develop, manufacture and commercialize the licensed product, having
      jointly announced commencement of a development program for lingual spray
      propofol in 2003.





In
      2004,
      we reported results of the first human trial for our proprietary lingual spray
      formulation of propofol. The
      study, which took place in the United Kingdom, was a single-center, randomized,
      double-blind, placebo-controlled dose-escalating clinical study of propofol
      lingual spray in twelve healthy adult volunteers. The primary objectives were
      to
      compare the safety and tolerability of three dose levels of lingual spray
      propofol to a single intravenous bolus low dose of propofol, as well as to
      determine the respective pharmacokinetic profiles and relative bioavailability
      of the three escalating doses.





No
      serious adverse events, nor dose-dependent changes in vital signs, occurred
      in
      any group. The mean time to maximum blood concentration of propofol following
      spray was approximately 30 minutes across all doses. Propofol was detectable
      in
      blood as early as 4 minutes following spray administration. The mean maximum
      blood concentrations plateaued at the highest of the three doses tested, and
      the
      mean bioavailability of the current spray formulation was up to 18% of that
      of
      the intravenous formulation.





In
      2005,
      the FDA accepted our IND for the initiation of the human clinical trials in
      the
      United States of lingual spray propofol. We continue to pursue FDA approval
      of
      lingual spray propofol under the 505(b)(2) regulatory pathway. Section 505(b)(2)
      of the U.S. Food, Drug & Cosmetic Act allows the FDA to approve a drug on
      the basis of existing data in the scientific literature or data used by the
      FDA
      in the approval of other drugs. See “—Government Regulation - Drug Approval
      Process.” Accordingly, the FDA has indicated to us that we will be able to
      utilize Section 505(b)(2) to proceed directly to a pivotal Phase III trial
      for
      lingual spray propofol following completion of Phase I trials.





Spending
      during 2006 on lingual spray propofol was minimal as we were, and continue,
      planning the next steps of the development of this product candidate through
      meetings with our scientific advisors, NovaDel and others. See also
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Liquidity and Capital Resources - Research and Development Projects
      - Lingual Spray Propofol.”




7




*Market
      and Competition*





To
      date,
      midazolam (now a generic), which is delivered both intravenously and orally,
      has
      dominated the preprocedural sedation market posting sales of $536 million in
      1999. However, serious adverse events are reported in the midazolam package
      insert, including respiratory depression, airway obstruction, oxygen
      desaturation, apnea and even respiratory arrest. In contrast, at the doses
      being
      developed by us, we believe that lingual spray propofol may offer a safer,
      noninvasively administered alternative to midazolam. Propofol’s rapid onset
      profile will allow clinicians to more accurately time its peak effects during
      procedures, as well as to determine the precise concentration needed for desired
      levels of 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 of which is patentable. 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.




*Oleoyl-estrone
      License Agreement*




We
      currently have worldwide, exclusive license rights to the U.S. and foreign
      patents and patent applications regarding Oleoyl-estrone and its use for the
      treatment of human disease:




1.
            US
                Patent No. 5,798,348 entitled “Fatty-acid monesters of estrogens for the
                treatment of obesity and/or overweight.” M. Alemany, Inventor. Application
                filed, October 30, 1996. Patent issued August 25, 1998. This patent
                expires on October 30, 2016.




2.
            European
                Patent No. 771.817 entitled “Oleate monoesters of estrogens for the
                treatment of obesity and/or overweight.” M. Alemany, Inventor. Application
                filed, October 28, 1996. Patent issued March 26, 2003. This patent
                expires
                on October 28, 2016.




3.
            Spanish
                Patent Application No. ES 200100785 entitled “Fatty-acid monoesters of
                estrogens acting as anti-diabetic and hypolipidemia agents.” M. Alemany
                Lamana, Francisco Javier Remesar Betiloch, and Jose Antonio Fernandez
                Lopez, Inventors. Application filed March 28, 2001, European Patent
                Application No. EP1380300A1, filed March 25, 2002, and Canadian Patent
                Application No. 2441890, filed March 25, 2002.




The
      U.S.
      and European patents have numerous, detailed, and specific claims for both
      the
      composition of Oleoyl-estrone, and its method of use for weight loss. Our rights
      to these patents are subject to the terms of a February 2002 license agreement
      between us and OED. The license agreement provides us with an exclusive,
      worldwide right to the intellectual property covered by the license agreement,
      including the right to grant sublicenses. Our success in developing
      Oleoyl-estrone depends on our ability to maintain and enforce the patents
      relating to Oleoyl-estrone.




8




In
      consideration for the license, we paid an initial license fee of $175,000.
      The
      license agreement provides for further cash payments of $9,250,000 in the
      aggregate, payable as follows: $250,000 payable upon treatment of the first
      patient in a Phase I clinical trial under an IND sponsored by us; $250,000
      upon
      treatment of the first patient in a Phase II clinical trial; $750,000 upon
      the
      first successful completion of a Phase II clinical trial; $2,000,000 upon the
      first successful completion of a Phase III clinical trial; and $6,000,000 upon
      the first final approval of a New Drug Application (“NDA”) for oleoyl-estrone by
      the FDA. The license agreement does not require us to make any royalty payments.
      Through December 31, 2006, we have paid the initial license fee of $175,000
      and
      $500,000 in milestone payments.




Subject
      to earlier termination as described below, the term of the license expires
      on
      the last to expire patent right licensed under the agreement, which is currently
      October 2016. Oleoylestrone Developments has the right to terminate the license
      agreement sooner, subject to certain requirements to provide us advance notice,
      in the event we become bankrupt or similar proceedings are initiated, fail
      to
      make the required milestone payments required under the agreement or otherwise
      materially breach the license agreement. We have the right to terminate the
      license agreement for any reason upon written notice.




*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 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.





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.
                Patent No. 6,066,618, entitled “Regulation of cell proliferation and
                differentiation using peptides.” M.F. Holick, Inventor. Application filed
                November 13, 1998. Patent issued May 23, 2000. This patent expires
                October
                20, 2007.





4.
            European
                Patent Specification PCT/US88/03639




These
      patents have numerous, detailed and specific claims relating to the topical
      use
      of PTH (1-34) In consideration for our rights under the IGI Agreement, a payment
      of $300,000 was made upon execution of the agreement, prior to our acquisition
      of Tarpan. In addition the IGI Agreement requires us to make certain milestone
      payments as follows: $300,000 payable upon the commencement of a Phase II
      clinical trial; $500,000 upon the commencement of a Phase III 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
      III
      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.




9




In
      addition, we are 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, we are obligated to pay IGI, Inc. an annual royalty
      of 9% annual net sales. Through December 31, 2006 none of the milestones have
      been reached and sales have not commenced, we, therefore, have not paid any
      such
      milestone fees or 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 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.




*Propofol
      LS License Agreement*




Pursuant
      to the NovaDel license agreement, we have an exclusive, worldwide license to
      NovaDel’s proprietary lingual spray technology to deliver propofol for
      preprocedural sedation prior to diagnostic, therapeutic or endoscopic
      procedures. Our rights under the NovaDel License include license rights to
      the
      following patents held by NovaDel:




1.
            U.S.
                Patent No. 5,955,098, entitled “Buccal Non Polar Spray or Capsule.” H.A.
                Dugger, III, Inventor. Application filed April 12, 1996. Patent issued
                September 21, 1999. This patent expires April 12,
                2016.





2.
            U.S.
                Patent No. 6,110,486, entitled “Buccal Polar Spray or Capsule.” H.A.
                Dugger, III, Inventor. Application filed November 25, 1998. Patent
                issued
                August 29, 2000. This patent expires April 12,
                2016.





3.
            U.S.
                Patent No. 6,969,508, entitled “Buccal, polar and non-polar spray or
                capsule containing drugs for treating pain.” H.A. Dugger, III, Inventor.
                Application filed December 4, 2003. Patent issued November 29, 2005.
                This
                patent expires October 1, 2017.





4.
            European
                Patent No. 0904055 entitled “Buccal, Non-Polar Spray or Capsule.” H.A.
                Dugger, III, Inventor. Application filed, February 21, 1997. Patent
                issued
                April 16, 2003. This patent expires February 21,
                2017.





5.
            U.S.
                Patent Application No. 10/834815 entitled “Buccal, Polar and Non-Polar
                Sprays Containing Propofol.” H.A. Dugger and M.A. El-Shafy, Inventors.
                Application filed April 27, 2004.





These
      issued patents have numerous, detailed, and specific claims relating to the
      formulation for lingual spray applications and their method of use. We have
      the
      right to use the technology in connection with one application - delivering
      propofol. Our success in developing lingual spray propofol depends substantially
      on the maintenance and enforcement of NovaDel’s patents covering its proprietary
      spray technology. In consideration for our rights under the NovaDel license
      agreement, we paid NovaDel an initial license fee of $500,000 in 2003. In
      addition, the license agreement requires us 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 approved by a European Union country; $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). Through December 31, 2006, none of these milestones have
      been
      reached we, therefore, have not paid any such milestone fees. In addition,
      we
      are obligated to pay NovaDel an annual royalty based on a fixed rate of net
      sales of licensed products, or if greater, the annual royalty is based on our
      net profits from the sale of licensed products at a rate that is twice the
      net
      sales rate.




10





Subject
      to certain requirements to provide us with notice and an opportunity to cure,
      NovaDel may terminate the license agreement in the event we (1) become subject
      to a bankruptcy or similar proceeding that is not dismissed within 60 days,
      (2)
      default in our obligation to make a required payment under the license
      agreement, or (3) otherwise materially breach the license agreement. We may
      terminate the license agreement for any reason upon 90 days’ notice to
      NovaDel.





**Manufacturing**




We
      do not
      have any manufacturing capabilities. We are in contact with several contract
“
current Good Manufacturing Process”, or cGMP manufacturers for the supply of
      Oleoyl-estrone, lingual spray propofol, and PTH(1-34) that will be necessary
      to
      conduct Phase I and Phase II human clinical trials. A method has been identified
      for synthesizing Oleoyl-estrone, and can be done through simple reactions that
      produce the substance at above 99 percent purity. We believe that the production
      of Oleoyl-estrone will involve one contract manufacturer for clinical trials.
      In
      addition, we will be outsourcing the manufacture of lingual spray propofol
      and
      PTH(1-34) as well.




**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:





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




·
            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.


11




Preclinical
      tests include laboratory evaluation of product chemistry, toxicity, and
      formulation, as well as animal studies. The conduct of the preclinical tests
      and
      formulation of the compounds for testing must comply with federal regulations
      and requirements. The results of the preclinical 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 I 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 II 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 III 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
      I,
      phase II, or phase III 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.




Assuming
      successful completion of the required clinical testing, the results of the
      preclinical 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.




12




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 lingual spray propofol.




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.





***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 which 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.




13




***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 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 8 full time employees, including 3 persons
      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.




14


**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,
      2006, we had $3,029,118 of cash and cash equivalents. **** We
      received additional funding of approximately $8 million net from the sale of
      common stock and warrants in a private placement in March 2007. Even though
      we
      were successful in raising funds in March 2007 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, 2006 and for the period from
      August 6, 2001 (inception) through December 31, 2006, we incurred net losses
      of
      $9,695,123, and $41,787,174, 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:





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


·
            seek
                regulatory approvals for our product
                candidates;


·
            implement
                additional internal systems and infrastructure;




15




·
            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 pre-clinical 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 pre-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 Investigational New Drug Application, or an IND, which
      will
      set forth our plans for clinical testing of our product candidates. In January
      2005, the FDA accepted INDs for both our Oleoyl-estrone and Propofol LS product
      candidates. We have not yet filed a corporate IND for PTH(1-34). In May and
      July
      2005, we completed Phase Ia and Phase Ib trials in Basel, Switzerland to
      evaluate the safety and tolerability as well as preliminary signs of efficacy
      of
      defined doses of orally administered Oleoyl-estrone in obese adults, in
      accordance with relevant regulatory guidelines. Because propofol has already
      been approved by the FDA for intravenous use, the FDA has informed us that
      we
      may utilize a rapid development strategy that will enable us to go directly
      to a
      Pivotal Phase III trial following completion of Phase I trials. We are unable
      to
      estimate the size and timing of all the Phase II and Phase III programs for
      Oleoyl-estrone at this time and, accordingly, cannot estimate the time when
      development of that product candidate will be completed.




When
      the
      clinical testing for our product candidates is complete, we will submit to
      the
      FDA a New Drug Application, or 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 pre-clinical
      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 pre-clinical 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;




16




·
            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.




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 pre-clinical
      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 pre-clinical
      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. We expect that our clinical trials will only involve a small sample
      size. Accordingly, the results of such trials may not be indicative of future
      results over a larger patient population.




17




**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 NovaDel Pharma, from which we license our
      rights to lingual spray propofol, in the development of that product candidate
      in the pre-clinical and early clinical trial stages. Under our agreement with
      NovaDel, it has agreed to perform certain development on our behalf and at
      our
      expense, including formulation stability testing, formulation analytic method
      development and testing and manufacture of clinical trial material for the
      pre-clinical and early clinical development of propofol lingual spray. Beyond
      those limited activities, we need to engage independent investigators and other
      third party collaborators to conduct pre-clinical and clinical trials for
      lingual spray propofol. We are not currently collaborating with any third party
      with respect to the development of oleoyl-estrone, but we intend to engage
      third
      party independent investigators and collaborators, which may include
      universities and medical institutions, to conduct our pre-clinical and clinical
      trials for that product candidate, as well. Accordingly, the successful
      development of our product candidates will depend on the performance of these
      third parties. These collaborators will not be our employees, however, and
      we
      cannot control the amount or timing of resources that they will devote to our
      programs. Our collaborators may not assign as great a priority to our programs
      or pursue them as diligently as we would if we were undertaking such programs
      ourselves. If outside collaborators fail to devote sufficient time and resources
      to our drug-development programs, or if their performance is substandard, the
      approval of our FDA applications, if any, and our introduction of new drugs, if
      any, will be delayed. These collaborators may also have relationships with
      other
      commercial entities, some of whom may compete with us. If our collaborators
      assist our competitors at our expense, our competitive position would be
      harmed.




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




We
      have
      no experience in drug formulation or manufacturing and do not intend to
      establish our own manufacturing facilities. We lack the resources and expertise
      to formulate or manufacture our own product candidates. We currently have no
      contract for the manufacture of our product candidate. 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.




18




·
            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
      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.




Each
      of
      these risks could delay our clinical trials, the approvals, if any, of our
      product candidates by the FDA or the commercialization of our product candidates
      or result in higher costs or deprive us of potential product
      revenues.




**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 its 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 oleoyl-estrone and perhaps our other 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 its
      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.




19




**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
                pre-clinical 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.**




Companies
      that currently sell both generic and proprietary anti-obesity compounds
      formulations include among others Abbot Laboratories, Inc., Amgen, Inc., and
      Regeneron Pharmaceuticals, Inc. Alternative technologies are being developed
      to
      treat obesity and overweight disease, several of which are in advanced clinical
      trials. In addition, companies pursuing different but related fields represent
      substantial competition. Many of these 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.




20




**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.




We
      currently do not directly own the rights to any patents. We license the
      exclusive rights to two issued patents relating to Oleoyl-estrone, which expire
      in 2016. We also license the exclusive rights to four issued patents relating
      to
      lingual spray propofol, which expire from 2016 to 2017. In addition we license
      the exclusive rights to three patents relating to topical PTH (1-34), which
      expire from 2007 to 2013. 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. For example, despite covenants in
      our
      license agreements with Oleoylestrone Developments and NovaDel Pharma, from
      which we license Oleoyl-estrone and lingual spray propofol, respectively, that
      generally prohibit those companies from disclosing information relating to
      our
      licensed technology, the respective license agreements allow for each company
      to
      publish data and other information relating to our licensed technology. 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;




21




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




·
            pay
                damages; or




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




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




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




·
            government
                and health administration
                authorities;




·
            private
                health maintenance organizations and health insurers;
                and




·
            other
                healthcare payers.




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




**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 pre-clinical
      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.




22




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




Our
      directors, executive officers and principal stockholders beneficially own
      approximately 32 percent of our outstanding voting stock and, including shares
      underlying outstanding options and warrants, this group beneficially owns
      approximately 35 percent of our common stock. 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 $0.62 (in
      the
      third and fourth quarters of 2006) to a high of $2.10 (in the first quarter
      of
      2005). 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 pre-clinical 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.




23




**We
      have received notice** **from the American Stock Exchange** **that we fail to comply with certain of its continued listing
      standards** **,
      which may** **result
      in the delisting** **of our common stock** **from the exchange** **.**




Our
      common stock is currently listed
      for trading on the American Stock Exchange, or AMEX, and the continued listing
      of our common stock on the AMEX is subject to our compliance with a number
      of
      listing standards.  On
      January 8, 2007, we received notice from the AMEX informing us that, as of
      September 30, 2006, we are not in compliance with an AMEX listing standard
      that
      requires us to have stockholders’ equity of at least $4,000,000, if we have had
      net losses in three of our four most recent fiscal years, as well as a similar
      listing standard that requires that we have stockholders’ equity of at least
      $6,000,000 if we have net losses in our 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 February 2007. AMEX accepted our plan in March 2007,
      allowing us to continue our listing during the period ending April 16, 2008,
      during which time we will be subject to periodic review to determine if we
      are
      making progress consistent with the plan. 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 plan period, AMEX staff may initiate
      delisting proceedings. There can be no assurance that we will be able to make
      progress consistent with such plan.





If
      we
      fail to make sufficient progress under our plan, AMEX may initiate delisting
      proceedings. If our common stock is delisted
      from AMEX, trading in our common stock would likely be conducted on the OTC
      Bulletin Board, a regulated quotation service. If our common stock is delisted
      from the AMEX, 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.




24


**ITEM
      2.**  **LEGAL
      PROCEEDINGS**




We
      are
      not a party to any legal proceedings.




**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 December 15, 2006. 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
            
            
            37,627,263
            
            
            809,645Neil
                Herskowitz
            
            
            38,104,850
            
            
            332,058Malcolm
                Hoenlein
            
            
            37,906,150
            
            
            530,758Timothy
                McInerney
            
            
            37,820,746
            
            
            616,162Joan
                Pons Gimbert
            
            
            37,817,746
            
            
            619,162Richard
                I. Steinhart
            
            
            37,904,150
            
            
            532,758Michael
                Weiser
            
            
            37,549,808
            
            
            887,100





(ii) 
        The stockholders ratified the appointment of J.H. Cohn LLP as our
      independent registered public accounting firm for fiscal 2006. 38,345,996 votes
      were cast for the proposal; 88,072 votes were cast against the proposal, shares
      representing 2,840 votes abstained; and there were no broker
      non-votes.




25




**PART
      II**




**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS**




**Market
      for Common Stock**




Our
      common stock currently trades on
      the
      American Stock Exchange under the symbol “MHA.” Prior to October 7, 2005, our
      common stock was quoted
      on
      the OTC Bulletin Board under the symbol “MHTT.” The following table lists the
      high and low price for our common stock as quoted, in U.S. dollars, on the
      American Stock Exchange and OTC Bulletin Board during each quarter within the
      last two fiscal years:. The quotations from the OTC Bulletin Board reflect
      inter-dealer prices, without retail mark-up, mark-down or commission, and may
      not represent actual transactions.




**Price
                Range****2006**
            
            **2005****Quarter
                Ended**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**March
                31
            
            $
            1.640
            
            $
            1.160
            
            $
            2.100
            
            $
            0.850June
                30
            
            
            1.360
            
            
            0.075
            
            
            1.640
            
            
            1.200September
                30
            
            
            0.880
            
            
            0.620
            
            
            1.600
            
            
            1.110December
                31
            
            
            0.920
            
            
            0.620
            
            
            1.520
            
            
            1.040





The
      quotations from the OTC Bulletin Board reflect inter-dealer prices, without
      retail mark-up, mark-down or commission, and may not represent actual
      transactions.




**Record
      Holders**




The
      number of holders of record of our common stock as of March 16, 2007 was
      480.




**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 2006.




26







**ITEM
                6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                OR PLAN 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 biopharmaceutical 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 three product candidates in development:
      Oleoyl-estrone, an orally administered small molecule for the treatment of
      obesity; topical PTH (1-34) for the treatment of psoriasis; and Lingual Spray
      Propofol for sedation prior to diagnostic, therapeutic or endoscopic procedures.
      In addition to the development of our current products, we are focused on
      expanding our product candidate pipeline. 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-KSB. 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**




***2006
      Versus 2005***




During
      each of the years ended December 31, 2006 and 2005, we had no revenues, and
      are
      considered a development stage company. We do not expect to have revenues
      relating to our technologies prior to December 31, 2007.




27




For
      the
      year ended December 31, 2006 research and development expense was $6,173,000
      as
      compared to $5,178,000 for the year ended December 31, 2005. The increase of
      $995,000 is due to shared-based compensation of $529,000, increases in spending
      on the development of Oleoyl-estrone of $66,000 and on the development of PTH
      (1-34) of $517,000, partially offset by a decrease in spending on the
      development of Propofol Lingual Spray of $117,000. As we continue with Phase
      IIa
      clinical trials in Oleoyl-estrone and begin Phase II clinical trials in PTH
      (1-34), we expect research and development to continue to increase in
      2007.




For
      the
      year ended December 31, 2006, general and administrative expense was $3,827,000
      as compared to $2,291,000 for the year ended December 31, 2005. The increase
      of
      $1,536,000 is due primarily to shared-based compensation of $1,147,000 and
      increases in compensation expense of $342,000, in professional fees of $143,000
      and in insurance costs of $43,000, partially offset by a decrease in investor
      services costs of $133,000. As a result of our continued expansion of our
      infrastructure required to support the planned growth, we expect general and
      administrative expenses to continue to increase in 2007.




For
      the
      year ended December 31, 2006, other income, including realized gain on the
      sale
      of marketable equity securities, was $305,000 as compared to $216,000 for the
      year ended December 31, 2005. The increase of $89,000 is a result of higher
      balances of cash and short-term investments earning investment
      income.




Net
      loss
      for the year ended December 31, 2006, was as $9,695,000 compared to $19,141,000
      for the year ended December 31, 2005. This decrease of $9,446,000 is
      attributable primarily to the in-process research and development charge of
      $11,888,000 related to the acquisition of Tarpan recognized in the year ended
      December 31, 2005 offset by share-based compensation of $1,675,000 recognized
      in
      the year ended December 31, 2006. Additionally, there were increases in other
      research and development expenses of $466,000 and in other general and
      administrative expenses of $389,000. There was also an increase in interest
      and
      other income of $89,000.




Preferred
      stock dividends of $176,000 had no effect on earnings per share for the year
      ended December 31, 2005. There were no shares of preferred stock outstanding
      during 2006.




***2005
      Versus 2004***




During
      each of the years ended December 31, 2005 and 2004, we had no revenues, and
      are
      considered a development stage company




For
      the
      year ended December 31, 2005 research and development expense was $5,178,000
      as
      compared to $4,153,000 for the year ended December 31, 2004. The increase of
      $1,025,000 is due primarily to an acceleration of pre-clinical and clinical
      development of our Oleoyl-estrone drug and, commencing after the April 2005
      acquisition of Tarpan, the pre-clinical and clinical development of our PTH
      (1-34) which amounted to approximately $970,000.




For
      the
      year ended December 31, 2005, general and administrative expense was $2,291,000
      as compared to $1,990,000 for the year ended December 31, 2004. The increase
      of
      $301,000 is due primarily to increases in payroll, outside services and investor
      relations expenses of approximately $139,000, $146,000 and $106,000,
      respectively. In addition, we had increases in expenses related to franchise
      taxes, depreciation and accounting fees of approximately $50,000, $34,000,
      and
      $31,000, respectively. These increases are partially offset by reductions in
      consulting, legal fees and all other expenses of approximately $168,000, $19,000
      and $18,000, respectively.




28




The
      in-process research and development charge in 2005 relates to the allocation
      of
      the purchase price of the Tarpan acquisition. See Note 1 to the consolidated
      financial statements for further details.




For
      the
      year ended December 31, 2005, interest and other income including realized
      gain
      on the sale of marketable equity securities was $216,000 as compared to $247,000
      for the year ended December 31, 2004. The decrease of $31,000 is a result of
      a
      non-recurring realized gain on sale of marketable equity securities in 2004,
      partially offset by higher balances of cash and short-term investments earning
      investment income.




Net
      loss
      for the year ended December 31, 2005, was $19,141,000 as compared to $5,896,000
      for the year ended December 31, 2004. This increase in net loss is attributable
      primarily to the in-process research and development charge of $11,888,000
      related to the acquisition of Tarpan. Additionally, there were increases in
      research and development expenses of $1,025,000 and general and administrative
      expenses of $301,000. Additionally, there was a decrease in interest and other
      income of $31,000.




Preferred
      stock dividends of $176,000 and $586,000 reduced earnings per share for the
      years ended December 31, 2005 and 2004 by $0.00 and $0.02,
      respectively.




**Liquidity
      and Capital Resources**




From
      inception to December 31, 2006, we incurred a deficit during the development
      stage of $42,967,000 primarily as a result of our net losses, and we expect
      to
      continue to incur additional losses through at least December 31, 2007 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, 2006, we had a net decrease in cash, cash
      equivalents and short-term investments of $7,805,000. This decrease resulted
      largely from net cash used in operating activities of $7,751,000. Total liquid
      resources as of December 31, 2006 were $3,029,000 compared to $10,834,000,
      including short term investments, at December 31, 2005.




Our
      current liabilities as of December 31, 2006 were $1,943,000 compared to
      $1,666,000 at December 31, 2005, an increase of $277,000,. The increase was
      primarily due to increases in expenditures associated with our Oleoyl-estrone
      product candidate and our PTH (1-34) product candidate. As of December 31,
      2006,
      we had working capital of $1,350,000 compared to $9,363,000 at December 31,
      2005.




In
      March
      2007 we completed a private placement of common stock and warrants. We received
      net proceeds of approximately $8 million from this private
      placement.




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 pre-clinical 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.




29




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, 2006, 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, 2006 and the net proceeds from the March 2007
      private placement management believes we have sufficient capital to fund our
      operations through the end of 2007. 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 2007 to
      be
      able to sustain our operations beyond 2007 and we will need additional financing
      thereafter until we can achieve profitability, if ever.




We
      have
      reported net losses of $9,695,000 and $19,141,000 for the years ended December
      31, 2006 and 2005, respectively. The net loss from date of inception, excluding
      preferred stock dividends, August 6, 2001 to December 31, 2006, amounts to
      $41,787,000. Management believes that we will continue to incur net losses
      through at least December 31, 2007. Based on the current resources available
      to
      us, we will need additional equity or debt or financing or we will need to
      generate revenues through licensing our products or entering into strategic
      alliances to be able to sustain our operations until we can achieve
      profitability, if ever.




In
      January 2007 we received notice from the staff of the American Stock Exchange,
      or 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 September 30, 2006, with section 1003(a)(ii) of the AMEX Company Guide as
      we
      had less than the $4,000,000 of stockholders’ equity and had losses from
      continuing operations and/or net losses in three of its four most recent fiscal
      years, and with section 1003(a) (iii) which requires the Company 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 February 2007. AMEX accepted our plan in March 2007,
      so
      we are now able to continue our listing during the period ending April 16,
      2008,
      during which time we will be subject to periodic review to determine if we
      are
      making progress consistent with the plan. 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 plan period, AMEX staff may initiate
      delisting proceedings. There can be no assurance that we will be able to make
      progress consistent with such plan.





If
      we
      fail to make sufficient progress under our plan, AMEX may initiate delisting
      proceedings. If our common stock is delisted
      from AMEX, trading in our common stock would likely be conducted on the OTC
      Bulletin Board, a regulated quotation service. If our common stock is delisted
      from the AMEX, 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. Further,
      if we are delisted from AMEX, we may find it more difficult to raise additional
      capital through sales of our common stock or other equity
      securities.




30





***Development
      Commitments***





**Oleoyl-estrone**





On
      February 15, 2002, we entered into a License Agreement (the "License Agreement")
      with Oleoylestrone Developments, S.L. (“OED”). Under the terms of the License
      Agreement, OED granted to us a world-wide license to make, use, lease and sell
      the products incorporating the licensed technology. OED also granted to us
      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 our bankruptcy. OED may terminate the License
      Agreement in the event of a material breach by us that is not cured within
      the
      notice period. We may terminate the License Agreement for any reason upon 60
      days notice.





Under
      the
      License Agreement, we agreed to pay to OED certain licensing fees which are
      being expensed as they are incurred. We paid $175,000 in up front licensing
      fees
      in 2002. In addition, pursuant to the License Agreement, we issued 1,000,000
      shares of our common stock to OED. We valued these shares at their then
      estimated fair value of $1,000.





In
      connection with the License Agreement, we have 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, which we expect to pay during
      2007; (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 FDA. Through December 31, 2006, we have
      paid $675,000 in licensing fees and milestone payments.





In
      addition to the License Agreement, we entered into a consulting agreement with
      OED. The agreement became effective in February 2002, at a fee of $6,250 per
      month, and will terminate when the License Agreement terminates. The fees
      associated with the consulting agreement are expensed as incurred. OED agreed
      to
      designate a member of our Scientific Advisory Board and to render consultative
      and advisory services to us. Such services include research, development and
      clinical testing of our technology as well as the reporting of the findings
      of
      such tests, assistance in the filing of patent applications and oversight and
      direction of efforts in regards to personnel for clinical
      development.





**Propofol
      Lingual Spray**





In
      April
      2003, we entered into a license and development agreement with NovaDel Pharma,
      Inc., or NovaDel, under which we 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, we agreed to use our 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 our expense, a substantial
      portion of the development activities, including without limitation, preparation
      and filing of various applications with applicable regulatory
      authorities.




31





In
      consideration of the license, we are required to make certain license and
      milestone payments. Specifically, we were required to pay a $500,000 license
      fee
      at such time as we had completed a financing transaction resulting in aggregate
      gross proceeds of at least $10,000,000. We paid and expensed the $500,000
      license fee in 2003.





We
      are
      also required to make various milestone payments to NovaDel under the license
      agreement 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 approved by a European Union country; $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). Through December 31, 2006,
      none of the milestones have been reached, therefore, we have not paid any such
      milestone fees .





In
      addition, we are 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 our net profits from the sale of licensed products at a rate that
      is
      twice the net sales rate. In the event we sublicense the licensed product to
      a
      third party, we are obligated to pay royalties based on a fixed rate of fees
      or
      royalties received from the sublicensee until such time as we recover our
      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.





NovaDel
      may terminate the agreement (i) upon 10 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 or insolvency is filed and not dismissed within 60 days
      or if we become subject to a receiver or trustee for the benefit of creditors.
      Each party may terminate the agreement upon 30 days’ written notice and an
      opportunity to cure in the event the other party committed a material breach
      or
      default. We may also terminate the agreement for any reason upon 90 days’ notice
      to NovaDel.





**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
      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 we will be responsible.




The
      IGI
      sublicense agreement requires us to make certain milestone payments as follows:
      $300,000 payable upon the commencement of a Phase II clinical trial; $500,000
      upon the commencement of a Phase III 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 III 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.




32




In
      addition, we are 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, we are obligated to pay IGI, Inc. an annual royalty
      of 9% on such excess. Through December 31, 2006, none of the milestones have
      been reached and sales have not commenced, therefore, we have not paid any
      such
      milestones or 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.




**Research
      and Development Projects**




***Oleoyl-estrone***




In
      January 2005, the FDA accepted our filed investigational new drug application,
      or “IND” for the human clinical testing of Oleoyl-estrone. We completed Phase Ia
      and Phase Ib clinical trials in May 2005 and July 2005 and released data on
      both
      trials in October 2005. Both trials were completed in Basel, Switzerland after
      obtaining formal approval from the Swiss medical authority, Swissmedic, however
      only the Phase Ia trial was conducted pursuant to the IND accepted by the FDA.
      The objective of both dose-escalation studies was to determine the safety and
      tolerability of defined doses of orally administered Oleoyl-estrone in obese
      adult volunteers as well as the pharmacokinetic profile (i.e. the manner in
      which the drug is absorbed, distributed, metabolized and excreted by the body)
      of Oleoyl-estrone in both men and women.




The
      Phase
      Ia study involved 36 obese volunteers. Twelve of the 36 patients received
      placebo and 24 received a single dose in one of six strengths ranging from
      1 mg
      to 150 mg. Oleoyl-estrone was shown to be safe with no serious adverse events
      noted in this study.




The
      Phase
      Ib study was a seven day repeat dose study involving 24 obese volunteers in
      four
      cohorts of 6 patients each who received either placebo or Oleoyl-estrone in
      doses ranging from 10 mg to 150 mg once daily for seven consecutive days. The
      results indicated that Oleoyl-estrone was generally well-tolerated at all doses
      and no serious adverse events were reported. There were also no clinically
      significant changes in the physical exams, vital signs, ECGs, coagulation and
      liver function tests. The study demonstrated evidence of greater weight loss
      among the treated groups compared with the placebo group as well as evidence
      of
      reduction in desire to eat, hunger levels, fasting glucose and LDL cholesterol.
      Important clinical laboratories findings included reversible, dose-dependent
      elevations in estrone and estradiol levels, as well as reductions in
      testosterone levels.




In
      March
      2006, we entered into a research and development agreement with Swiss Pharma
      Contract Ltd., or Swiss Pharma, to perform a Phase IIa clinical study in 100
      obese patients of our Oleoyl-estrone product candidate for the treatment of
      obesity. The contract requires us to pay up to $2,152,000 to Swiss Pharma for
      conducting the study.




33





In
      the
      fourth quarter of 2006 ,
      we
      expanded this ongoing Phase IIa clinical trial of Oleoyl-estrone in obesity
      into
      two new clinical sites in the United States. Because the size of the study
      has
      not been expanded beyond the 100 obese patients, we do not anticipate the
      addition of the two new sites to materially increase our total financial
      commitment of up to $2,152,000. Such financial commitment will now be paid
      to
      three clinical centers rather than one. Enrollment in this study was completed
      in February 2007 and we expect this study to conclude mid-year
      2007.





In
      the
      fourth quarter of 2006, we commenced a Phase IIa study in the morbidly
      obese led by St.Lukes/Roosevelt hospital in New York in conjunction
      with Columbia University. The financial commitment for this study is
      approximately $685,000. The study is expected to conclude mid-year
      2007.





We
      often
      contract with third parties to facilitate, coordinate and perform agreed upon
      research and development of product candidates. To ensure that research and
      development costs are expensed as incurred, we record 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 recognized, or an accrued liability, when the amounts
      paid
      are less than the related research and development costs
      recognized.





Expenses
      associated with the ongoing clinical trials are recognized on this activity
      based basis, therefore, the expense recognition differs from the payment
      schedules. Approximately $937,000 was paid on this basis in 2006 and $764,000
      of
      expense was recognized in 2006. Because the amounts paid were greater than
      the related research and development costs recognized as of December 31, 2006,
      we recognized a prepaid expense of approximately $173,000.




To
      date,
      we have incurred $12,301,000 of project costs related to our development of
      oleoyl-estrone, including milestone payments triggered under our license
      agreement for oleoyl-estrone, of which $4,311,000 was incurred in fiscal 2006.
      Since oleoyl-estrone is regarded by the FDA as a new entity, it is not realistic
      to predict the size and the design of future studies at this time.




Based
        on
        the resources available to us at December 31, 2006 and the net proceeds from
        the
        March 2007 private placement management believes we have sufficient capital
        to
        fund the development of Oleoyl-estrone through the end of 2007. We will need
        to
        raise additional capital in order to complete our planned R&D activities for
        oleoyl-estrone and its continued development beyond 2007. If we are unable
        to
        raise such additional capital, we may have to sublicense our rights to
        oleoyl-estrone to a third party as a means of continuing development, or,
        although less likely, we may be required to abandon further development efforts
        altogether, either of which would have a material adverse effect on the
        prospects of our business.




In
      addition to raising further capital, whether we are successful in developing
      oleoyl-estrone is dependent on numerous other factors, including unforeseen
      safety issues, lack of effectiveness, significant unforeseen delays in the
      clinical trial and regulatory approval process, both of which could be extremely
      costly, and inability to monitor patients adequately before and after
      treatments. See also “Item 1. Description of Business - Risk Factors” in this
      Form 10-KSB. The existence of any of these factors could increase our
      development costs or make successful completion of development impractical,
      which would have a material adverse affect on the prospects of our
      business.




34




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




We
      are
      developing PTH (1-34) as a topical treatment for psoriasis. In
      August
      2003, researchers, led by Michael Holick, MD, Professor of Medicine, Physiology,
      and Biophysics at Boston University Medical Center, reported positive results
      from a US Phase I and II clinical trial evaluating the safety and efficacy
      of
      PTH (1-34) as a topical treatment for psoriasis. This double-blind, controlled
      trial in 15 patients compared PTH (1-34) formulated in the Novasome® Technology
      versus the Novasome® vehicle alone. Following 8 weeks of treatment, the topical
      application of 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 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 PTH (1-34)
      we
      believe that it may have an important clinical advantage over current topical
      psoriasis treatments. A follow on physician IND Phase IIa trial involving 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 IIa clinical study
      of
      topical PTH (1-34) due to a formulation issue. We believe we
      have identified and resolved this issue. In conjunction with formulation
      experts, we have produced several alternative formulations of PTH (1-34) that
      have successfully completed preliminary testing and have shown high levels
      of
      activity in preclinical models. These formulations will now advance into the
      final stages of testing. Based on discoveries made during this formulation
      effort, the Company is preparing several patent applications.




Our
      rights to PTH (1-34) were acquired as a result of our April 2005 acquisition
      of
      Tarpan Therapeutics, Inc. PTH (1-34) is being developed as a topical treatment
      for psoriasis. To date, we have incurred $2,696,000 of project costs related
      to
      our development of PTH (1-34). These project costs have been incurred since
      April 1, 2005, the date of the Tarpan Therapeutics acquisition. During 2006
      $1,726,000 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 PTH
      (1-34) beyond 2007. We will, therefore, need to raise additional capital in
      order to complete our planned R&D activities for PTH (1-34) and its
      continued development beyond 2007. To the extent additional capital is not
      available when we need it, we may be forced to sublicense our rights to PTH
      (1-34) or abandon our development efforts altogether, either of which would
      have
      a material adverse effect on the prospects of our business.




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.




***Lingual
      spray propofol***




We
      are
      developing propofol lingual spray, the right to which we license from NovaDel
      Pharma, Inc., for light to medium sedation on a Section 505b2 bioequivalence
      regulatory pathway toward FDA approval. In January 2005, the FDA accepted our
      IND for propofol lingual spray, allowing us to commence clinical trials. The
      FDA
      has indicated to us in discussions that we may proceed to a pivotal Phase III
      trial of propofol lingual spray following completion of Phase I trials. We
      are
      planning the next steps for the clinical development of this product candidate,
      meeting with our scientific advisors, NovaDel and other formulation partners
      regarding formulation, reviewing existing data, developing trial design and
      evaluating plans to re-enter the clinic. See also “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations - Liquidity and
      Capital Resources - Research and Development Projects - Lingual Spray Propofol.




35




To
      date,
      we have incurred $2,956,837 of project costs related to our development of
      propofol lingual spray, of which $135,651 was incurred in fiscal 2006. As with
      the development of our other product candidates, we do not currently have
      sufficient capital to fund our planned development activities of propofol
      lingual spray beyond 2007. We will, therefore, need to raise additional
      capital in order to complete our planned R&D activities for propofol lingual
      spray and its continued development beyond 2007. To the extent additional
      capital is not available when we need it, we may be forced to sublicense our
      rights to propofol lingual spray or abandon our development efforts altogether,
      either of which would have a material adverse effect on the prospects of our
      business.





**Summary
      of Contractual Commitments**





***Employment
      Agreements***




We
      have
      employment agreements with three employees for the payment of aggregate annual
      base salaries of $805,000 as well as performance based bonuses. All of these
      agreements have terms of three years and have a remaining obligation of
      $1,492,000 as of December 31, 2006.




***Leases***




Rent
      expense for the years ended December 31, 2006 and 2005 was $141,012 and
      $120,209, respectively. Future minimum rental payments subsequent to December
      31, 2006 under an operating lease for the Company’s office facility are as
      follows:




Years
                Ending December 31,
            
            Commitment2007
            
            $
            141,6002008
            
            $
            100,0002009
                and subsequent
            
            $
            0





**Off-Balance
      Sheet Arrangements**




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




36




**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.





***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 year ended December 31, 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.




37




***New
      Accounting Pronouncements***





In
      July
      2006, the FASB issued Interpretation No. 48 (“FIN No. 48”),
      Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes
      detailed guidance for the financial statement recognition, measurement and
      disclosure of uncertain tax positions recognized in an enterprise’s financial
      statements in accordance with FASB Statement No. 109
      (“FAS No. 109”), Accounting for Income Taxes . Tax positions must meet
      a more-likely-than-not recognition threshold at the effective date to be
      recognized upon the adoption of FIN No. 48 and in subsequent periods.
      FIN No. 48 will be effective for fiscal years beginning after
      December 15, 2006 and the provisions of FIN No. 48 will be
      applied to all tax positions accounted for under FAS No. 109 upon
      initial adoption. The cumulative effect of applying the provisions of
      FIN No. 48 will be reported as an adjustment to the opening balance of
      retained earnings for that fiscal year. The Company currently believes that
      the
      adoption of FIN 48 will have no material impact on its consolidated financial
      position or results of operations.





In
      December 2006, the FASB issued FASB Staff Position EITF 00-19-2 (“FSP 00-19-2”),
      Accounting for Registration Payment Arrangements. FSP 00-19-2 addresses an
      issuer’s accounting for registration payment arrangements by specifying that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. FSP 00-19-2 will be
      effective for fiscal years beginning after December 15, 2006, and interim
      periods within those fiscal years. The Company currently believes that the
      adoption of FSP 00-19-2 will have no material impact on its consolidated
      financial position or results of operations.







**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.




38


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




None.




**ITEM
              8A.**
            **CONTROLS
                AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      December 31, 2006, 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 Rules 13a-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, 2006
      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.




39





**** **PART
      III**





**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(a) OF THE EXCHANGE ACT**





Information
      in response to this Item is incorporated herein by reference to our 2007 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after
      the end of the fiscal year covered by this Form 10-KSB.





**ITEM
              10.**
            **EXECUTIVE
                COMPENSATION**





Information
      in response to this Item is incorporated herein by reference to our 2007 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after
      the end of the fiscal year covered by this Form 10-KSB.





**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 2007 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after
      the end of the fiscal year covered by this Form 10-KSB.





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





Information
      in response to this Item is incorporated herein by reference to our 2007 Proxy
      Statement to be filed pursuant to Regulation 14A within 120 days after
      the end of the fiscal year covered by this Form 10-KSB.




40


**ITEM
      13.**  **EXHIBITS
      LIST**




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
              
              Warrant
                  issued to John Prendergast to purchase 37,500 shares of Registrant’s
                  common stock (incorporated by reference from Exhibit 10.24 to the
                  Registrant’s Form 10-QSB for the quarter ended March 31,
                  1997.4.3
              
              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).4.4
              
              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)).4.5
              
              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).4.6
              
              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).
  41
  10.2
              
              Form
                  of Notice of Stock Option Grant issued to employees of the Registrant
                  from
                  April 12, 2000 to February 21, 2003 (incorporated by reference
                  to Exhibit
                  99.2 of the Registrant’s Registration Statement non Form S-8 filed March
                  24, 1998 (File 333-48531)).10.3
              
              Schedule
                  of Notices of Stock Option Grants, the form of which is attached
                  hereto as
                  Exhibit 4.2.10.4
              
              Form
                  of Stock Option Agreement issued to employees of the Registrant
                  from April
                  12, 2000 to February 21, 2003 (incorporated by reference to Exhibit
                  99.3
                  to the Registrant’s Registration Statement on Form S-8 filed March 24,
                  1998 (File 333-48531)).10.5
              
              License
                  Agreement dated on or about February 28, 2002 between Manhattan
                  Research
                  Development, Inc. (f/k/a Manhattan Pharmaceuticals, Inc.) and
                  Oleoyl-Estrone Developments SL (incorporated by reference to Exhibit
                  10.6
                  to the Registrant’s Amendment No. 2 to Form 10-QSB/A for the quarter ended
                  March 31, 2003 filed on March 12, 2004).10.6
              
              License
                  Agreement dated April 4, 2003 between the Registrant and NovaDel
                  Pharma,
                  Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s
                  Amendment No. 1 to Form 10-QSB/A for the quarter ended June 30,
                  2003 filed
                  on March 12, 2004).++10.7
              
              2003
                  Stock Option Plan (incorporated by reference to Exhibit 4.1 to
                  Registrant’s Registration Statement on Form S-8 filed February 17,
                  2004).10.8
              
              Employment
                  Agreement dated April 1, 2005, between the Registrant and Douglas
                  Abel
                  (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K/A
                  filed June 15, 2005).10.9
              
              Sublicense
                  Agreement dated April 14, 2004 between Tarpan Therapeutics, Inc.,
                  the
                  Registrant’s wholly-owned subsidiary, and IGI, Inc. (incorporated by
                  reference to Exhibit 10.109 to IGI Inc.’s Form 10-Q for the quarter ended
                  March 31, 2004 (File No. 001-08568).10.10
              
              Form
                  of subscription agreement between the Registrant and the investors
                  in the
                  Registrant’s August 2005 private placement (incorporated by reference as
                  Exhibit 10.1 to the Registrant’s Form 8-K filed September 1,
                  2005).10.11
              
              Employment
                  Agreement between the Registrant and Alan G. Harris January 26,
                  2006
                  (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-QSB
                  for the quarter ended March 31, 2006).10.12
              
              Employment
                  Agreement dated July 7, 2006 between the Registrant and Michael
                  G.
                  McGuinness (incorporated by reference to Exhibit 10.1 of the Registrant’s
                  Form 8-K filed July 12, 2006).10.13
              
              Separation
                  Agreement dated July 7, 2006 between the Registrant and Nicholas
                  J.
                  Rossettos (incorporated by reference to Exhibit 10.2 of the Registrant’s
                  Form 8-K filed July 12, 2006).
  42
  10.14
              
              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).10.15
              
              Form
                  of Stock Option Agreement issued under the Registrant’s 2003 Stock Option
                  Plan.23.1
              
              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.


43


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





**Fees
      Billed to the Company by Its Independent Auditors**




The
      following is a summary of the fees billed to us by J.H. Cohn LLP, our
      independent registered public accounting firm for professional services rendered
      for fiscal years ended December 31, 2006 and 2005:


**J.H.
                  Cohn LLP****Fee
                  Category**
              
              **Fiscal
                  2006 Fees**
              
              **Fiscal
                  2005 Fees**Audit
                  Fees
              
              $
              100,111
              
              $
              101,911Audit-Related
                  Fees (1)
              
              
              22,943
              
              
              9,430Tax
                  Fees (2)
              
              
              21,165
              
              
              18,622All
                  Other Fees (3)
              
              
              -
              
              
              -Total
                  Fees
              
              $
              144,219
              
              $
              129,963







(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 2006 was obtained in reliance on the waiver of the pre-approval
      requirement afforded in SEC regulations.




44


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Securities Exchange Act, Manhattan
      Pharmaceuticals, Inc. has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, on April 2, 2007.


Manhattan
                Pharmaceuticals, Inc.By:
            /s/
              Douglas AbelDouglas
                Abel
              Chief
                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
              
              April
                  2, 2007Douglas
                  Abel
              
              Director
                  (principal executive officer)/s/
                  Michael G. McGuinness
              
              Secretary
                  and Chief Financial Officer
              
              April
                  2, 2007Michael
                  G. McGuinness
              
              (principal
                  accounting and financial officer)/s/
                  Neil Herskowitz
              
              Director
              
              April
                  2, 2007Neil
                  Herskowitz/s/
                  Malcolm Hoenlein
              
              Director
              
              April
                  2, 2007Malcolm
                  Hoenlein/s/
                  Timothy McInerney
              
              Director
              
              April
                  2, 2007Timothy
                  McInerney/s/
                  Joan Pons Gimbert
              
              Director
              
              April
                  2, 2007Joan
                  Pons Gimbert/s/
                  Richard Steinhart
              
              Director
              
              April
                  2, 2007Richard
                  Steinhart/s/
                  Michael Weiser
              
              Director
              
              April
                  2, 2007Michael
                  Weiser
 45


**Index
      to Consolidated Financial Statements**




**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                2005
                and the cumulative period from August 6, 2001 (inception) to December
                31,
                2006
            F-4Consolidated
                Statement of Stockholders’ Equity (Deficiency) for the Years EndedDecember
                31, 2006 and 2005 and the cumulative period from August 6, 2001
                (inception) to December 31, 2006
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005
                and the cumulative period from August 6, 2001 (inception) to December
                31,
                2006
            F-6Notes
                to Consolidated Financial Statements
            F-7




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, 2006 and 2005, 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, 2006. 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, 2006 and 2005,
        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,
        2006,
        in conformity with accounting principles generally accepted in the United
        States
        of America.
 
 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
        2,
        2007, except for Notes 2 and 12 which are as of March 30, 2007
  F-2


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 (A
        Development Stage Company)
 
 Consolidated
        Balance Sheets


**December
                31,**
              **2006**
            
            **December
                31,**
              **2005****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            3,029,118
            
            $
            9,826,336Short-term
                investments, available for sale, at market
            
            
            —
            
            
            1,007,818Prepaid
                expenses
            
            
            264,586
            
            
            194,776Total
                current assets
            
            
            3,293,704
            
            
            11,028,930Property
                and equipment, net
            
            
            83,743
            
            
            106,877Other
                assets
            
            
            70,506
            
            
            70,506Total
                assets
            
            $
            3,447,953
            
            $
            11,206,313**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            1,393,296
            
            $
            1,617,489Accrued
                expenses
            
            
            550,029
            
            
            48,328Total
                liabilities
            
            
            1,943,325
            
            
            1,665,817Commitments
                and contingenciesStockholders’
                equity:Preferred
                stock, $.001 par value. Authorized 1,500,000 shares;no
                shares issued and outstanidng at December 31, 2006 and
                2005Common
                stock, $.001 par value. Authorized 150,000,000 shares;60,120,038
                and 60,092,697 shares issued and outstandingat
                December 31, 2006 and December 31, 2005, respectively
            
            
            60,120
            
            
            60,093Additional
                paid-in capital
            
            
            44,411,326
            
            
            42,751,111Deficit
                accumulated during the development stage
            
            
            (42,966,818
            )
            
            (33,271,695
            )Accumulated
                other comprehensive income
            
            
            —
            
            
            987Total
                stockholders’ equity
            
            
            1,504,628
            
            
            9,540,496Total
                liabilities and stockholders' equity
            
            $
            3,447,953
            
            $
            11,206,313





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****2006**
            
            
            **2005**
            
            
            ******2006**Revenue
            $
            —
            
            $
            —
            
            $
            —Costs
                and expenses:Research
                and development(including
                stock based compensation expense of$528,723
                for the year ended December 31, 2006and
                for the cumulative period from August 6, 2001(inception)
                to December 31, 2006)
            
            6,172,845
            
            
            5,178,077
            
            
            17,953,356General
                and administrative(including
                stock based compensation expense of$1,146,776
                for the year ended December 31, 2006and
                for the cumulative period from August 6, 2001(inception)
                to December 31, 2006)
            
            3,827,482
            
            
            2,291,121
            
            
            10,244,093In-process
                research and development charge
            
            —
            
            
            11,887,807
            
            
            11,887,807Impairment
                of intangible assets
            
            —
            
            
            —
            
            
            1,248,230Loss
                on disposition of intangible assets
            
            —
            
            
            —
            
            
            1,213,878Total
                operating expenses
            
            10,000,327
            
            
            19,357,005
            
            
            42,547,364Operating
                loss
            
            (10,000,327
            )
            
            (19,357,005
            )
            
            (42,547,364
            )Other
                (income) expense:Interest
                and other income
            
            (307,871
            )
            
            (210,156
            )
            
            (709,716
            )Interest
                expense
            
            1,665
            
            
            —
            
            
            25,558Realized
                (gain)/loss on sale of marketable equity securities
            
            1,002
            
            
            (5,852
            )
            
            (76,032
            )Total
                other income
            
            (305,204
            )
            
            (216,008
            )
            
            (760,190
            )Net
                loss
            
            (9,695,123
            )
            
            (19,140,997
            )
            
            (41,787,174
            )Preferred
                stock dividends (including imputed amounts)
            
            —
            
            
            (175,663
            )
            
            (1,179,644
            )Net
                loss applicable to common shares
            $
            (9,695,123
            )
            $
            (19,316,660
            )
            $
            (42,966,818
            )Net
                loss per common share:Basic
                and diluted
            $
            (0.16
            )
            $
            (0.44
            )Weighted
                average shares of common stock outstanding:Basic
                and diluted
            
            60,112,333
            
            
            43,544,206




See
                accompanying notes to consolidated financial
                statements.


F-4


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES** (A
          Development Stage Company)
  Consolidated
          Statement of Stockholder's Equity (Deficiency)


**Subscription**
                **receivable**
              
              **Deficit**
                **accumulated**
                **during**
                **development**
                **stage**
              
              **Dividends**
                **payable
                  in**
                **Series
                  A**
                **preferred**
                **shares**
              
              
              
              
              
              **Total**
                **stock–**
                **holders'**
                **equity**
                **(deficiency)****Series
                  A**
                **convertible**
                **preferred
                  stock**
              
              
              
              
              
              
              
              
              
              
              **Accumulated**
                **other**
                **comprehensive**
                **income
                  (loss)****Additional**
                **paid-in**
                **capital**
              
              
              
              
              
              **Unearned**
                **consulting**
                **services****Common
                  stock****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**Stock
                      issued at $0.0004 per share forsubscription
                      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 byissuance 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
              )
              
              4,453,816Common
                  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 ofaccounts
                    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
              )
              $
              —
              
              $
              —
              
              $
              —
              
              $
              1,504,628





See
                accompanying notes to consolidated financial
                statements.


F-5


**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) toDecember 31,****2006****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (9,695,123
              )
              $
              (19,140,997
              )
              
              $
              (41,787,174
              )Adjustments
                  to reconcile net loss tonet
                  cash used in operating activities:Share-based
                  compensation
              
              
              1,675,499
              
              
              87,139
              
              
              
              1,924,027Amortization
                  of intangible assets
              
              
              —
              
              
              —
              
              
              
              145,162(Gain)/loss
                  on sale of marketable equity securities
              
              
              1,002
              
              
              (5,852
              )
              
              
              (76,032
              )Depreciation
              
              
              60,186
              
              
              53,734
              
              
              
              147,480Non
                  cash portion of in-process research and development charge
              
              
              —
              
              
              11,721,623
              
              
              
              11,721,623Loss
                  on impairment of intangible assets
              
              
              —
              
              
              —
              
              
              
              1,248,230Loss
                  on disposition of intangible assets
              
              
              —
              
              
              —
              
              
              
              1,213,878Other
              
              
              —
              
              
              —
              
              
              
              5,590Changes
                  in operating assets and liabilities, net of acquisitions:Increase
                  in prepaid expenses and other current assets
              
              
              (69,810
              )
              
              (154,650
              )
              
              
              (206,341
              )Increase
                  in other assets
              
              
              —
              
              
              —
              
              
              
              (70,506
              )Increase
                  (decrease) in accounts payable
              
              
              (224,193
              )
              
              1,197,835
              
              
              
              1,793,510Increase
                  (decrease) in accrued expenses
              
              
              501,701
              
              
              (3,774
              )
              
              
              9,708Net
                  cash used in operating activities
              
              
              (7,750,738
              )
              
              (6,244,942
              )
              
              
              (23,930,845
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (37,052
              )
              
              (39,555
              )
              
              
              (221,501
              )Cash
                  paid in connection with acquisitions
              
              
              —
              
              
              —
              
              
              
              (32,808
              )Purchase
                  of short-term investments
              
              
              —
              
              
              —
              
              
              
              (5,000,979
              )Proceeds
                  from sale of short-term investments
              
              
              1,005,829
              
              
              3,499,999
              
              
              
              5,436,917Proceeds
                  from sale of license
              
              
              —
              
              
              —
              
              
              
              200,001Cash
                  acquired in acquisition
              
              
              —
              
              
              6,777
              
              
              
              6,777Net
                  cash provided by (used in) investing activities
              
              
              968,777
              
              
              3,467,221
              
              
              
              388,407Cash
                  flows from financing activities:Repayments
                  of notes payable to stockholders
              
              
              —
              
              
              (651,402
              )
              
              
              (884,902
              )Payment
                  for fractional shares for Preferred stock dividends
              
              
              —
              
              
              (1,296
              )
              
              
              (2,286
              )(Costs)
                  proceeds related to sale of common stock, net
              
              
              (15,257
              )
              
              12,250,209
              
              
              
              18,044,077Proceeds
                  from sale of preferred stock, net
              
              
              —
              
              
              —
              
              
              
              9,046,176Proceeds
                  from exercise of stock options
              
              
              —
              
              
              32,400
              
              
              
              62,500Proceeds
                  from exercise of warrants
              
              
              —
              
              
              68,490
              
              
              
              68,491Other,
                  net
              
              
              —
              
              
              —
              
              
              
              237,500Net
                  cash (used in) provided by financing activities
              
              
              (15,257
              )
              
              11,698,401
              
              
              
              26,571,556Net
                  (decrease) increase in cash and cash equivalents
              
              
              (6,797,218
              )
              
              8,920,680
              
              
              
              3,029,118Cash
                  and cash equivalents at beginning of period
              
              
              9,826,336
              
              
              905,656
              
              
              
              —Cash
                  and cash equivalents at end of period
              
              $
              3,029,118
              
              $
              9,826,336
              
              
              $
              3,029,118Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              1,665
              
              $
              —
              
              
              $
              25,558Supplemental
                  disclosure of noncash investing and financing activities:Common
                  stock issued in satisfaction of accounts payable
              
              $
              —
              
              $
              750,000
              
              
              $
              750,000Imputed
                  preferred stock dividend
              
              
              —
              
              
              —
              
              
              
              418,182Preferred
                  stock dividends accrued
              
              
              —
              
              
              175,663
              
              
              
              761,462Conversion
                  of preferred stock to common stock
              
              
              —
              
              
              896
              
              
              
              1,067Preferred
                  stock dividends paid by issuance of shares
              
              
              —
              
              
              477,736
              
              
              
              759,134Issuance
                  of common stock for acquisitions
              
              
              —
              
              
              11,052,984
              
              
              
              13,389,226Marketable
                  equity securities received in connection withsale
                  of license
              
              
              —
              
              
              —
              
              
              
              359,907Net
                  liabilities assumed over assets acquired in business
                  combination
              
              
              —
              
              
              (675,416
              )
              
              
              (675,416
              )Cashless
                  exercise of warrants
              
              
              27
              
              
              —
              
              
              
              27


See
                  accompanying notes to consolidated financial
                  statements.




F-6


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. (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.





***Business
      and Operations***




As
      described above, the Company resulted from the February 21, 2003 reverse merger
      between Atlantic Technology Ventures, Inc., 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
      Development.




The
      Company is a development stage biopharmaceutical company that holds an exclusive
      world-wide, royalty-free license to certain intellectual property related to
      oleoyl-estrone, which is owned by Oleoyl-Estrone Developments, SL (“OED”) of
      Barcelona, Spain. Oleoyl-estrone is an orally administered small molecule that
      has been shown to cause significant weight loss in pre-clinical animal studies
      regardless of dietary modifications. In addition, the Company has exclusive,
      world-wide proprietary rights to a technology for the clinical uses of PTH
      (1-34) relating to the regulation of cell differentiation and proliferation
      for
      treatment of skin disorders including psoriasis. The Company also holds the
      worldwide, exclusive rights to proprietary lingual spray technology to deliver
      the drug propofol for preprocedural sedation prior to diagnostic, therapeutic
      or
      endoscopic procedures.





***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 received approximately 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-7


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). Results of operations of Tarpan
      are included in the consolidated financials since April 1, 2005.




F-8





MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




A
        summary
        of the allocation of the purchase price is as follows:




Assets
                  purchased:Cash
              
              $
              6,777Property
                  and equipment
              
              
              2,037Acquired
                  in-process research and development
              
              
              11,887,807Total
              
              
              11,896,621Liabilities
                  assumed:Accounts
                  payable
              
              
              26,051Notes
                  payable - related parties
              
              
              651,402Total
              
              
              677,453Net
                  purchase price
              
              $
              11,219,168




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


**Twelve
                  months ended****December
                  31,****2005**Net
                  loss
              
              $
              (19,268,258
              )Weighted
                  average number of common shares outstanding
              
              
              46,219,619Loss
                  per common share - basic and diluted
              
              $
              (0.42
              )





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





***Liquidity***





The
      Company incurred 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 and a net loss
      of
      $19,140,997 and negative cash flows from operating activities of $6,244,942
      for
      the year ended December 31, 2005. The net loss from date of inception, August
      6,
      2001, to December 31, 2006 amounts to $41,787,174.





The
      Company received approximately $8 million net from a private placement of common
      stock and warrants in March 2007. This private placement is more fully described
      in Note 12.




F-9


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


Management
      believes that the Company will continue to incur net losses through at least
      December 31, 2007 and for the foreseeable future thereafter. Based on the
      resources of the Company available at December 31, 2006 and the net proceeds
      received from the March 2007 private placement management believes that the
      Company has sufficient capital to fund its operations through 2007.
      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 beyond
      2007. Furthermore, we will need additional financing thereafter to complete
      development and commercialization of our products. There can be no assurances
      that we can successfully complete development and commercialization of our
      products.





The
      Company’s continued operations will depend on its ability to raise additional
      funds through various potential sources such as equity and debt financing,
      collaborative agreements, strategic alliances and its ability to realize the
      full potential of its technology in development. Additional funds may not become
      available on acceptable terms, and there can be no assurance that any additional
      funding that the Company does obtain will be sufficient to meet the Company’s
      needs in the long-term.




**(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.




**Use
      of Estimates**




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




***Research
      and Development***




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




F-10


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


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
      13,383,229 and 12,841,159 shares at December 31, 2006 and 2005,
      respectively.




***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.”




F-11


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




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
      year ended December 31, 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 recognized compensation expense related to stock option grants on a
      straight-line basis over the vesting period. For the year ended December 31,
      2006, the Company recognized share-based employee compensation cost of
      $1,670,661 in accordance with Statement 123(R). $1,500,690 of this expense
      resulted from the grants of stock options to officers, directors and employees
      of the Company on or prior to December 31, 2005. The balance of $169,971 relates
      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 value at the end of each
      reporting period until such options vest, and the fair value of the
      options, as adjusted, is amortized to consulting expense over the related
      vesting period.  As a result of adjusting consultant and other non-employee
      options to fair value as of December 31, 2006, net of amortization, the Company
      recognized 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:


**2006**General
                and administrative expense:Share-based
                employee compensation cost
            
            $
            1,176,618Share-based
                consultant and non-employee cost
            
            
            (29,842
            )$
            1,146,776Research
                and development expenseShare-based
                employee compensation cost
            
            $
            494,043Share-based
                consultant and non-employee cost
            
            
            34,680$
            528,723Total
                share-based cost
            
            $
            1,675,499




F-13





MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






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.




The
      net
      loss for the year ended December 31, 2005 does not include any compensation
      charges related to options granted to employees since the Company used the
      intrinsic value method for employee options and the exercise price of the
      options granted through December 31, 2005 was not less than the fair value
      at
      the date of grant. The following table illustrates the pro forma effect on
      net
      loss and loss per share assuming the Company had applied the fair value
      recognition provisions of SFAS No. 123 instead of the intrinsic value
      method under APB 25 to stock-based employee compensation:


**2005**Net
                  loss applicable to common shares, as reported
              
              $
              (19,316,660
              )Deduct: 
                  Total
                  stock-based employeecompensation
                  expense determinedunder
                  fair value method
              
              
              (1,089,814
              )Net
                  loss applicable to common shares, pro forma
              
              $
              (20,406,474
              )Net
                  loss per common share – basicAs
                  reported
              
              $
              (0.44
              )Pro
                  forma
              
              
              (0.47
              )




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. Under the 1995 Plan at December 31, 2006 options to purchase
      1,137,240 shares were outstanding and no shares were reserved for future stock
      option grants.




To
      compute compensation expense in 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.




F-14


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




The
      following table shows the weighted average assumptions the Company used to
      develop the fair value estimates for the determination of the compensation
      charges in 2006 and the pro forma charges in 2005:


**2006**
              
              **2005**Expected
                  Volatility
              
              
              84%
                  - 98
              %
              
              70%
                  - 72
              %Dividend
                  yield
              
              
              —
              
              
              —Expected
                  term (in years)
              
              
              5
                  - 10
              
              
              4
                  - 5Risk-free
                  interest rate
              
              
              4.45%
                  - 5.1
              %
              
              3.4%
                  - 4.4
              %Forfeiture
                  rate
              
              
              4
              %
              
              N/A




***Financial
      Instruments***




At
      December 31, 2006 and 2005, the fair values of cash and cash equivalents,
      short-term investments 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, 2006. At December 31, 2005 the Company had short-term investments
      with a market value of $1,007,818, a cost basis of $1,006,831 and an unrealized
      gain of $987. Unrealized gain (and loss, if any) is excluded from operations
      and
      included in accumulated other comprehensive income (loss). The Company’s
      comprehensive loss (net loss adjusted for changes in unrealized gains/losses
      on
      short-term investments) for 2005 was $19,153,247.




F-15


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




***New
      Accounting Pronouncements***





In
      July
      2006, the FASB issued Interpretation No. 48 (“FIN No. 48”),
      Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes
      detailed guidance for the financial statement recognition, measurement and
      disclosure of uncertain tax positions recognized in an enterprise’s financial
      statements in accordance with FASB Statement No. 109
      (“FAS No. 109”), Accounting for Income Taxes . Tax positions must meet
      a more-likely-than-not recognition threshold at the effective date to be
      recognized upon the adoption of FIN No. 48 and in subsequent periods.
      FIN No. 48 will be effective for fiscal years beginning after
      December 15, 2006 and the provisions of FIN No. 48 will be
      applied to all tax positions accounted for under FAS No. 109 upon
      initial adoption. The cumulative effect of applying the provisions of
      FIN No. 48 will be reported as an adjustment to the opening balance of
      retained earnings for that fiscal year. The Company currently believes that
      the
      adoption of FIN 48 will have no material impact on its consolidated financial
      position or results of operations.





In
      December 2006, the FASB issued FASB Staff Position EITF 00-19-2 (“FSP 00-19-2”),
      Accounting for Registration Payment Arrangements. FSP 00-19-2 addresses an
      issuer’s accounting for registration payment arrangements by specifying that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. FSP 00-19-2 will be
      effective for fiscal years beginning after December 15, 2006, and interim
      periods within those fiscal years. The Company currently believes that the
      adoption of FSP 00-19-2 will have no material impact on its consolidated
      financial position or results of operations.





The
      FASB
      and the Securities and Exchange Commission had issued certain other accounting
      pronouncements as of December 31, 2006 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, 2006
      and
      2005 and for the period from August 6, 2001 (inception) to December 31, 2006
      or
      that will have a significant effect at the time they become
      effective.




F-16





MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


**(4)**
              **Property
                  and Equipment**
  Property
        and equipment consists of the following at December 31:





**2006**
            
            **2005**Property
                and equipment
            
            $
            244,040
            
            $
            206,988Less
                accumulated depreciation
            
            
            (160,297
            )
            
            (100,111
            )Net
                property and equipment
            
            $
            83,743
            
            
            106,877




**(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.




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.





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. 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-17





MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS






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.





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.




F-18


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


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.





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.





During
      2006 the Company issued 27,341 shares of common stock upon the exercise of
      warrants.




**(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 and 2005,
      7,400,000 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 534,500 shares of common stock at an exercise price
      of $1.35, 50,000 shares of common stock at an exercise price of $0.89 and
      220,000 shares of common stock at an exercise price of $0.70 during the year
      ended December 31, 2006.




At
      December 31, 2006 there were 1,536,736 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, 2006 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, 2006 and 2005
      and changes during the years then ended is presented below:




F-19


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  **2006**
              
              **2005****Shares**
              
              **Weighted
                  average**
                **exercise**
                **price**
              
              **Weighted
                  Average Remaining Contractual Term (years)**
              
              **Aggregate
                  Intrinsic**
                **Value**
              
              **Shares**
              
              **Weighted
                  average**
                **exercise**
                **price**Outstanding
                  atbeginning
                  of year
              
              
              6,328,754
              
              $
              1.33
              
              
              
              
              
              
              
              
              2,822,140
              
              $
              1.17Granted
              
              
              804,500
              
              
              1.12
              
              
              
              
              
              
              
              
              3,641,180
              
              
              1.45Exercised
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              (32,400
              )
              
              1.00Cancelled
              
              
              (132,750
              )
              
              1.20
              
              
              
              
              
              
              
              
              (102,166
              )
              
              1.31Outstanding
                  at endof
                  year
              
              
              7,000,504
              
              $
              1.31
              
              
              7.71
              
              $
              262,937
              
              
              6,328,754
              
              $
              1.33Options
                  exercisable atyear-end
              
              
              4,822,372
              
              
              
              
              
              7.37
              
              $
              262,937
              
              
              3,472,745Weighted-averagefair
                  value ofoptions
                  grantedduring
                  the year
              
              $
              0.50
              
              
              
              
              
              
              
              
              
              
              $
              0.89




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





Included
      in the options granted during 2005 are options for 350,000 shares issued to
      consultants which are subject to variable accounting pursuant to EITF 96-18.
      As
      a result, the Company recorded expense for the increase in the fair value of
      those options of $4,838 and $66,971 for the years ended December 31, 2006 and
      December 31, 2005, respectively.




F-20





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, 2006:





**Remaining**
            
            **Number
                of****Exercise**
            
            **Number**
            
            **contractual**
            
            **options****price**
            
            **outstanding**
            
            **life
                (years)**
            
            **exercisable**$0.400
            
            
            876,090
            
            
            6.16
            
            
            876,0900.430
            
            
            400
            
            
            6.15
            
            
            4000.700
            
            
            220,000
            
            
            9.53
            
            
            —0.890
            
            
            50,000
            
            
            9.38
            
            
            —0.970
            
            
            440,000
            
            
            8.75
            
            
            415,0001.000
            
            
            312,364
            
            
            8.04
            
            
            195,5221.000
            
            
            65,000
            
            
            5.24
            
            
            65,0001.250
            
            
            12,000
            
            
            5.08
            
            
            12,0001.250
            
            
            163,750
            
            
            5.14
            
            
            153,7501.350
            
            
            130,000
            
            
            9.08
            
            
            —1.350
            
            
            300,000
            
            
            9.09
            
            
            —1.350
            
            
            60,000
            
            
            9.53
            
            
            —1.500
            
            
            2,923,900
            
            
            8.25
            
            
            1,949,2771.500
            
            
            250,000
            
            
            3.58
            
            
            25,0001.600
            
            
            100,000
            
            
            8.46
            
            
            33,3331.650
            
            
            1,077,000
            
            
            7.08
            
            
            1,077,0004.375
            
            
            10,000
            
            
            4.14
            
            
            10,00020.938
            
            
            10,000
            
            
            3.28
            
            
            10,0007,000,504
            
            
            
            
            
            4,822,372




F-21





MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
      Development Stage Company)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


**(7)**
              **Stock
                  Warrants**
  The
        following table summarizes the information about warrants to purchase shares
        of
        our common stock outstanding at December 31, 2006:





**Remaining**
            
            **Number
                of****Exercise**
            
            **Number**
            
            **contractual**
            
            **warrants****price**
            
            **outstanding**
            
            **life
                (years)**
            
            **exercisable**0.700
            
            
            353,013
            
            
            1.00
            
            
            353,0130.700
            
            
            1,252,752
            
            
            2.21
            
            
            1,252,7520.780
            
            
            10,000
            
            
            2.98
            
            
            10,0001.100
            
            
            909,090
            
            
            1.85
            
            
            909,0901.100
            
            
            326,499
            
            
            2.08
            
            
            326,4991.440
            
            
            2,702,216
            
            
            3.65
            
            
            2,702,2161.440
            
            
            135,135
            
            
            3.65
            
            
            135,1351.490
            
            
            276,741
            
            
            3.67
            
            
            276,7411.900
            
            
            100,000
            
            
            2.21
            
            
            100,0006.690
            
            
            185,601
            
            
            1.10
            
            
            185,6018.000
            
            
            101,678
            
            
            1.00
            
            
            101,67822.500
            
            
            30,000
            
            
            0.01
            
            
            30,0006,382,725
            
            
            
            
            
            6,382,725





**(8)**
            **Related-Party
                Transactions**




**Oleoylestrone
      Developments, SL**




Pursuant
      to the terms of a license agreement dated February 15, 2002 by and between
      Manhattan Research Development, Inc., the Company’s wholly owned subsidiary and
      OED, the Company has an exclusive, worldwide license to U.S. and foreign patents
      and patent applications relating to certain technologies. Although the Company
      is not obligated to pay royalties to OED, the license agreement requires the
      Company to make certain performance-based milestone payments. See Note 10.
      OED
      currently owns approximately 7 percent of the Company’s outstanding common
      stock. Additionally, Mr. Pons, a member of the Company’s board of directors, is
      chief executive officer of OED.




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 will terminate when the license agreement terminates.
      The
      fees associated with the consulting agreement are expensed as incurred. OED
      agreed to serve as a member of the Company’s Scientific Advisory Board and to
      render consultative and advisory services to the Company. Such services include
      research, development and clinical testing of the Company’s technology as well
      as the reporting of the findings of such tests, assistance in the filing of
      patent applications and oversight and direction of efforts in regards to
      personnel for clinical development.





Total
      milestone payments under the license agreement of $250,000, $250,000 and
      $675,000 and consulting fees of $75,000, $75,000 and $362,500 are included
      in
      the accompanying consolidated statements of operations for the years ended
      December 31, 2006, 2005 and for the cumulative period from August 6, 2001 to
      December 31, 2006.




F-22


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**NovaDel
      Pharma Inc.**




As
      discussed in Note 10, pursuant to the terms of a license agreement dated April
      4, 2003 by and between the Company and NovaDel Pharma Inc. (“NovaDel”), the
      Company has the rights to develop NovaDel’s proprietary lingual spray technology
      to deliver propofol for preprocedural sedation. The license agreement with
      NovaDel requires the Company to make certain license and milestone payments,
      as
      well as pay royalties. During 2003, the Company paid aggregate license fees
      of
      $500,000 to NovaDel under the license agreement. In 2005 and 2006, no milestones
      were reached and no payments were made to NovaDel. Lindsay A. Rosenwald, who
      beneficially owns more than 10 percent of the Company’s common stock, also
      beneficially owns in excess of 20 percent of the common stock of NovaDel and
      may
      therefore be deemed to be an affiliate of that company.




**Paramount
      BioCapital, Inc.**




One
      member of the Company’s board of directors, Timothy McInerney, is also an
      employees of Paramount BioCapital, Inc. or one of its affiliates (“Paramount”).
      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 BioCapital through August 2004 and were directors of the Company
      until
      September 2005. The sole shareholder of Paramount BioCapital, Inc. (“Paramount
      BioCapital”) is Lindsay A. Rosenwald, M.D. Dr. Rosenwald beneficially owns more
      than 5 percent of the Company’s common stock as of December 31, 2006 and various
      trusts established for Dr. Rosenwald’s or his family’s benefit, held in excess
      of 14% of the Company’s common stock as of December 31, 2006. In November 2003,
      the Company paid to Paramount BioCapital 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
      BioCapital 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 BioCapital 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-23


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**(9)**
            **Income
                Taxes**




There
      was
      no current or deferred tax expense for the years ended December 31, 2006
      and 2005 because of the Company’s operating losses.




The
      components of deferred tax assets as of December 31, 2006 and 2005 are as
      follows:


**2006**
              
              **2005**Deferred
                  tax assets:Tax
                  loss carryforwards
              
              $
              18,265,000
              
              $
              14,860,000Research
                  and development credit
              
              
              1,263,000
              
              
              1,174,000Other
              
              
              29,000
              
              
              (5,000
              )Gross
                  deferred tax assets
              
              
              19,557,000
              
              
              16,029,000Less
                  valuation allowance
              
              
              (19,557,000
              )
              
              (16,029,000
              )Net
                  deferred tax assets
              
              $
              —
              
              $
              —




The
      reasons for the difference between actual income tax benefit for the years
      ended
      December 31, 2006 and 2005 and the amount computed by applying the
      statutory federal income tax rate to losses before income tax benefit are as
      follows:


**2006**
              
              **2005****%
                  of**
              
              
              
              **%
                  of****pretax**
              
              
              
              **pretax****Amount**
              
              **loss**
              
              **Amount**
              
              **loss**Federal
                  income taxbenefit
                  at statutory rate
              
              $
              (3,296,000
              )
              
              (34.0
              %)
              $
              (6,508,000
              )
              
              (34.0
              %)State
                  income taxes,net
                  of federal tax
              
              
              (659,000
              )
              
              (6.8
              %)
              
              (1,302,000
              )
              
              (6.8
              %)Research
                  anddevelopment
                  credits
              
              
              (90,000
              )
              
              (0.9
              %)
              
              (233,000
              )
              
              (1.2
              %)Other
              
              
              (165,000
              )
              
              (1.7
              %)
              
              —
              
              
              —Stock
                  based compensation
              
              
              682,000
              
              
              7.0
              %
              
              —
              
              
              —In-process
                  research anddevelopment
                  charge
              
              
              —
              
              
              —
              
              
              4,850,000
              
              
              25.3
              %Change
                  in valuationallowance
              
              
              3,528,000
              
              
              36.4
              %
              
              3,193,000
              
              
              16.7
              %$
              -
              
              
              —
              
              $
              -
              
              
              —




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, 2006 and
      2005
      was an increase of $3,528,000 and $3,193,000 , 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.




F-24


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




At
      December 31, 2006, the Company had unused federal and state net operating
      loss carryforwards of approximately $46,432,000 and $38,412,000, respectively.
      The net operating loss carryforwards expire in various amounts through 2026
      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 in reducing
      any
      future year’s taxable income. At December 31, 2006, the Company also had
      research and development credit carryforwards of approximately $1,263,000 for
      federal income tax purposes which expire in various amounts through
      2026.




**(10)**
            **License
                and Consulting 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.





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 will terminate when the License Agreement terminates.
      The
      fees associated with the consulting agreement are expensed as incurred. OED
      agreed to serve as a member of the Company’s Scientific Advisory Board and to
      render consultative and advisory services to the Company. Such services include
      research, development and clinical testing of the Company’s technology as well
      as the reporting of the findings of such tests, assistance in the filing of
      patent applications and oversight and direction of efforts in regards to
      personnel for clinical development.





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:




F-25


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


(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, 2006, the Company
      paid a total of $675,000 in licensing fees and milestone payments.





**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. Holders of a significant portion of the Company’s common
      stock own a significant portion of the common stock of NovaDel. (See Note
      8.)





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).





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, 2006, the Company has incurred,
      and paid a total of $500,000 under the NovaDel license agreement, the initial
      license fee paid in 2003.




F-26





NovaDel
      may terminate the agreement (i) upon 10 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 or insolvency is filed and not dismissed
      within 60 days or if the Company becomes subject to a receiver or trustee for
      the benefit of creditors. Each party may terminate the agreement upon 30 days’
written notice and an opportunity to cure in the event the other party committed
      a material breach or default. The Company may also terminate the agreement
      for
      any reason upon 90 days’ notice to NovaDel.




**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 II clinical trial; $500,000 upon the commencement of
      a
      Phase III 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 III 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.




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, 2006, the Company
      has not paid any such milestones or 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.




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




***Research
      and Development Agreement***




On
      March
      27, 2006, the Company entered into a research and development agreement with
      Swiss Pharma Contract Ltd. (“Swiss Pharma”) to perform a Phase IIa study in 100
      obese patients of the Company’s Oleoyl-estrone product for the treatment of
      obesity. The terms of the contract call for the Company to pay Swiss Pharma
      up
      to $2,151,840. The payment terms are: 20%, or $430,368, upon signing the
      agreement, 20% after the first patient has received the initial dose, 20% after  half
      the
      patients have received the initial dose, 20% after all patients have completed
      dosing, 10%, on receipt of statistical analyses and 10% on acceptance by the
      Company of the Phase IIa study.




F-27


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


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.





The
      contract with Swiss Pharma contains a list of the fees to be charged by Swiss
      Pharma for the provision of specific services under the contract. The maximum
      fees to be charged under the contract are $2,151,840. The Company recognizes
      expense as per this list as the specific services are performed by Swiss Pharma.
      In the fourth quarter of 2006, we expanded this ongoing Phase IIa clinical
      trial
      of Oleoyl-estrone in obesity into two clinical sites in the United States.
      Because the size of the study has not been expanded beyond the 100 obese
      patients, we do not anticipate the addition of the two new sites to materially
      increase our total financial commitment of up to $2,152,000. Such financial
      commitment will now be paid to three clinical centers rather than one. As of
      December 31, 2006, the Company had paid an aggregate of $1,168,755 to the three
      clinical sites and recognized $1,012,333 of research and development expense
      for
      the Phase IIa study. The remainder, $156,422, is included in prepaid
      expenses.





In
      the
      fourth quarter of 2006 the Company commenced a Phase IIa clinical trial in
      the
      morbidly obese at St. Lukes/Roosevelt Hospital in New York City. The financial
      commitment for this study is approximately $685,000. The study is expected
      to
      conclude mid year 2007.




***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.




F-28


MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES
 (A
        Development Stage Company)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


***Employment
      Agreement***




The
      Company has employment agreements with three employees for the payment of
      aggregate annual base salary of $805,000 as well as performance based bonuses.
      These agreements have three year terms and have a remaining obligation of
      $1,492,000 as of December 31, 2006.




***Leases***




The
      Company leases office space under a non-cancellable lease terminating in
      September 2008. Rent expense for the years ended December 31, 2006 and 2005
      was
      $141,012 and $120,209, respectively.




Future
      minimum rental payments subsequent to December 31, 2006 under an operating
      lease
      for the Company’s office facility are as follows:




Years
                Ending December 31,
            
            Commitment2007
            
            $
            141,6002008
            
            $
            100,0002009
                and subsequent
            
            $
            0




**(12)**
            **Subsequent
                Events**




On
      March
      30, 2007, the Company completed a private placement of our common stock and
      warrants to purchase shares of our common stock. We received net proceeds of
      approximately $8.0 million from this private placement. The Company issued
      approximately 10.2 million shares of common stock at a price of $0.84 per share
      and 5-year warrants to purchase an additional 3.6 million shares of our common
      stock at $1.00 per share to the investors and warrants to purchase approximately
      510,000 shares of our common stock at $1.00 per share to the placement agent,
      Paramount Biocapital, Inc., a related party. In connection with this private
      placement the Company paid approximately $600,000 to Paramount as a placement
      fee. As a result of this private placement, the Company believes it now has
      sufficient capital to fund its operations through the end of 2007.




F-29


**Index
      to Exhibits Filed with this Report**




Exhibit
                No.
            
            Description10.15
            
            Form
                of Stock Option Agreement issued under the Registrant’s 2003 Stock Option
                Plan.23.1
            
            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.