UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




x           Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2008





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


Commission File
Number  1-32639




MANHATTAN
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)




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




(212)
582-3950


(Registrant’s
telephone number, including area code)




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





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





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





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





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





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


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


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


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


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





The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates of the registrant on June 30, 2008 based on
the closing price of the common stock as reported on the  OTC Bulletin
Board on such date was $7,778,172.





As of
March 17, 2009 there were 70,624,232 outstanding shares of common stock,
par value $.001 per share.





TABLE OF
CONTENTS




PagePART
      IItem
      1
                                                  Business
                                                  3Item
      1A
                                                  Risk
      Factors
                                                  18Item
      2
                                                  Properties
                                                  28Item
      3
                                                  Legal
      Proceedings
                                                  28PART
      IIItem
      5
                                                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                  29Item
      7
                                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                  35Item
      8
                                                  Financial
      Statements and Supplementary Data
                                                  52Item
      9
                                                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                  52Item
      9A(T)
                                                  Controls
      and Procedures
                                                  52Item
      9B
                                                  Other
      Information
                                                  53PART
      IIIItem
      10
                                                  Directors,
      Executive Officers and Corporate Governance
                                                  54Item
      11
                                                  Executive
      Compensation
                                                  58Item
      12
                                                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                  62Item
      13
                                                  Certain
      Relationships and Related Transactions, and Director
      Independence
                                                  64Item
      14
                                                  Principal
      Accounting Fees and Services
                                                  68PART
      IVItem
      15
                                                  Exhibits
      and Financial Statement Schedules
                                                  69Index
      to Financial Statements
                                                  F-1


1
  References
to the “Company,” the “Registrant,” “we,” “us,” or “our” or in this Annual
Report on Form 10-K refer to Manhattan Pharmaceuticals, Inc., a Delaware
corporation, and our consolidated subsidiaries, together taken as a whole,
unless the context indicates otherwise.
  Forward-Looking
Statements
  This annual report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Exchange Act. Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but not
always, made through the use of words or phrases such as “anticipate,”
“estimate,” “plan,” “project,” “expect,” “may,” “intend” and similar words or
phrases. Accordingly, these statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially from those
expressed in them. These statements are therefore subject to risks and
uncertainties, known and unknown, which could cause actual results and
developments to differ materially from those expressed or implied in such
statements. Such risks and uncertainties relate to, among other
factors:
 
 ·
              our
      ability to obtain adequate financing to continue our
      operations;
 ·
              the
      development of our pharmaceutical product
  candidates;
 ·
              the
      regulatory approval of our pharmaceutical product
    candidates;
 ·
              our
      use of clinical research centers and other
  contractors;
 ·
              our
      ability to find collaborative partners for research, development and
      commercialization of potential
products;
 ·
              acceptance
      of our products by doctors, patients or
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 products;
 ·
              the
      effect of potential strategic transactions on our business;
      and
 ·
              the
      volatility of our stock price.
 
 Further,
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict which
factors will arise. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
  2
 
 PART I
  ITEM
1.  BUSINESS
  Overview
  We are a
specialty healthcare product company focused on developing and commercializing
innovative treatments for underserved patient populations.  We aim to
acquire rights to these technologies by licensing or otherwise acquiring an
ownership interest, funding their research and development and eventually either
bringing the technologies to market or out-licensing.  In the short
term we are focusing our efforts on the commercialization of the two product
candidates we currently have in development:  HedrinTM, a novel,
non-insecticide treatment for pediculosis (head lice), which we are developing
through a joint venture, and a topical product for the treatment of
psoriasis.  Longer term, we intend to acquire and commercialize low
risk, quick to market products, specifically products that could be marketed
over-the-counter (“OTC”), treat everyday maladies, are simple to manufacture,
and/or could be classified as medical devices by the FDA.
  During
2007, we discontinued development of Oleoyl-estrone and Propofol Lingual
Spray.  In March 2009, we discontinued development of Altoderm and
Altolyn.  We have not received regulatory approval for, or generated
commercial revenues from marketing or selling any drugs.
  Our
executive offices are located at 48 Wall Street, 11th floor,
New York, NY 10005 USA.  Our telephone number is (212) 582-3950 and
our internet website address is www.manhattanpharma.com.
  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. This transaction was accounted for as a purchase of
Tarpan by the Company.
  Active
Research and Development Programs
  HedrinTM
  In June
2007, Manhattan Pharmaceuticals entered into an exclusive license agreement with
Thornton & Ross Ltd. (“T&R”) and Kerris, S.A. (“Kerris”) for a product
candidate called Hedrin (the “Hedrin License Agreement”). We acquired an
exclusive North American license to certain patent rights and other intellectual
property relating to Hedrin, a non-insecticide product candidate for the
treatment of head lice. In addition, and at the same time, we also entered into
a Supply Agreement with T&R pursuant to which T&R will be the Company’s
exclusive supplier of Hedrin product (the “Hedrin Supply
Agreement”).
  3
  In
February 2008, Manhattan Pharmaceuticals announced that it had entered into a
joint venture agreement with Nordic Biotech Advisors ApS (“Nordic”) to develop
and commercialize Hedrin.  The 50/50 joint venture entity, H
Pharmaceuticals (“H Pharmaceuticals” or the “Hedrin JV”), now owns, is
developing, and is working to secure commercialization partners for Hedrin in
North America.  Manhattan Pharmaceuticals manages the day-to-day
operations of the Hedrin JV under a management contract with the Hedrin
JV.  H Pharmaceuticals is independently funded and is responsible for
all costs associated with the Hedrin project, including any necessary United
States (“U.S.”) clinical trials, patent costs, and future milestones owed to the
original licensor, T&R.
  Pediculosis
(Head lice)
  Head lice
(Pediculus humanus
capitis) are small parasitic insects that live mainly on the human scalp
and neck hair.  Head lice are not known to transmit disease, but they
are highly contagious and are acquired by direct head-to-head contact with an
infested person’s hair, and may also be transferred with shared combs, hats, and
other hair accessories.  They can also live on bedding or upholstered
furniture for a brief period.  Head lice are seen across the
socioeconomic spectrum and are unrelated to personal cleanliness or
hygiene.  Children are more frequently infested than are adults, and
Caucasians more frequently than other ethnic groups.  Lice are most
commonly found on the scalp, behind the ears, and near the neckline at the back
of the neck.  Common symptoms include a tickling feeling of something
moving in the hair, itching, irritability caused by poor sleep, and sores on the
head caused by scratching.  According to our internal analysis, a
majority of the currently available prescription and over-the-counter (“OTC”)
head lice treatments are chemical insecticides.
  Mechanism
of Action
  Hedrin is
a novel, non-insecticide combination of silicones (dimethicone and
cyclomethicone) that acts as a pediculicidal (lice killing) agent by disrupting
the insect’s mechanism for managing fluid and breathing.  In contrast
with most currently available lice treatments, Hedrin contains no chemical
insecticides.  Because Hedrin kills lice by preventing the louse from
excreting waste fluid, rather than by acting on the central nervous system, the
insects cannot build up resistance to the treatment.  Recent studies have
indicated that resistance to chemical insecticides may be increasing and
therefore contributing to insecticide treatment failure.  Manhattan
Pharmaceuticals believes there is significant market potential for convenient,
non-insecticide treatment alternatives.  Both silicones in this
proprietary formulation of Hedrin are used extensively in cosmetics and
toiletries.
  Product
Development
  To date,
Hedrin has been clinically studied in 362 subjects and is currently marketed as
a medical device in Western Europe and as a pharmaceutical in the United Kingdom
(“U.K.”).
  In a
randomized, controlled, equivalence, clinical study (conducted in Europe),
Hedrin was administered to 253 adult and child subjects with head lice
infestation.  The study results, published in the British Medical
Journal in June 2005, demonstrated Hedrin’s equivalence when compared to the
insecticide treatment, phenothrin, the most widely used pediculicide in the
U.K.  In addition, according to the same study, the Hedrin treated
subjects experienced significantly less irritation (2%) than those treated with
phenothrin (9%).
  A
clinical study published in the November 2007 issue of PLoS One, an
international, peer-reviewed journal published by the Public Library of Science
(PLoS), demonstrated Hedrin’s superior efficacy compared to a U.K. formulation
of malathion, a widely used insecticide treatment in both Europe and North
America.  In this randomized, controlled, assessor blinded, parallel
group clinical trial, 73 adult and child subjects with head lice infestations
were treated with Hedrin or malathion liquid.  Using intent-to-treat
analysis, Hedrin achieved a statistically significant cure rate of 70% compared
to 33% with malathion liquid.  Using the per-protocol analysis Hedrin
achieved a highly statistically significant cure rate of 77% compared to 35%
with malathion.  In Europe, it has been widely documented that head
lice has become resistant to malathion, and we believe this resistance may have
influenced the study results.  To date, there have been no reports of
malathion resistance in the U.S.  Additionally, Hedrin treated
subjects experienced no irritant reactions, and Hedrin showed clinical
equivalence to malathion in its ability to inhibit egg
hatching.  Overall, investigators and study subjects rated Hedrin as
less odorous, easier to apply, and easier to wash out, and 97% of Hedrin treated
subjects stated they were significantly more inclined to use the product again
versus 31% of those using malathion.
  4
  Two new,
unpublished Hedrin studies were completed by T&R in 2008.  In the
first, Hedrin achieved a 100% kill rate in vitro, including in malathion
resistant head lice.  In the other, a clinical field study conducted
in Manisa province, a rural area of Western Turkey, Hedrin was administered to
36 adult and child subjects with confirmed head lice
infestations.  Using per protocol analysis, Hedrin achieved a 97% cure
rate.  Using intent-to-treat analysis, Hedrin achieved a 92% cure rate
since 2 subjects were eliminated due to protocol violations.  No
subjects reported any adverse events.
  In the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a medical device.  In January 2009, the U.S.
Food and Drug Administration (“FDA”) Center for Devices and Radiological Health
(“CDRH”) notified H Pharmaceuticals that Hedrin had been classified as a Class
III medical device.  A Class III designation means that a Premarket
Approval (“PMA”) Application will need to be obtained before Hedrin can be
marketed in the U.S.  The Company expects to be required to complete
at least one clinical trial as part of that PMA Application.
  Market
and Competition
  In
Europe, Hedrin has been launched in 27 countries and, according to T&R, has
achieved 2008 annual sales through its licensees of approximately $48 million
(€35 million) at in-market public prices, garnering approximately 23% market
share across Europe.  It is the market leader in the U.K. with $10
million in sales (25% market share) and France with a 25% market
share.
  According
to the American Academy of Pediatrics an estimated 6-12 million Americans are
infested with head lice each year, with pre-school and elementary children and
their families affected most often.  The total U.S. head lice market
is estimated to be over $200 million with prescription and over-the-counter
(OTC) therapies comprising approximately 50% of that market.  The
remaining 50% of the market is comprised of alternative therapies such as tea
tree oils, mineral oils, and “nit picking”, or physical combing to remove
lice.  We believe there is significant market potential for a
convenient, non-insecticide treatment for head lice.
  The
prescription and OTC segment of the market is dominated by 4-5 name brand
products and numerous, low cost generics and store brand
equivalents.  The active ingredients in these pharmacological
therapies are chemical insecticides.  The most frequently prescribed
insecticide treatments are Kwell (lindane) and Ovide (malathion), and the most
frequently purchased OTC brands are Rid (pyrethrin), Nix (permethrin), and
Pronto (pyrethrin).  Lindane has been banned in 52 countries worldwide
and has now been banned in the state of California due to its
toxicity.  European formulations of Malathion have experienced
widespread resistance.  Resistance to U.S. formulations of malathion
have not been widely reported, but experts believe it may eventually develop
with continued use.  Head lice resistance to pyrethrin and permethrin
has been reported in the U.S. and treatment failures are common.
  See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources- Research and Development Projects-
Hedrin.”
  5
  Topical
Psoriasis Product
  Since
2005, Manhattan Pharmaceuticals has been developing a topical formulation of
parathyroid hormone (1-34) (“Topical PTH (1-34)”) for the prescription treatment
of mild to moderate psoriasis.  In July 2008, we announced Phase 2a
study results where PTH (1-34) failed to demonstrate a statistically significant
or clinically meaningful improvement in psoriasis versus a vehicle
(placebo).  In this study, the vehicle (placebo) was a topical gel
(“GEL”) that had been developed by the Company and was identical to the Topical
PTH (1-34) product minus the active ingredient, PTH (1-34).  Both the
active and vehicle (placebo) arms of the study showed similar improvements in
study subjects’ psoriasis plaques.  In summary, the study results
indicated that PTH (1-34) was not effective for the treatment of psoriasis since
it did not achieve superiority or a statistical separation in efficacy over the
GEL.  The GEL placebo may be effective enough to market as an OTC
product.  Due to these study results, the Company has decided to
discontinue development of PTH (1-34) as a prescription topical pharmaceutical
candidate, and instead, we are exploring the possibility of developing the GEL
as an OTC product for mild psoriasis.
  We
currently hold an exclusive, worldwide license to develop and commercialize
Topical PTH (1-34) for the treatment of psoriasis.  This license was
obtained as a result of our merger with Tarpan Therapeutics in 2005, and Tarpan
had acquired the exclusive, worldwide rights pursuant to a 2004 license
agreement with IGI, Inc (“IGI”).  We intend to return the rights to
PTH (1-34) to IGI under the terms of the license agreement.
  Psoriasis
  Psoriasis
is a common, chronic, immune-mediated disease that results in the
over-production of skin cells. In healthy skin, immature skin cells migrate from
the lowest layer of the epidermis to the skin’s surface over a period of 28-30
days. In psoriasis, these cells reproduce at an extremely accelerated rate and
advance to the surface in only 7 days.   This results in a build
up of excess, poorly differentiated skin cells that accumulate in dry, thick
patches known as plaques. These plaques can appear anywhere on the body
resulting in skin irritation and disability.
  PTH
(1-34) Product Development History
  In April
2006, we encountered a stability issue with the original topical PTH (1-34)
product which utilized IGI’s Novosome®
formulation technology.  In order to resolve that stability issue we
created a new topical gel delivery system to be used with peptides, including
PTH (1-34), and other types of molecules.  In 2007 we filed new patent
applications in the U.S. for this new proprietary GEL formulation.
  In
September 2007, the U.S. FDA accepted our Investigational New Drug (“IND”)
application for this new gel formulation of Topical PTH (1-34), and in October
2007, we initiated and began dosing subjects in a Phase 2a clinical study of
Topical PTH (1-34) for the treatment of psoriasis.  This U.S.,
multi-center, randomized, double-blind, vehicle-controlled, parallel group study
was designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
in patients with mild to moderate psoriasis.  Approximately 54
subjects were enrolled and randomized to receive one of two dose levels of
Topical PTH (1-34), or the GEL vehicle (placebo), for an 8 week treatment
period.  In this study the vehicle was the topical GEL without the
active ingredient, PTH (1-34).  In July 2008, we announced the results
of the Phase 2a study where Topical PTH (1-34) failed to demonstrate a
statistically significant or clinically meaningful improvement in
psoriasis.  We have conducted no further clinical activities with
Topical PTH (1-34) and we intend to return the product to IGI under the terms of
the license agreement.
  6
  Topical
GEL for Psoriasis
  The GEL
vehicle (placebo) used in the above-mentioned study is the Company’s proprietary
topical GEL showed evidence of psoriasis improving properties.  In
this Phase 2a study, when it was utilized as the vehicle (placebo), 15% of study
subjects achieved a clear or almost clear state at the end of week
2.  At the end of week 4, 20% of subjects treated with the GEL had
achieved a clear or almost clear state, and at the end of week 8, 25% of
subjects treated with the GEL had achieved a clear or almost clear
state.  The Company owns worldwide rights to this topical GEL and is
exploring the possibility of developing it as an OTC product for mild
psoriasis.
  Market
and Competition
  According
to the National Psoriasis Foundation approximately 125 million people worldwide,
including approximately 6 million Americans, suffers from
psoriasis.  Of these, approximately 65% (4.4 million) have mild
psoriasis and maybe likely to be treated with an OTC
product.  According to Datamonitor, only an estimated 55% of psoriasis
sufferers have been formally diagnosed by a physician, so the OTC market could
potentially be much larger.
  There are
a number of treatments available today for psoriasis, including numerous OTC
creams and ointments that help to reduce inflammation, stop itching, and soothe
skin.  Products such as Psoriasin, CortAid, Dermarest, and Cortizone
10 are the most common, but none are viewed as particularly effective for
psoriasis.  Steroids are also prescribed as an adjunct prescription
therapy for pain and anti-inflammation.
  See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Research and Development Projects
– Topical Psoriasis Product.”
  Discontinued
Research and Development Programs
  AltodermTM
  In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altoderm in North
America. Altodermis a novel, proprietary
formulation of topical cromolyn sodium and is designed to enhance the absorption
of cromolyn sodium into the skin in order to treat pruritus (itch) associated
with dermatologic conditions including atopic dermatitis (eczema).
  Atopic
Dermatitis (Eczema)
  Atopic
dermatitis, also know as eczema, is a chronic disease of the skin that is
believed to be caused by a combination of hereditary and environmental factors.
The main symptoms of atopic dermatitis include dry, itchy skin leading to rashes
on the face, hands, feet, along with inside the elbows and behind the knees.
Scratching results in redness, swelling, cracking, “weeping” clear fluid, and
crusting or scaling.
  Product
Development
  In a
Phase 3, randomized, double-blind, placebo-controlled, parallel-group, clinical
study (conducted in Europe by T&R.) the compound was administered for 12
weeks to 114 subjects with moderately severe atopic dermatitis. The placebo
(vehicle) used in this study was the Altoderm product without the active
ingredient.  In the study results, published in the British Journal of
Dermatology in February 2005, Altoderm demonstrated a statistically significant
reduction (36%) in atopic dermatitis symptoms. During the study, subjects were
permitted to continue with their existing treatment, in most cases this
consisted of emollients and topical steroids. A positive secondary outcome of
the study was a 35% reduction in the use of topical steroids for the Altoderm
treated subjects.  Further analysis of the clinical data, performed by
Manhattan Pharmaceuticals, showed that Altoderm treated subjects also
experienced a 57% reduction in pruritus.
  7
  On March
6, 2008, Manhattan Pharmaceuticals announced it had successfully completed a
pre-IND meeting with the FDA.  Based on a review of the submitted
package for Altoderm, including data from the two previously reported Phase 3
clinical studies, the FDA determined that following completion of certain
nonclinical studies, and the acceptance of an IND, Phase 2 clinical studies may
be initiated in the U.S.  The FDA also concurred that the proposed
indication of pruritus associated with dermatologic conditions including atopic
dermatitis can be pursued.
  In a
second, Phase 3, randomized, double-blind, vehicle-controlled clinical study
(also conducted in Europe by T&R) Altoderm was safe and well tolerated, and
showed a trend toward improvement in pruritus, but the efficacy results were
inconclusive.  Altoderm treated subjects and vehicle only treated
subjects experienced a similar improvement (each greater than 30%), and
therefore, the study did not achieve statistical significance.
  As a
result of the inconclusive European study data and a lack of sufficient funds to
develop Altoderm, in March 2009 the Company discontinued development and
returned the project to T&R under the terms of the license
agreement.
  See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources- Research and Development Projects-
Altoderm.”
  AltolynTM
  In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altolyn in North America.
Altolynis a novel,
proprietary oral tablet formulation of cromolyn sodium designed to treat
mastocytosis and possibly other gastrointestinal disorders such as food allergy
and symptoms of irritable bowel syndrome.
  Mastocytosis
  Mastocytosis
is a rare disorder that occurs in both children and adults.  It is
caused by the presence of too many mast cells in the body.  Mast cells
are found in skin, linings of the stomach and intestine, and connective tissue
(such as cartilage and tendons).  Mast cells play an important role in
helping the immune systems defend these tissues from disease.  They
release chemical “alarms” such as histamine and cytokines to attract other key
players of the immune defense system to sites in the body where they might be
needed.  People with mastocytosis experience abdominal discomfort,
nausea and vomiting, ulcers, diarrhea, and skin lesions.
  Product
Development
  On March
6, 2008, Manhattan Pharmaceuticals announced it had successfully completed a
pre-IND meeting with the FDA.  Based on a review of the submitted
package for Altolyn, the FDA concurred that the proposed indication of
mastocytosis can be pursued and that the 505(b)(2) NDA would be an acceptable
approach provided a clinical bridge is established between Altolyn and
Gastrocrom®, the oral liquid formulation of cromolyn sodium currently approved
in the U.S. to treat mastocytosis.  Section 505(b)(2) of the Food,
Drug and Cosmetic Act allows the FDA to approve a follow-on drug on the basis of
data in the scientific literature or data used by FDA in the approval of other
drugs.The FDA also affirmed that a single, Phase 3 study demonstrating the
efficacy of Altolyn over placebo, may be sufficient to support a product
approval in the U.S.  In addition, the FDA also concurs that no
additional nonclinical studies will be required to support an IND
application.  The Company is working with T&R and the current U.K.
manufacturer of Altolyn to develop a Good Manufacturing Process (“cGMP”)
compliant manufacturing process.
  8
  Due to
small market opportunity and lack of sufficient funds to develop Altolyn, in
March 2009 the Company discontinued development and returned the project to
T&R under the terms of the license agreement.
  See
also “Management’s Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources- Research and Development Projects-
Altolyn.”
  Oleoyl-estrone
  On July
9, 2007 the Company announced the results of its two Phase 2a clinical trials of
oral Oleoyl-estrone (“OE”).  The results of both randomized,
double-blind, placebo controlled studies, one in common obesity and the other in
morbid obesity, demonstrated no statistically or clinically meaningful placebo
adjusted weight loss for any of the treatment arms evaluated.  Based
on these results, the Company discontinued its OE programs in both common
obesity and morbid obesity.
  Propofol
Lingual Spray
  On July
9, 2007 the Company announced that it discontinued development of Propofol
Lingual Spray for pre-procedural sedation.
 
  Intellectual
Property and License Agreements
  Our goal
is to obtain, maintain and enforce patent protection for our products,
formulations, processes, methods and other proprietary technologies, preserve
our trade secrets, and operate without infringing on the proprietary rights of
other parties, both in the United States and in other countries.  Our
policy is to actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our product candidates,
proprietary information and proprietary technology through a combination of
contractual arrangements and patents, both in the U.S. and elsewhere in the
world.
  We also
depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as that of our advisors, consultants and other contractors.
This knowledge and experience we call “know-how”.  To help protect our
proprietary know-how which is not patentable, and for inventions for which
patents may be difficult to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests.  To this end, we
require all employees, consultants, advisors and other contractors to enter into
confidentiality agreements which prohibit the disclosure of confidential
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions important to our
business.
  Hedrin
  On June
26, 2007, the Company entered into an exclusive license the Hedrin agreement
with T&R and Kerris. Pursuant to the Hedrin License Agreement, the Company
has acquired an exclusive North American license to certain patent rights and
other intellectual property relating to HedrinTM, a
non-insecticide product candidate for the treatment of pediculosis (“head
lice”):
  9
 
 1.
              U.S. Patent Application No.
      2007/0142330, entitled, “Method and composition for the control of
      arthropods.”  Jayne Ansell,
      Inventor.   Application filed February 12,
      2007.  This application is a divisional of U.S. application Ser.
      No. 10/097,615, filed Mar. 15, 2002, which is a continuation of
      International Application No. PCT/GB00/03540, which designated the United
      States and was filed on Sep. 14, 2000.    This
      application has not yet issued as a patent.  Any patent that
      issues will expire on September 14,
  2020.
 
 This
patent application has numerous, detailed and specific claims related to the use
of Hedrin (novel formulation of silicon derivatives) in controlling and
repelling arthropods such as insects and arachnids, and in particular control
and eradication of head lice and their ova.
  In
addition, on June 26, 2007, the Company entered into the Hedrin Supply Agreement
with T&R pursuant to which T&R will be the Company’s exclusive supplier
of the Hedrin product.
  In
consideration for the license, the Company issued to T&R and Kerris
(jointly, the “Licensor”) a combined total of 150,000 shares of its common stock
valued at $120,000.  In addition, the Company also made a cash payment
of $600,000 to the Licensor.  Further, the Company agreed to make
future milestone payments to the Licensor comprised of various combinations of
cash and common stock in respective aggregate amounts of $2,500,000 upon the
achievement of various clinical and regulatory milestones as
follows:  $250,000 upon acceptance by the FDA of an IND; $1,000,000
upon the achievement of a successful outcome of a Phase 3 clinical trial;
$700,000 upon the final approval of a New Drug Application (“NDA”), or its
equivalent, by the FDA; $300,000 upon the issuance of a U.S. patent on Hedrin:
and $250,000 upon receipt of marketing authorization in Canada.
  Through
December 31, 2008, none of the milestones have been reached and sales have not
commenced, therefore, we have not paid any such milestones or
royalties.
  The
Company also agreed to pay royalties to the Licensor of 8% (or, under certain
circumstances, 4%) on net sales of licensed products. The Company’s exclusivity
under the Hedrin Agreement is subject to an annual minimum royalty payment of
$1,000,000 (or, under certain circumstances, $500,000) in each of the third
through seventh years following the first commercial sale of Hedrin. The Company
may sublicense its rights under the Hedrin Agreement with the consent of
Licensor and the proceeds resulting from such sublicenses will be shared with
the Licensor.
  Pursuant
to the Hedrin Supply Agreement, the Company has agreed that it and its
sublicensees will purchase their respective requirements of the Hedrin product
from T&R at agreed upon prices. Under certain circumstances where T&R is
unable to supply Hedrin products in accordance with the terms and conditions of
the Supply Agreement, the Company may obtain product from an alternative
supplier subject to certain conditions. The term of the Supply Agreement ends
upon termination of the Hedrin Agreement.
  On
February 25, 2008 the Company assigned and transferred its rights in Hedrin to
the Hedrin JV.  The Hedrin JV is now responsible for all of the
Company’s obligations under the Hedrin License Agreement and the Hedrin Supply
Agreement.
  10
  Topical PTH (1-34) License
Agreement.
  In
connection with our April 2005 acquisition of Tarpan Therapeutics, Inc., we
acquired Tarpan’s rights under an April 2004 Sublicense Agreement with IGI, Inc.
(the “IGI Agreement”). Pursuant to this agreement we now have worldwide,
exclusive license rights to the U.S. and foreign patents and patent applications
for all topical uses of Topical PTH(1-34) for the treatment of
hyperproliferative skin disorders including psoriasis:
  1.
              U.S.
      Patent No. 5,527,772, entitled “Regulation of cell proliferation and
      differentiation using peptides.”  M.F. Holick, Inventor.
      Application filed July, 28, 1994.  Patent issued June 18,
      1996.  This patent expires June 18,
  2013.
  2.
              U.S.
      Patent No. 5,840,690, entitled “Regulation of cell proliferation and
      differentation using peptides.”  M.F. Holick, Inventor.
      Application filed June 6, 1995.  Patent issued November 24,
      1998. This patent expires June 18,
2013.
  3.
              U.S.
      Provisional application No. US60/940,509, entitled “Topical Compositions
      comprising a macromolecule and methods of using
      same.”  Application was filed on May 29,
  2007.
  
 These
patents have numerous, detailed and specific claims relating to the topical use
of Topical PTH (1-34)
  The IGI
sublicense agreement requires us to make certain milestone payments as
follows:  $300,000 payable upon the commencement of a Phase 2 clinical
trial; $500,000 upon the commencement of a Phase 3 clinical trial; $1,500,000
upon the acceptance of an Investigational New Drug Application (“NDA”) by the
FDA; $2,400,000 upon the approval of an NDA by the FDA; $500,000 upon the
commencement of a Phase 3 clinical trial for an indication other than psoriasis;
$1,500,000 upon the acceptance of and NDA application for an indication other
than psoriasis by the FDA; and $2,400,000 upon the approval of an NDA for an
indication other than psoriasis by the FDA.
  During
2007 we achieved the milestone of the commencement of a Phase 2 clinical
trial.  As a result $300,000 became payable to IGI.  This
$300,000 is included in research and development expense for the year ended
December 31, 2007.  Payment was made to IGI in February
2008.
  In
addition, we are obligated to pay IGI, Inc. an annual royalty of 6% on annual
net sales up to $200,000,000.  In any calendar year in which net sales
exceed $200,000,000, we are obligated to pay IGI, Inc. an annual royalty of 9%
annual net sales.  Through December 31, 2008 sales have not commenced,
therefore we have not paid any such royalties.
  IGI, Inc.
may terminate the agreement (i) upon 60 days’ notice if we fail to make any
required milestone or royalty payments, or (ii) if we become bankrupt or if a
petition in bankruptcy is filed, or if we are placed in the hands of a receiver
or trustee for the benefit of creditors.  IGI, Inc. may terminate the
agreement upon 60 days’ written notice and an opportunity to cure in the event
we commit a material breach or default. We may terminate the agreement in whole
or as to any portion of the PTH patent rights upon 90 days’ notice to IGI,
Inc.
  11
 
 Altoderm
  On April
3, 2007, the Company entered into a license agreement for Altoderm (the
“Altoderm Agreement”) with T&R.  Pursuant to the Altoderm
Agreement, the Company acquired an exclusive North American license to certain
patent rights and other intellectual property relating to Altoderm, a topical
skin lotion product candidate with the active ingredient cromolyn sodium (also
known as sodium cromoglicate) for the treatment of pruritis (itch) associated
with dermatologic conditions including atopic dermatitis:
  1.
              U.S.
      Patent No. 7,109,246, entitled “Pharmaceutical compositions comprising an
      amphoteric surfactant an alkoxylated cetyl alcohol and a polar
      drug.”  Brian Hawtin, Inventor.  Application filed May 20,
      1999.  Patent issued September 19, 2006. This patent expires on
      May 20, 2019.
  2.
              U.S.
      Application Publication No. 2007/0036860, entitled “Treatment of allergic
      conditions.”  Alexander James Wigmore, Inventor.  Any
      patent that issues will expire on November 9, 2019.  This patent
      covers both Altoderm and Altolyn.
  These
patents have numerous, detailed and specific claims related to the use of
Altoderm (composition of topically administered cromolyn sodium) for treating
atopic dermatitis (eczema).
  In
accordance with the terms of the Altoderm Agreement, the Company issued 125,000
shares of its common stock, valued at $112,500, and made a cash payment of
$475,000 to T&R upon the execution of the agreement. Further, the Company
agreed to make future milestone payments to T&R comprised of various
combinations of cash and common stock in respective aggregate amounts of
$5,675,000 and 875,000 shares of our common stock upon the achievement of
various clinical and regulatory milestones. as follows:  $450,000 upon
acceptance by FDA of an IND; 125,000 shares of our common stock upon the first
dosing of a patient in the first Phase 2 clinical trial; 250,000 shares of our
common stock and $625,000 upon the first dosing of a patient in the first Phase
3 clinical trial; $1,000,000 upon the achievement of a successful outcome of a
Phase 3 clinical trial; $1,100,000 upon the acceptance for filing of a NDA
application by the FDA; 500,000 shares of our common stock and $2,000,000 upon
the final approval of an NDA by the FDA; and $500,000 upon receipt of marketing
authorization in Canada.
  In
addition, we are obligated to pay T&R an annual royalty of 10% on annual net
sales of up to $100,000,000; 15% of the amount of annual net sales in excess of
$100,000,000 and 20% of annual net sales in excess of
$200,000,000.  There is a minimum royalty of $1,000,000 per
year.  There is a one-time success fee of $10,000,000 upon the
achievement of cumulative net sales of $100,000,000.  Through December
31, 2008, none of the milestones have been reached and sales have not commenced,
therefore, we have not paid any such milestones or royalties.
  Altolyn
  On April
3, 2007, the Company and T&R also entered into a license agreement for
Altolyn (the “Altolyn Agreement”). Pursuant to the Altolyn Agreement, the
Company acquired an exclusive North American license to certain patent rights
and other intellectual property relating to Altolyn, an oral tablet formulation
product candidate using sodium cromolyn for the treatment of mastocytosis, food
allergies, and inflammatory bowel disorder.
  1.
              U.S.
      Patent No. 7,258,872, entitled “Chromone enteric release formulation.”
      Alexander James Wigmore, Inventor.  Application filed November 9,
      1999, claiming the benefit of a GB application filed November 11, 1998.
      Patent issued August 21, 2007. The expected date of expiration, which was
      November 9, 2019, has been extended by 793 days (expiration date Jan 10,
      2022).
  12
  2.
              U.S.
      Application Publication No. 2007/0036860, entitled “Treatment of allergic
      conditions.”  Alexander James Wigmore,
      Inventor.  Application filed October 13, 2006, claiming the
      benefit of a prior U.S. application, which claimed the benefit of a PCT
      application filed November 9, 1999.  This application has not
      yet issued as a patent.  Any patent that issues is expected to
      expire on November 9, 2019.    This patent covers both
      Altoderm and Altolyn.
 
 These
patents have numerous, detailed and specific claims related to Altolyn (as an
oral tablet drug delivery composition), and the pending application discloses
and may be used to claim the use of Altolyn (composition of orally administered
sodium cromolyn) for the treatment of allergic conditions, specifically food
allergies.
  In
accordance with the terms of the Altolyn Agreement, the Company made a cash
payment of $475,000 to T&R upon the execution of the agreement. Further, the
Company agreed to make future milestone payments to T&R comprised of various
combinations of cash and common stock in respective aggregate amounts of
$5,675,000 upon the achievement of various clinical and regulatory milestones.
as follows:  $450,000 upon acceptance filing by the FDA of an IND;
$625,000 upon the first dosing of a patient in the first Phase 3 clinical trial;
$1,000,000 upon the achievement of a successful outcome of a Phase 3 clinical
trial; $1,100,000 upon the acceptance for filing of a NDA application by the
FDA; $2,000,000 upon the final approval of an NDA by the FDA; and $500,000 upon
receipt of marketing authorization in Canada.
  In
addition, we are obligated to pay T&R an annual royalty of 10% on annual net
sales of up to $100,000,000; 15% of the amount of annual net sales in excess of
$100,000,000 and 20% of annual net sales in excess of
$200,000,000.  There is a minimum royalty of $1,000,000 per
year.  There is a one-time success fee of $10,000,000 upon the
achievement of cumulative net sales of $100,000,000.  Through December
31, 2008, none of the milestones have been reached and sales have not commenced,
therefore, we have not paid any such milestones or royalties.
  Oleoyl-estrone
  On July
9, 2007 the Company announced the results of its two Phase 2a clinical trials of
oral OE.  The results of both randomized, double-blind, placebo
controlled studies, one in common obesity and the other in morbid obesity,
demonstrated no statistically or clinically meaningful placebo adjusted weight
loss for any of the treatment arms evaluated.  Based on these results,
the Company discontinued its OE programs in both common obesity and morbid
obesity.
  Propofol
Lingual Spray
  On July
9, 2007 the Company announced that it discontinued development of Propofol
Lingual Spray for pre-procedural sedation.
  Manufacturing
  We do not
have any manufacturing capabilities.  We are in contact with several
contract cGMP manufacturers for the supply of Topical PTH(1-34), the topical GEL
for psoriasis and, on behalf of the Hedrin JV, Hedrin that will be necessary to
conduct human clinical trials, if needed.
  13
  Government
Regulation
  The
research, development, testing, manufacture, labeling, promotion, advertising,
distribution, and marketing, among other things, of our products are extensively
regulated by governmental authorities in the United States and other countries.
In the United States, the FDA regulates drugs under the Federal Food, Drug, and
Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply
with the applicable U.S. requirements may subject us to administrative or
judicial sanctions, such as FDA refusal to approve pending NDAs, warning
letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, and/or criminal
prosecution.
  Drug Approval
Process.None of our drugs may be marketed in the U.S. until
the drug has received FDA approval. The steps required before a drug may be
marketed in the U.S. include:
  ·
              nonclinical
      laboratory tests, animal studies, and formulation
  studies,
  ·
              submission
      to the FDA of an IND for human clinical testing, which must become
      effective before human clinical trials may
  begin,
  ·
              adequate
      and well-controlled human clinical trials to establish the safety and
      efficacy of the drug for each
indication,
  ·
              submission
      to the FDA of an NDA,
  ·
              satisfactory
      completion of an FDA inspection of the manufacturing facility or
      facilities at which the drug is produced to assess compliance with current
      good manufacturing practices, or cGMPs,
and
  ·
              FDA
      review and approval of the NDA.
  Nonclinical
tests include laboratory evaluation of product chemistry, toxicity, and
formulation, as well as animal studies. The conduct of the nonclinical tests and
formulation of the compounds for testing must comply with federal regulations
and requirements. The results of the nonclinical tests, together with
manufacturing information and analytical data, are submitted to the FDA as part
of an IND, which must become effective before human clinical trials may begin.
An IND will automatically become effective 30 days after receipt by the FDA,
unless before that time the FDA raises concerns or questions about issues such
as the conduct of the trials as outlined in the IND. In such a case, the IND
sponsor and the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. We cannot be sure that submission of an IND
will result in the FDA allowing clinical trials to begin.
  Clinical
trials involve the administration of the investigational drug to human subjects
under the supervision of qualified investigators. Clinical trials are conducted
under protocols detailing the objectives of the study, the parameters to be used
in monitoring safety, and the effectiveness criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND.
  Clinical
trials typically are conducted in three sequential phases, but the phases may
overlap. The study protocol and informed consent information for study subjects
in clinical trials must also be approved by an Institutional Review Board for
each institution where the trials will be conducted. Study subjects must sign an
informed consent form before participating in a clinical trial. Phase 1 usually
involves the initial introduction of the investigational drug into people to
evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics
and pharmacologic actions, and, if possible, to gain an early indication of its
effectiveness. Phase 2 usually involves trials in a limited patient population
to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible
adverse effects and safety risks; and (iii) preliminarily evaluate the efficacy
of the drug for specific indications. Phase 3 trials usually further evaluate
clinical efficacy and test further for safety by using the drug in its final
form in an expanded patient population. There can be no assurance that Phase 1,
Phase 2, or Phase 3 testing will be completed successfully within any specified
period of time, if at all. Furthermore, we or the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
  14
  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
nonclinical and clinical studies, together with other detailed information,
including information on the manufacture and composition of the drug, are
submitted to the FDA in the form of a NDA requesting approval to market the
product for one or more indications. The testing and approval process requires
substantial time, effort, and financial resources. The agencies review the
application and may deem it to be inadequate to support the registration and we
cannot be sure that any approval will be granted on a timely basis, if at all.
The FDA may also refer the application to the appropriate advisory committee,
typically a panel of clinicians, for review, evaluation and a recommendation as
to whether the application should be approved. The FDA is not bound by the
recommendations of the advisory committee.
  The FDA
has various programs, including fast track, priority review, and accelerated
approval, that are intended to expedite or simplify the process for reviewing
drugs, and/or provide for approval on the basis surrogate endpoints. Generally,
drugs that may be eligible for one or more of these programs are those for
serious or life-threatening conditions, those with the potential to address
unmet medical needs, and those that provide meaningful benefit over existing
treatments. We cannot be sure that any of our drugs will qualify for any of
these programs, or that, if a drug does qualify, that the review time will be
reduced.
  Section
505(b)(2) of the FDCA allows the FDA to approve a follow-on drug on the basis of
data in the scientific literature or data used by FDA in the approval of other
drugs. This procedure potentially makes it easier for generic drug manufacturers
to obtain rapid approval of new forms of drugs based on proprietary data of the
original drug manufacturer.  We intend to rely on Section 505(b)(2) to
obtain approval for Altolyn.
  Before
approving an NDA, the FDA usually will inspect the facility or the facilities at
which the drug is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. If the FDA evaluates the NDA and the manufacturing
facilities as acceptable, the FDA may issue an approval letter, or in some
cases, an approvable letter followed by an approval letter. Both letters usually
contain a number of conditions that must be met in order to secure final
approval of the NDA. When and if those conditions have been met to the FDA’s
satisfaction, the FDA will issue an approval letter. The approval letter
authorizes commercial marketing of the drug for specific indications. As a
condition of NDA approval, the FDA may require post marketing testing and
surveillance to monitor the drug’s safety or efficacy, or impose other
conditions.
  After
approval, certain changes to the approved product, such as adding new
indications, making certain manufacturing changes, or making certain additional
labeling claims, are subject to further FDA review and approval. Before we can
market our product candidates for additional indications, we must obtain
additional approvals from FDA. Obtaining approval for a new indication generally
requires that additional clinical studies be conducted. We cannot be sure that
any additional approval for new indications for any product candidate will be
approved on a timely basis, or at all.
  15
  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 that has an orphan
drug designation subsequently receives the first FDA approval for the indication
for which it has such designation, the product is entitled to orphan
exclusivity, meaning that the FDA may not approve any other applications to
market the same drug for the same indication, except in certain very limited
circumstances, for a period of seven years. Orphan drug designation does not
prevent competitors from developing or marketing different drugs for that
indication.
  Non-United States
Regulation.Before our
products can be marketed outside of the United States, they are subject to
regulatory approval similar to that required in the United States, although the
requirements governing the conduct of clinical trials, including additional
clinical trials that may be required, product licensing, pricing and
reimbursement vary widely from country to country. No action can be taken to
market any product in a country until an appropriate application has been
approved by the regulatory authorities in that country. The current approval
process varies from country to country, and the time spent in gaining approval
varies from that required for FDA approval. In certain countries, the sales
price of a product must also be approved. The pricing review period often begins
after market approval is granted. Even if a product is approved by a regulatory
authority, satisfactory prices may not be approved for such
product.
  In
Europe, marketing authorizations may be submitted at a centralized, a
decentralized or national level. The centralized procedure is mandatory for the
approval of biotechnology products and provides for the grant of a single
marketing authorization that is valid in all European Union (“EU”) members
states. As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products that are not subject to the
centralized procedure. There can be no assurance that the chosen regulatory
strategy will secure regulatory approvals on a timely basis or at
all.
 
 16
  Employees
  We
currently have 1 part time and 3 full time employees, including: our Chief
Executive Officer, our Chief Operating and Financial Officer and 2 persons in
business development, administration and finance.  None of our
employees is covered by a collective bargaining unit.  We believe our
relations with our employees are satisfactory.
  17
  ITEM
1A.  RISK FACTORS
 
 An
investment in our securities is speculative in nature, involves a high degree of
risk, and should not be made by an investor who cannot bear the economic risk of
its investment for an indefinite period of time and who cannot afford the loss
of its entire investment.  You should carefully consider the following
risk factors and the other information contained elsewhere in this Annual Report
before making an investment in our securities.
  Risks Related to Our
Business
  We
currently have no product revenues and will need to raise 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 both of our remaining drug development programs and may not continue as a
going concern.
  We have
generated no product revenues to date and will not until, and if, we receive
approval from the FDA and other regulatory authorities for our two 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, 2008, we had $106,023 of cash and cash equivalents.We received additional
funding of approximately $0.5 million from a joint venture agreement in February
2009 and $0.4 million from the sale of Secured 12% Notes in February
2009.  We will still have to raise substantial additional funds to
complete the development of our product candidates and to bring them to market.
Beyond the capital requirements mentioned above, our future capital requirements
will depend on numerous factors, including:
  ·
              the
      results of any clinical trials;
  ·
              the
      scope and results of our research and development
  programs;
  ·
              the
      time required to obtain regulatory
approvals;
  ·
              our
      ability to establish and maintain marketing alliances and collaborative
      agreements; and
  ·
              the
      cost of our internal marketing
activities.
  Swiss
Pharma has received an arbitration award against us, in the Swiss Chamber of
Commerce, and has initiated proceedings in New York State courts to confirm the
arbitration award and enter a judgment on Swiss Pharma's behalf against
us.  We do not have sufficient cash or other current available assets to
satisfy the arbitrators award.  If Swiss Pharma is successful in entering a
judgment against us, it could take actions against us that would significantly
impair our ability to continue as a going concern.  See "Item 3 - Legal
Proceedings."
  It is
difficult for companies like ours to raise funds in the current economic
conditions and 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.  Our auditors have concluded that our net
losses, negative cash flow, accumulated deficit and negative working capital as
of December 31, 2008, raise substantial doubt about our ability to continue as a
going concern.
  18
  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, 2008 and
for the period from August 6, 2001 (inception) through December 31, 2008, we
incurred net losses applicable to common shares of $4,268,858,  and
$59,267,928 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 nonclinical development and clinical trials for our product
      candidates;
  ·
              seek
      regulatory approvals for our product
candidates;
  ·
              implement
      additional internal systems and
infrastructure;
  ·
              lease
      additional or alternative office facilities;
and
  ·
              hire
      additional personnel.
  We also
expect to experience negative cash flow for the foreseeable future as we fund
our operating losses and capital expenditures. As a result, we will need to
generate significant revenues in order to achieve and maintain profitability. We
may not be able to generate these revenues or achieve profitability in the
future. .  Our auditors have concluded that our net losses, negative
cash flow, accumulated deficit and negative working capital as of December 31,
2008, raise substantial doubt about our ability to continue as a going
concern.
  Our
failure to achieve or maintain profitability could negatively impact the value
of our common stock.
  We
have a limited operating history upon which to base an investment
decision.
  We are a
development-stage company and have not yet demonstrated any ability to perform
the functions necessary for the successful commercialization of any product
candidates.   The successful commercialization of our product
candidates will require us to perform a variety of functions,
including:
  ·
              continuing
      to undertake nonclinical development and clinical
  trials;
  ·
              participating
      in regulatory approval processes;
  ·
              formulating
      and manufacturing products; and
  ·
              conducting
      sales and marketing activities.
  Since
inception as Manhattan Research Development, Inc., our operations have been
limited to organizing and staffing, and acquiring, developing and securing our
proprietary technology and undertaking nonclinical and clinical trials of
principal product candidates. These operations provide a limited basis for you
to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.
  19
  We
depend greatly on the intellectual capabilities and experience of our key
executives, and the loss of any of them could affect our ability to develop our
remaining products.
 
  We had
only three full-time and one part-time employee as of March 30, 2009.  The
loss of Douglas Abel, our President and Chief Executive Officer, or Michael
G. McGuinness, our Chief Operating and Financial Officer, could harm us. 
The current terms of our employment agreements with Messrs. Abel and McGuinness
expire in April 2009 and July 2009, respectively.    We cannot
predict our success in hiring or retaining the personnel we require for
continued operations.
  We
may not obtain the necessary U.S. or worldwide regulatory approvals to
commercialize our product candidates.
  We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from the FDA equivalent regulatory authorities in foreign
jurisdictions to commercialize our product candidates in those jurisdictions. In
order to obtain FDA approval of any of our product candidates, we must first
submit to the FDA an IND, which will set forth our plans for clinical testing of
our product candidates. In September 2007, the FDA accepted our IND for Topical
PTH(1-34).  Our remaining two products, Hedrin and the Topical GEL for
psoriasis are currently considered pre-clinical.  We are unable to
estimate the size and timing of the clinical and non clinical trials required to
bring our two product candidates to market and, accordingly, cannot estimate the
time when development of these product candidates will be
completed.
  When the
clinical testing for our product candidates is complete, we will submit to the
FDA a NDA demonstrating that the product candidate is safe for humans and
effective for its intended use.  This demonstration requires
significant research and animal tests, which are referred to as nonclinical
studies, as well as human tests, which are referred to as clinical
trials.  Satisfaction of the FDA’s regulatory requirements typically
takes many years, depends upon the type, complexity and novelty of the product
candidate and requires substantial resources for research, development and
testing.  We cannot predict whether our research and clinical
approaches will result in drugs that the FDA considers safe for humans and
effective for indicated uses. The FDA has substantial discretion in the drug
approval process and may require us to conduct additional nonclinical and
clinical testing or to perform post-marketing studies.  The approval
process may also be delayed by changes in government regulation, future
legislation or administrative action or changes in FDA policy that occur prior
to or during our regulatory review.   Delays in obtaining
regulatory approvals may:
  ·
              delay
      commercialization of, and our ability to derive product revenues from, our
      product candidates;
  ·
              impose
      costly procedures on us; and
  ·
              diminish
      any competitive advantages that we may otherwise
  enjoy.
  Even if
we comply with all FDA requests, the FDA may ultimately reject any or all of our
future NDAs. We cannot be sure that we will ever obtain regulatory clearance for
any of our product candidates. Failure to obtain FDA approval of any of our
product candidates will severely undermine our business by reducing our number
of salable products and, therefore, corresponding product revenues.
  In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs.  Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above.  We have not yet made any
determination as to which foreign jurisdictions we may seek approval and have
not undertaken any steps to obtain approvals in any foreign
jurisdiction.
  20
  Clinical
trials are very expensive, time consuming and difficult to design and
implement.
  Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. We estimate that clinical trials of our
product candidates will take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials.  The commencement
and completion of clinical trials may be delayed by several factors,
including:
  ·
              unforeseen
      safety issues;
  ·
              determination
      of dosing issues;
  ·
              lack
      of effectiveness during clinical
trials;
  ·
              slower
      than expected rates of patient
recruitment;
  ·
              inability
      to monitor patients adequately during or after treatment;
    and
  ·
              inability
      or unwillingness of medical investigators to follow our clinical
      protocols.
  In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our IND submissions or the conduct of these
trials.
  The
results of our clinical trials may not support our product candidate
claims.
  Even if
our clinical trials are completed as planned, we cannot be certain that their
results will support our product candidate claims.  Success in
nonclinical testing and early clinical trials does not ensure that later
clinical trials will be successful, and we cannot be sure that the results of
later clinical trials will replicate the results of prior clinical trials and
nonclinical testing. The clinical trial process may fail to demonstrate that our
product candidates are safe for humans or effective for indicated
uses.  This failure would cause us to abandon a product candidate and
may delay development of other product candidates. Any delay in, or termination
of, our clinical trials will delay the filing of our NDAs with the FDA and,
ultimately, our ability to commercialize our product candidates and generate
product revenues.  In addition, we anticipate that our clinical trials
will involve only a small patient population.  Accordingly, the
results of such trials may not be indicative of future results over a larger
patient population.
  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;
  21
  ·
              availability
      of reimbursement for our products from government or other healthcare
      payers; and
  ·
              effectiveness
      of marketing and distribution efforts by us and our licensees and
      distributors, if any.
  Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.
  Our
drug-development program depends upon third-party researchers who are outside
our control.
  We
currently are collaborating with several third-party researchers, for the
development of our product candidates.  Accordingly, the successful
development of our product candidates will depend on the performance of these
third parties. These collaborators will not be our employees, however, and we
cannot control the amount or timing of resources that they will devote to our
programs. Our collaborators may not assign as great a priority to our programs
or pursue them as diligently as we would if we were undertaking such programs
ourselves. If outside collaborators fail to devote sufficient time and resources
to our drug-development programs, or if their performance is substandard, the
approval of our FDA applications, if any, and our introduction of new drugs, if
any, will be delayed. These collaborators may also have relationships with other
commercial entities, some of whom may compete with us. If our collaborators
assist our competitors at our expense, our competitive position would be
harmed.
  We
rely exclusively on third parties to formulate and manufacture our product
candidates.
  We have
no experience in drug formulation or manufacturing and do not intend to
establish our own manufacturing facilities. We lack the resources and expertise
to formulate or manufacture our own product candidates. We intend to contract
with one or more manufacturers to manufacture, supply, store and distribute drug
supplies for our clinical trials. If any of our product
candidates receive FDA approval, we will rely on one or more third-party
contractors to manufacture our drugs.  Our anticipated future reliance
on a limited number of third-party manufacturers, exposes us to the following
risks:
  ·
              We
      may be unable to identify manufacturers on acceptable terms or at all
      because the number of potential manufacturers is limited and the FDA must
      approve any replacement contractor.  This approval would require
      new testing and compliance inspections. In addition, a new manufacturer
      would have to be educated in, or develop substantially equivalent
      processes for, production of our products after receipt of FDA approval,
      if any.
  ·
              Our
      third-party manufacturers might be unable to formulate and manufacture our
      drugs in the volume and of the quality required to meet our clinical needs
      and commercial needs, if any.
  ·
              Our
      future contract manufacturers may not perform as agreed or may not remain
      in the contract manufacturing business for the time required to supply our
      clinical trials or to successfully produce, store and distribute our
      products.
  ·
              Drug
      manufacturers are subject to ongoing periodic unannounced inspection by
      the FDA, the  Drug Enforcement Agency, and corresponding state
      agencies to ensure strict compliance with good manufacturing practice and
      other government regulations and corresponding foreign standards. We do
      not have control over third-party manufacturers’ compliance with these
      regulations and standards.
  22
  ·
              If
      any third-party manufacturer makes improvements in the manufacturing
      process for our products, we may not own, or may have to share, the
      intellectual property rights to the
innovation.
  We
have no experience selling, marketing or distributing products and no internal
capability to do so.
  We
currently have no sales, marketing or distribution capabilities.  We
do not anticipate having the resources in the foreseeable future to allocate to
the sales and marketing of our proposed products.  Our future success
depends, in part, on our ability to enter into and maintain such collaborative
relationships, the collaborator’s strategic interest in the products under
development and such collaborator’s ability to successfully market and sell any
such products.  We intend to pursue collaborative arrangements
regarding the sales and marketing of our products, however, there can be no
assurance that we will be able to establish or maintain such collaborative
arrangements, or if able to do so, that they will have effective sales
forces.  To the extent that we decide not to, or are unable to, enter
into collaborative arrangements with respect to the sales and marketing of our
proposed products, significant capital expenditures, management resources and
time will be required to establish and develop an in-house marketing and sales
force with technical expertise.  There can also be no assurance that
we will be able to establish or maintain relationships with third party
collaborators or develop in-house sales and distribution
capabilities.  To the extent that we depend on third parties for
marketing and distribution, any revenues we receive will depend upon the efforts
of such third parties, and there can be no assurance that such efforts will be
successful.  In addition, there can also be no assurance that we will
be able to market and sell our product in the United States or
overseas.
  If
we cannot compete successfully for market share against other drug companies, we
may not achieve sufficient product revenues and our business will
suffer.
  The
market for our product candidates is characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with a number of existing and future drugs and therapies
developed, manufactured and marketed by others. Existing or future competing
products may provide greater therapeutic convenience or clinical or other
benefits for a specific indication than our products, or may offer comparable
performance at a lower cost. If our products fail to capture and maintain market
share, we may not achieve sufficient product revenues and our business will
suffer.
  We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have product candidates that will
compete with ours already approved or in development. In addition, many of these
competitors, either alone or together with their collaborative partners, operate
larger research and development programs and have substantially greater
financial resources than we do, as well as significantly greater experience
in:
  ·
              developing
      drugs;
  ·
              undertaking
      nonclinical testing and human clinical
trials;
  ·
              obtaining
      FDA and other regulatory approvals of
drugs;
  ·
              formulating
      and manufacturing drugs; and
  ·
              launching,
      marketing and selling drugs.
  23
  Developments
by competitors may render our products or technologies obsolete or
non-competitive.
  Many of
the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, longer drug
development history in obtaining regulatory approvals and greater manufacturing
and marketing capabilities than we do. These organizations also compete with us
to attract qualified personnel, parties for acquisitions, joint ventures or
other collaborations.
  If
we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish.
  Our
success, competitive position and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights of
third parties.
  We
currently do not directly own the rights to any issued patents.  See
“Business – Intellectual Property and License Agreements.”.
  However,
with regard to the patents covered by our license agreements and any future
patents issued to which we will have rights, we cannot predict:
  ·
              the
      degree and range of protection any patents will afford us against
      competitors including whether third parties will find ways to invalidate
      or otherwise circumvent our
patents;
  ·
              if
      and when patents will issue;
  ·
              whether
      or not others will obtain patents claiming aspects similar to those
      covered by our patents and patent applications;
  or
  ·
              whether
      we will need to initiate litigation or administrative proceedings which
      may be costly whether we win or
lose.
  Our
success also depends upon the skills, knowledge and experience of our scientific
and technical personnel, our consultants and advisors as well as our licensors
and contractors.  To help protect our proprietary know-how and our
inventions for which patents may be unobtainable or difficult to obtain, we rely
on trade secret protection and confidentiality agreements.  To this
end, we require all of our employees, consultants, advisors and contractors to
enter into agreements which prohibit the disclosure of confidential information
and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our
business.  These agreements may not provide adequate protection for
our trade secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure or the lawful development by others of such
information.  If any of our trade secrets, know-how or other
proprietary information is disclosed, the value of our trade secrets, know-how
and other proprietary rights would be significantly impaired and our business
and competitive position would suffer.
  If
we infringe the rights of third parties we could be prevented from selling
products, forced to pay damages, and defend against litigation.
  Our
business is substantially dependent on the intellectual property on which our
product candidates are based.  To date, we have not received any
threats or claims that we may be infringing on another’s patents or other
intellectual property rights.  If our products, methods, processes and
other technologies infringe the proprietary rights of other parties, we could
incur substantial costs and we may have to:
  24
  ·
              obtain
      licenses, which may not be available on commercially reasonable terms, if
      at all;
  ·
              redesign
      our products or processes to avoid
infringement;
  ·
              stop
      using the subject matter claimed in the patents held by
      others;
  ·
              pay
      damages; or
  ·
              defend
      litigation or administrative proceedings which may be costly whether we
      win or lose, and which could result in a substantial diversion of our
      valuable management resources.
  Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.
  Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement will be available from:
  ·
              government
      and health administration
authorities;
  ·
              private
      health maintenance organizations and health insurers;
  and
  ·
              other
      healthcare payers.
  Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. Healthcare payers, including Medicare, are challenging the prices
charged for medical products and services. Government and other healthcare
payers increasingly attempt to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs.  Even if our
product candidates are approved by the FDA, insurance coverage may not be
available, and reimbursement levels may be inadequate, to cover our
drugs.  If government and other healthcare payers do not provide
adequate coverage and reimbursement levels for any of our products, once
approved, market acceptance of our products could be reduced.
  We
may not successfully manage our growth.
  Our
success will depend upon the expansion of our operations and the effective
management of our growth, which will place a significant strain on our
management and on our administrative, operational and financial
resources.  To manage this growth, we must expand our facilities,
augment our operational, financial and management systems and hire and train
additional qualified personnel.  If we are unable to manage our growth
effectively, our business may suffer.
  If
we are unable to hire additional qualified personnel, our ability to grow our
business may be harmed.
  We will
need to hire additional qualified personnel with expertise in nonclinical
testing, clinical research and testing, government regulation, formulation and
manufacturing and sales and marketing. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals is intense, and we cannot be
certain that our search for such personnel will be successful. Attracting and
retaining qualified personnel will be critical to our success.
  25
  We
may incur substantial liabilities and may be required to limit commercialization
of our products in response to product liability lawsuits.
  The
testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our products.  We currently carry clinical trial
insurance in an amount up to $5,000,000, which may be inadequate to protect
against potential product liability claims or may inhibit the commercialization
of pharmaceutical products we develop, alone or with corporate
collaborators.  Although we intend to maintain clinical trial
insurance during any clinical trials, this may be inadequate to protect us
against any potential claims.  Even if our agreements with any future
corporate collaborators entitle us to indemnification against losses, such
indemnification may not be available or adequate should any claim
arise.
  We
are controlled by current officers, directors and principal
stockholders.
  Our
directors, executive officers and principal stockholders beneficially own
approximately 29 percent of our outstanding voting stock and, including shares
underlying outstanding options and warrants.   In addition,
Nordin Biotech Venture Fund has the right to acquire up to 66,666,666 shares of
our common stock (which would represent approximately 49% of our common stock as
of March 17, 2009), resulting in Nordic owning approximately 49% of our common
stock.  Through its stock ownership, its right to acquire additional
shares, its substantial control over the management of the Hedrin JV (which
includes the ability to terminate our management contract with the Hedrin JV),
and various covenants contained in our registration rights agreement with
Nordic, Nordic has the ability to exert substantial influence over the election
of our Board of Directors, the outcome of issues submitted to our stockholders,
the development of Hedrin and our ability, as a company, to benefit from the
successful development of Hedrin.  Even without the exercise of its rights
to acquire additional shares of our common stock, our directors, officers and
principal stockholders, taken as a whole, have the ability to exert substantial
influence over the election of our Board of Directors and the outcome of
issues submitted to our stockholders.
  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 $0.007 in the
fourth quarter of 2008 to a high of $1.10 in the second quarter of
2007.  The volatile price of our stock makes it difficult for
investors to predict the value of their investment, to sell shares at a profit
at any given time, or to plan purchases and sales in advance.  A
variety of factors may affect the market price of our common
stock.  These include, but are not limited to:
  ·
              The continuing global economic
      crisis, which has affected stock prices of many companies, and
      particularly many small pharmaceutical companies like
      ours;
 
 ·
              publicity
      regarding actual or potential clinical results relating to products under
      development by our competitors or
us;
  ·
              delay
      or failure in initiating, completing or analyzing nonclinical or clinical
      trials or the unsatisfactory design or results of these
      trials;
  26
  ·
              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.
  We havedelisted from the
American Stock Exchange.
  As a result of our delisting, the liquidity of
our common stock has been and may continue to 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.
  27
  ITEM
2.  PROPERTIES
  Our
executive offices are located at 48 Wall Street,  New York, New York
10005.  We currently occupy this space pursuant to a written lease
that expires on September 30, 2009 under which we pay rent of approximately
$7,000 per month.
  We
believe that our existing facilities are adequate to meet our current
requirements.  We do not own any real property.
  ITEM
3.  LEGAL PROCEEDINGS
  Swiss
Pharma Contract LTD, or Swiss Pharma, a clinical site that we used in one of our
obesity trials, gave notice to us that Swiss Pharma believed it was entitled to
receive an additional payment of $322,776 for services in connection with that
clinical trial.  The contract between us and Swiss Pharma provided for
arbitration in the event of a dispute, such as this claim for an additional
payment.  On March 10, 2008, Swiss Pharma filed for arbitration with
the Swiss Chamber of Commerce.  As we did not believe that Swiss
Pharma was entitled to additional payments, we defended our position in
arbitration.  On April 2, 2008, we filed our statement of defense and
counterclaim for recovery of costs incurred by us as a result of Swiss Pharma’s
failure to meet agreed upon deadlines under our contract.  On June 3,
2008, a hearing was held before the arbitrator under the auspices of the Swiss
Chamber of Commerce.  On September 5, 2008, the arbitrator rendered an
award in favor of Swiss Pharma, awarding to Swiss Pharma a total of $646,000
which amount includes a $323,000 contract penalty, a final services invoice of
$48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses
incurred in the arbitration process of $245,000, reimbursement of arbitration
costs of $13,000 and interest through September 5, 2008 of
$17,000.  Further, the arbitrator ruled that we must pay interest at
the rate of 5% per annum on $371,000, the sum of the $323,000 contract penalty
and the final services invoice of $48,000, from October 12, 2007 until
paid.  We had previously recognized a liability to Swiss Pharma in the
amount of $104,000 for the final services invoice. The remainder of the award
was expensed in 2008. We have recognized research and development expense of
$267,000, general and administrative expense of $257,000 and interest expense of
$23,000 during the year ended December 31, 2008.  On January 22, 2009,
we received notice that Swiss Pharma submitted a petition to the Supreme Court
of the State of New York, County of New York seeking to confirm and to enter a
judgment on the Arbitration Award.  On February 17, 2009, we filed an
answer to Swiss Pharma's petition.  A hearing has not yet been
scheduled.  We will continue to accrue interest at the rate of 5% per
annum on the $371,000 until such amount has been settled.  We do not
have sufficient cash or other current available assets to satisfy the
arbitrator's award.
  28
  PART II
  ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
  Market
for Common Stock
  Our
common stock traded on the American Stock Exchange “AMEX”under the symbol “MHA”
during the year ended December 31, 2007 and for the period from January 1, 2008
to March 26, 2008.  On March 26, 2008 our common stock was voluntarily
delisted from the AMEX and began trading on the Over the Counter Bulletin Board
(“OCTBB”) under the symbol “MHAN”.  The following table lists the high
and low price for our common stock as quoted, in U.S. dollars, on the American
Stock Exchange or the Over the Counter Bulletin Board for the periods
indicated:
  Price Range2008
                            
                            
                            2007Quarter Ended
                            
                            High
                            
                            
                            Low
                            
                            
                            High
                            
                            
                            LowMarch
      31
                            
                            $
                            0.230
                            
                            
                            $
                            0.110
                            
                            
                            $
                            0.960
                            
                            
                            $
                            0.700June
      30
                            
                            
                            0.180
                            
                            
                            
                            0.100
                            
                            
                            
                            1.100
                            
                            
                            
                            0.690September
      30
                            
                            
                            0.200
                            
                            
                            
                            0.100
                            
                            
                            
                            0.780
                            
                            
                            
                            0.220December
      31
                            
                            
                            0.090
                            
                            
                            
                            0.007
                            
                            
                            
                            0.230
                            
                            
                            
                            0.090
  Stock
Chart
 
 Comparison to NASDAQ Biotechnology
Index.
  
  29
  Record
Holders
  The
number of holders of record of our common stock as of March 20, 2009 was
437.
  Dividends
  We have
not paid or declared any dividends on our common stock and we do not anticipate
paying dividends on our common stock in the foreseeable future, but intend
instead to retain earnings, if any, for use in our business
operations.  The payment of dividends in the future, if any, will be
at the sole discretion of our board of directors and will depend upon our debt
and equity structure, earnings and financial condition, need for capital in
connection with possible future acquisitions and other factors, including
economic conditions, regulatory restrictions and tax
considerations.  We cannot guarantee that we will pay dividends or, if
we pay dividends, the amount or frequency of these dividends.
  Stock
Repurchases
  We did
not make any repurchases of our common stock during 2008.
  Securities
authorized for issuance under equity compensation plans
  Equity
      Compensation Plan InformationPlan Category
                              
                              Number of securities
                                tobe issued upon
                                exerciseof
                                outstanding options,
                                warrants and rights
                              
                              
                              Weighted average
                                exercise price of
                                outstanding options,
                                warrants and rights
                              
                              
                              Number of securities
                                remaing available for
                                future issuance under
                                equity compenstaion
                                plans (excluding
                                securities reflected in
                                column (a))(a)
                              
                              
                              (b)
                              
                              
                              (c)Equity
      compensation plans approved by security holders
                              
                              
                              10,661,612
                              
                              
                              $
                              0.9340
                              
                              
                              
                              875,628Equity
      compensation plans not approved by security holdersTotal
                              
                              
                              10,661,612
                              
                              
                              $
                              0.934
                              
                              
                              
                              875,628
 
 Recent
Sales of Unregistered Securities
 
 In
connection with the Registrant’s merger of its wholly-owned subsidiary Tarpan
Acquisition Corp., with Tarpan Therapeutics, Inc. (“Tarpan”), effective as of
April 1, 2005, it issued an aggregate of 10,731,052 shares of its common stock
to the former stockholders of Tarpan in exchange for their shares of Tarpan
common stock.  The Registrant relied on the exemption from federal
registration under Section 4(2) of the Securities Act, based on its belief that
the issuance of such securities did not involve a public offering, as there were
fewer than 35 “non-accredited” investors, all of whom, either alone or through a
purchaser representative, had such knowledge and experience in financial and
business matters so that each was capable of evaluating the risks of the
investment.
  30
  In August
2005, the Registrant sold in a private placement offering to accredited
investors units of its securities consisting of shares of common stock and
warrants to purchase additional shares of common stock. The private placement
was completed in two separate closings held on August 26, 2005 and August 30,
2005. In the August 26 closing, the Registrant sold a total of 10,763,926 shares
of common stock and five-year warrants to purchase 2,152,758 shares for total
gross proceeds of approximately $11.95 million. The warrants issued at the
August 26 closing are exercisable at a price of $1.44 per share, which
represented approximately 110% of the average closing price of the Registrant’s
common stock during the five trading days preceding such closing date. On August
30, 2005, the Registrant sold an additional 1,108,709 shares of common stock and
five-year warrants to purchase 221,741 shares of common stock, which resulted in
gross proceeds of approximately $1.28 million. The warrants issued in connection
with the August 30 closing are exercisable at a price of $1.49 per share, which
represented approximately 110% of the average closing price of the Company's
common stock during the five trading days preceding such closing date. The total
gross proceeds resulting from this offering was approximately $13.22 million,
before deducting selling commissions and expenses. The Registrant paid total
cash commissions of approximately $925,000 to selling agents engaged in
connection with the offering and issued 5-year warrants to purchase an aggregate
of 593,196 shares of common stock, of which warrants to purchase 538,196 shares
are exercisable at a price of $1.44 per share and the remaining are exercisable
at a price of $1.49 per share.  In connection with this offering, the
Registrant relied on the exemption from federal registration under Section 4(2)
of the Securities Act and/or Rule 506 promulgated thereunder, based on its
belief that the offer and sale of the shares and warrants did not involve a
public offering as each investor was “accredited” and no general solicitation
was involved in the offering.
 
 On March
30, 2007, the Registrant entered into a series of subscription agreements with
various institutional and other accredited investors for the issuance and sale
in a private placement of an aggregate of 10,185,502 shares of the Registrant’s
common stock for total gross proceeds of approximately $8.56 million. Of the
total amount of shares issued, 10,129,947 were sold at a per share price of
$0.84, and an additional 55,555 shares were sold to an entity affiliated with
Neil Herskowitz, a director of Manhattan, at a per share price of $0.90, the
closing sale price of the Registrant’s common stock on March 29, 2007. Pursuant
to the subscription agreements, the Registrant also issued to the investors
5-year warrants to purchase an aggregate of 3,564,897 shares of the Registrant’s
common stock at an exercise price of $1.00 per share. The warrants are
exercisable during the period commencing September 30, 2007 and ending March 30,
2012.   Pursuant to the subscription agreements, the Registrant
agreed to file a registration statement with the Securities and Exchange
Commission on or before May 14, 2007 covering the resale of the shares issued in
the private placement, including the shares issuable upon exercise of the
investor warrants.  The Registrant engaged Paramount BioCapital, Inc.,
as its placement agent in connection with the private placement. In
consideration for its services, the Registrant paid aggregate cash commissions
of approximately $600,000 and issued to Paramount a 5-year warrant to purchase
an aggregate of 509,275 shares at an exercise price of $1.00 per
share.   The sale of the shares and warrants was not registered
under the Securities Act of 1933. Rather, the offer and sale of such securities
was made in reliance on the exemption from registration requirements provided by
Section 4(2) of the Securities Act and Regulation D promulgated thereunder. Each
of the investors was “accredited” (as defined under Regulation D) and no general
solicitation was used in connection with the offer and sale of such
securities.
 
 In April
2007, in partial consideration for entering into a license agreement, the
Registrant issued to  Thornton & Ross Ltd., the licensor, a total
of 125,000 shares of the Registrant’s common stock  in accordance with
the terms thereof.   The issuance of such common stock was
considered to be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
as a transaction by an issuer not involving a public offering.  The
recipient of such common stock represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in this transaction. All recipients either received adequate
information about us or had access to such information.
  31
  In June
2007, in consideration for entering into a license agreement, the Registrant
issued to each of Thornton & Ross, Ltd. and Kerra, S.A., each a licensor
thereunder, 75,000 shares of the Registrant’s common stock in accordance with
the terms thereof.  The issuances of such common stock were considered
to be exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act, or Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering. The recipients of
such common stock represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in these transactions.  All recipients either
received adequate information about the Registrant or had access to such
information.
 
 In
January 2008, the Registrant and Nordic Biotech Venture Fund II K/S ("Nordic"),
entered into a joint venture agreement the Registrant, as amended on February
18, 2008 and June 9, 2008 (the "Joint Venture Agreement"), pursuant to which in
February 2008, (i)  Nordic contributed cash in the amount of $2.5
million to H Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly
formed Danish limited partnership(the "Hedrin JV") in exchange for 50% of the
equity interests in the Hedrin JV, and (ii) the Registrant contributed certain
assets to North American rights (under license) to our Hedrin product to the
Hedrin JV in exchange for $2.0 million in cash and 50% of the equity interests
in the Hedrin JV.  On or around June 30, 2008, in accordance with the
terms of the Joint Venture Agreement, Nordic contributed an additional $1.25
million in cash to the Hedrin JV, $1.0 million of which was distributed to us
and equity in the Hedrin JV was distributed to each of us and Nordic sufficient
to maintain our respective ownership interests at 50%.  Pursuant to
the Joint Venture Agreement, upon the classification by the U.S. Food and Drug
Administration, or the FDA, of Hedrin as a Class II or Class III medical device,
Nordic will be required to contribute to the Hedrin JV an additional $1.25
million in cash, $0.5 million of which will be distributed to us and equity in
the Hedrin JV will be distributed to each of us and Nordic sufficient to
maintain our respective ownership interests at 50%.  Upon
classification by the FDA of Hedrin as a Class II or Class III medical device,
the Hedrin JV will have received a total of $1.5 million cash to be applied
toward the development and commercialization of Hedrin in North
America.  If classification of Hedrin by the FDA as a Class II or
Class III medical device is not received by June 30, 2009, then Nordic will not
be obligated to make the final payment of $1.25 million and Nordic will receive
an additional 20% ownership of the joint venture and enhanced control over the
joint venture's operations and other important
decision-making.  Pursuant to the terms of the Joint Venture
Agreement, Nordic has the right to nominate one person for election or
appointment to our board of directors.
 
 Pursuant
to the Joint Venture Agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of common
stock equal to the amount of Nordic’s investment in the Hedrin JV divided by
$0.14, as adjusted from time to time for stock splits and other specified
events, multiplied by a conversion factor, which is (i) 1.00 for so long as
Nordic's distributions from the Hedrin JV are less than the amount of its
investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin JV
are less than two times the amount of its investment but greater than or equal
to the amount of its investment amount, (iii) 1.50 for so long as Nordic's
distributions from the Hedrin JV are less than three times the amount of its
investment but greater than or equal to two times the amount of its investment
amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are
less than four times the amount of its investment but greater than or equal to
three times the amount of its investment amount and (v) 3.00 for so long as
Nordic’s distributions from Hedrin JV are greater than or equal to four times
the amount of its investment.  The put right expires upon the earlier
to occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's
distributions from the Hedrin JV exceed five times the amount Nordic has
invested in the Hedrin JV (or 10 days after such date if the Registrant has
provided Nordic notice thereof).  Pursuant to the Joint Venture
Agreement, the Registrant has the right to call all or a portion of Nordic's
equity interest in the Hedrin JV in exchange for such number of shares of common
stock equal to the portion of Nordic's investment in the Hedrin JV that the
Registrant calls by the dollar amount of Nordic's investment as of such date in
the Hedrin JV, divided by $0.14, as adjusted from time to time for stock splits
and other specified events.  The call right is only exercisable by the
Registrant if the price of common stock has closed at or above $1.40 per share
for 30 consecutive trading days.  During the first 30 consecutive
trading days in which the common stock closes at or above $1.40 per share, the
Registrant may exercise up to 25% of the call right.  During the
second 30 consecutive trading days in which the common stock closes at or above
$1.40 per share, the Registrant may exercise up to 50% of the call right on a
cumulative basis.  During the third consecutive 30 trading days in
which the common stock closes at or above $1.40 per share, the Registrant may
exercise up to 75% of the call right on a cumulative basis.  During
the fourth consecutive 30 days in which the common stock closes at or above
$1.40 per share, the Registrant may exercise up to 100% of the call right on a
cumulative basis.  Nordic may refuse the call, either by paying $1.5
million multiplied by the percentage of Nordic's investment being called or
forfeiting an equivalent portion of the put right, calculated on a pro rata
basis for the percentage of the Nordic equity interest called by
us.   The call right expires on February 25, 2013.
  32
  In
connection with the Joint Venture Agreement, on February 25, 2008, Nordic paid
the Registrant a  non-refundable fee of $150,000 in exchange for the
right to receive a warrant to purchase up to 7,142,857 shares
of  common stock at $0.14 per share, as adjusted from time to time for
stock splits and other specified events, if Nordic did not exercise all or part
of its put right on or before April 30, 3008.  As of April 30, 2008,
Nordic had not exercised all or any portion of its put right and the Registrant
issued the warrant to Nordic.
 
 The
offering and sale of the securities under the Joint Venture Agreement were
considered to be exempt from registration under the Securities Act, by virtue of
Section 4(2) thereof and the provisions of Regulation D promulgated
thereunder.  Nordic has represented to the Registrant that it is an
"accredited investor," as that term is defined in Rule 501(a) of Regulation D
under the Securities Act.
 
 On
September 11, 2008, the Registrant entered into a series of 10% secured
promissory notes with certain of its directors and officers and an employee of
the Registrant (the “Note Holders”) for aggregate of $70,000. Principal and
interest on the notes shall be paid in cash on March 10, 2009 unless paid
earlier by the Registrant. In connection with the issuance of the notes, the
Registrant also issued to the Note Holders 5-year warrants to purchase an
aggregate of 140,000 shares of the Registrant's common stock at an exercise
price of $0.20 per share.  The Registrant granted to the Note Holders
a continuing security interest in certain specific refunds, deposits and
repayments due to the Registrant and expected to be repaid to the Registrant in
the next several months.  .   The issuance of such
securities was considered to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.  The recipient of such securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the warrant certificates issued in this
transaction.  All recipients either received adequate information
about us or had access to such information.
 
 On
February 3, 2009, the Registrant completed a private placement (the "2009
Private Placement") of 345 units, with each unit consisting of a 12% senior
secured note promissory note in the principal amount of $5,000 and a warrant to
purchase up to 166,667 shares of common stock at an exercise price of $.09 per
share which expires on December 31, 2013, for aggregate gross proceeds of
$1,780,500.  The private placement was completed in three closings
which occurred on November 19, 2008 with respect to 207 units, December 23, 2008
with respect to 56 units and February 3, 2009 with respect to 82
units.
  33
  On
November 19, 2008, the Registrant completed the sale of 207 units in the first
closing of the 2009 Private placement.  The Registrant issued a
warrant to purchase 5,175,010 shares of common stock at an exercise price of
$.09 per share to the placement agent as partial compensation for its
services.  Te Registrant granted the placement agent the right to
nominate a member of its Board of Directors and such director shall receive all
compensation and benefits provided to its other
directors.  Additionally, upon such director’s appointment to the
Board of Directors, he or she shall be issued a warrant to purchase 1,000,000
shares of common stock at a per share exercise price equal to the greater of (i)
the fair market value on the date of issuance or (ii) $.09.
 
 On
December 23, 2008, the Registrant completed a second closing of the 2009 Private
Placement under the terms of the Securities Purchase Agreement.  At
the second closing, the Registrant sold an additional 56 units to
investors.   In connection with the second closing, the
Registrant issued to the placement agent a warrant to purchase 1,400,003 shares
of common stock at an exercise price of $.09 per share as additional
compensation for its services.
 
 On
February 3, 2009, the Registrant completed a third closing of the 2009 Private
Placement under the terms of the Securities Purchase Agreement.  At
the third closing, the Registrant sold an additional 82 units to
investors.   In connection with the third closing, the Registrant
issued to the placement agent a warrant to purchase 2,050,004 shares of common
stock at an exercise price of $.09 per share as additional compensation for its
services.
 
 All of
the investors represented in the 2009 Private Placement represented that they
were “accredited investors,” as that term is defined in Rule 501(a) of
Regulation D under the Securities Act, and the sale of the units was made in
reliance on exemptions provided by Regulation D and Section 4(2) of the
Securities Act of 1933, as amended.
  34
  ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
  Overview
  We were
incorporated in Delaware in 1993 under the name “Atlantic Pharmaceuticals, Inc.”
and, in March 2000, we changed our name to “Atlantic Technology Ventures,
Inc.”  In 2003, we completed a “reverse acquisition” of privately held
“Manhattan Research Development, Inc”.  In connection with this
transaction, we also changed our name to “Manhattan Pharmaceuticals,
Inc.”  From an accounting perspective, the accounting acquirer is
considered to be Manhattan Research Development, Inc. and accordingly, the
historical financial statements are those of Manhattan Research Development,
Inc.
  During
2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was
a privately held New York based biopharmaceutical company developing
dermatological therapeutics.  Through the merger, we acquired Tarpan’s
primary product candidate, Topical PTH (1-34) for the treatment of
psoriasis.  In consideration for their shares of Tarpan’s capital
stock, the stockholders of Tarpan received an aggregate of approximately
10,731,000 shares of our common stock, representing approximately 20% of our
then outstanding common shares.  This transaction was accounted for as
a purchase of Tarpan by the Company.
  We are a
specialty healthcare product company focused on developing and
commercializing  pharmaceutical treatments for underserved patient
populations.  We aim to acquire rights to these technologies by
licensing or otherwise acquiring an ownership interest, funding their research
and development and eventually either bringing the technologies to market or
out-licensing.  In the short term we are focusing our efforts on the
commercialization of the two product candidates we currently have in
development:  HedrinTM,
through the Hedrin JV, a novel, non-insecticide treatment of pediculitis (head
lice) and a topical product for the treatment of psoriasis.  Longer
term we intend to acquire and commercialize low risk, quick to market products,
specifically products that could be marketed over-the-counter (“OTC”), treat
everyday maladies, are simple to manufacture, and/or could be classified as
medical devices by the FDA.
  You
should read the following discussion of our results of operations and financial
condition in conjunction with the financial statements and notes thereto
appearing elsewhere in this Form 10-K.  This discussion includes
“forward-looking” statements that reflect our current views with respect to
future events and financial performance.  We use words such as we
“expect,” “anticipate,” “believe,” and “intend” and similar expressions to
identify forward-looking statements.  Investors should be aware that
actual results may differ materially from our expressed expectations because of
risks and uncertainties inherent in future events, particularly those risks
identified under the heading “Risk Factors” following Item 1 in this Annual
Report, and should not unduly rely on these forward looking
statements.  All share and per share information in this discussion
has been adjusted for the 1-for-5 combination of our common stock effected on
September 25, 2003.
  Results
Of Operations
  2008
versus 2007
 
 During
each of the years ended December 31, 2008 and 2007, we had no revenues, and are
considered a development stage company.  We do not expect to have
revenues relating to our products prior to December 31, 2009.
  35
  Years ended December 31,2008
                                
                                
                                2007
                                
                                
                                Increase
                                  (decrease)
                                
                                
                                % Increase
                                  (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                                
                                $
                                122,000
                                
                                
                                $
                                539,000
                                
                                
                                $
                                (417,000
                                )
                                
                                
                                -77.37
                                %In-license,
      milestone and related fees
                                
                                
                                -
                                
                                
                                
                                2,245,000
                                
                                
                                
                                (2,245,000
                                )
                                
                                
                                -100.00
                                %Other
      research and development expenses
                                
                                
                                1,681,000
                                
                                
                                
                                5,752,000
                                
                                
                                
                                (4,071,000
                                )
                                
                                
                                -70.78
                                %Total
      research and development expenses
                                
                                
                                1,803,000
                                
                                
                                
                                8,536,000
                                
                                
                                
                                (6,733,000
                                )
                                
                                
                                -78.88
                                %General
      and administrative:Share-based
      compensation
                                
                                
                                342,000
                                
                                
                                
                                902,000
                                
                                
                                
                                (560,000
                                )
                                
                                
                                -62.08
                                %Other
      general and administrative expenses
                                
                                
                                2,268,000
                                
                                
                                
                                2,706,000
                                
                                
                                
                                (438,000
                                )
                                
                                
                                -16.19
                                %Total
      general and administrative expenses
                                
                                
                                2,610,000
                                
                                
                                
                                3,608,000
                                
                                
                                
                                (998,000
                                )
                                
                                
                                -27.66
                                %Other
      income
                                
                                
                                144,000
                                
                                
                                
                                112,000
                                
                                
                                
                                32,000
                                
                                
                                
                                28.57
                                %Net
      loss
                                
                                $
                                4,269,000
                                
                                
                                $
                                12,032,000
                                
                                
                                $
                                (7,763,000
                                )
                                
                                
                                -64.52
                                %
  For the
year ended December 31, 2008 research and development expense was $1,803,000 as
compared to $8,536,000 for the year ended December 31, 2007.  This
decrease of $6,733,000, or 78.9%, is primarily comprised of a decrease in
in-license, milestone and related fees of $2,245,000, a decrease in other
research and development expenses of $4,071,000 and a decrease in stock based
compensation of $417,000.
  For the
year ended December 31, 2008 general and administrative expense was $2,610,000
as compared to $3,608,000 for the year ended December 31, 2007.  This
decrease of $998,000, or 27.7%, is primarily comprised of a decrease in
share-based compensation of $560,000 and a decrease in other general and
administrative expenses of $438,000.
  For the
year ended December 31, 2008 other income was $144,000 as compared to $112,000
for the year ended December 31, 2007.  This increase of $32,000, or
28.6%, is primarily due to increases in management fee revenue from the Hedrin
JV of $447,000 and in other income of $7,000 offset by equity in losses of the
Hedrin JV of $250,000, a decrease in interest income of $108,000 and an increase
in interest expense of $64,000.
  Net loss
for the year ended December 31, 2008 was $4,269,000 as compared to $12,032,000
for the year ended December 31, 2007.  This decrease of $7,763,000, or
64.5%, is primarily due to a decrease  in research and development
expenses of $6,733,000, a decrease in general and administrative expense of
$998,000 and an increase in other income of $32,000.
  Liquidity
and Capital Resources
  From
inception to December 31, 2008, we incurred a deficit during the development
stage of $59,268,000 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least December 31, 2009 and for
the foreseeable future.  These losses have been incurred through a
combination of research and development activities related to the various
technologies under our control and expenses supporting those
activities.
  We have
financed our operations since inception primarily through equity and debt
financings and a joint venture transaction.  During the year ended
December 31, 2008, we had a net decrease in cash and cash equivalents of
$544,000.  This decrease resulted largely from net cash used in
operating activities of $4,444,000 partially offset by net cash provided by
financing activities of $3,909,000.  Total liquid resources as of
December 31, 2008 were $106,000 compared to $650,000 at December 31,
2007.
  36
  Our
current liabilities as of December 31, 2008 were $1,486,000 compared to
$1,872,000 at December 31, 2007, a decrease of $386,000.  As of
December 31, 2008, we had working capital deficit of $612,000 compared to
working capital deficit of $1,006,000 at December 31, 2007.
  The
Company received approximately $1.8 million in February 2008 and approximately
$0.9 million in June 2008 from a joint venture agreement.  The Company
also received $70,000 in Secured 10% Notes in September 2008 and net proceeds of
$1.0 million from the sale of Secured 12% Notes in November and December
2008.
  Our
available working capital and capital requirements will depend upon numerous
factors, including progress of our research and development programs, our
progress in and the cost of ongoing and planned nonclinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, in-licensing activities, competing technological
and market developments, changes in our existing collaborative and licensing
relationships, the resources that we devote to developing manufacturing and
commercializing capabilities, the status of our competitors, our ability to
establish collaborative arrangements with other organizations and our need to
purchase additional capital equipment.
  Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing,
other collaborative agreements, strategic alliances, and our ability to realize
the full potential of our technology in development.  Such additional
funds may not become available on acceptable terms and there can be no assurance
that any additional funding that we do obtain will be sufficient to meet our
needs in the long term.  Through December 31, 2008, 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 of the Company available at December 31, 2008, the net proceeds of
$500,000 received in February 2009 from a joint venture agreement and net
proceeds of $360,000 received from the sale of additional Secured 12% Notes in
February 2009, management believes that the Company has sufficient capital to
fund its operations through 2009.  Management believes that the
Company will need additional equity or debt financing or will need to generate
positive cash flow from the Hedrin joint venture, or generate revenues through
licensing of its products or entering into strategic alliances to be able to
sustain its operations into 2010.  Furthermore, the Company will need
additional financing thereafter to complete development and commercialization of
its products.  There can be no assurances that we can successfully
complete development and commercialization of our products.
  These
matters raise substantial doubt about the Company’s ability to continue as a
going concern.  The accompanying financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
  We have
reported net losses of $4,269,000 and $12,032,000 for the years ended December
31, 2008 and 2007, respectively.  The net loss attributable to common
shares from date of inception, including preferred stock dividends, August 6,
2001 to December 31, 2008, amounts to $59,268,000.  Management
believes that we will continue to incur net losses through at least December 31,
2009.
  37
  Joint
Venture Agreement
  We and
Nordic Biotech Venture Fund II K/S, or Nordic, entered into a joint venture
agreement on January 31, 2008, which was amended on February 18, 2008 and on
June 9, 2008.  Pursuant to the joint venture agreement, in February
2008, (i) Nordic contributed cash in the amount of $2.5 million to H
Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed Danish
limited partnership, or the Hedrin JV, in exchange for 50% of the equity
interests in the Hedrin JV, and (ii) we contributed certain assets to North
American rights (under license) to our Hedrin product to the Hedrin JV in
exchange for $2.0 million in cash and 50% of the equity interests in the Hedrin
JV.  On or around June 30, 2008, in accordance with the terms of the
joint venture agreement, Nordic contributed an additional $1.25 million in cash
to the Hedrin JV, $1.0 million of which was distributed to us and equity in the
Hedrin JV was distributed to each of us and Nordic sufficient to maintain our
respective ownership interests at 50%.
 
 Pursuant
to the joint venture agreement, upon the classification by the U.S. Food and
Drug Administration, or the FDA, of Hedrin as a Class II or Class III medical
device, Nordic was required to contribute to the Hedrin JV an additional $1.25
million in cash, $0.5 million of which was to be distributed to us and equity in
the Hedrin JV was to be distributed to each of us and Nordic sufficient to
maintain our respective ownership interests at 50%.    The
FDA notified the Hedrin JV that Hedrin has been classified as a Class III
medical device and in February 2009, Nordic made the $1.25 million investment in
the Hedrin JV, the Hedrin JV made the $0.5 million milestone payment to us and
equity in the Hedrin JV was distributed to us and Nordic sufficient to maintain
our respective ownership interests at 50%.  In accordance with the
terms of the joint venture agreement, as of December 31, 2008 the Hedrin JV had
received a total of $1.75 million cash to be applied toward the development and
commercialization of Hedrin in North America.
 
 The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The
Hedrin JV has engaged us to provide management services to the Hedrin JV in
exchange for an annualized management fee, which for 2008, on an annualized
basis, is approximately $527,000.   As of December 31, 2008, we
had recognized approximately $447,000 of other income from management fees
earned from the Hedrin JV.
  The
profits of the Hedrin JV will be shared by us and Nordic in accordance with our
respective equity interests in the Hedrin JV, of which we each currently hold
50%, except that Nordic is entitled to receive a minimum return each year from
the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Hedrin JV, before any distribution is made to
us.  If the Hedrin JV realizes a profit in excess of the Nordic
minimum return in any year, then such excess shall first be distributed to us
until our distribution and the Nordic minimum return are in the same ratio as
our respective equity interests in the Hedrin JV and then the remainder, if any,
is distributed to Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5 million) plus 10% per year, less the cumulative distributions
received by Nordic from the Hedrin JV before any distribution is made to
us.  If the Hedrin JV’s assets in liquidation exceed the Nordic
liquidation preference amount, then any excess shall first be distributed to us
until our distribution and the Nordic liquidation preference amount are in the
same ratio as our respective equity interests in the Hedrin JV and then the
remainder, if any, is distributed to Nordic and us in the same ratio as our
respective equity interests.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.
  Pursuant
to the terms of the joint venture agreement, Nordic has the right to nominate
one person for election or appointment to our board of directors.  The
Hedrin JV's board of directors consists of four members, two members appointed
by us and two members appointed by Nordic.  Nordic has the right to
appoint one of the directors as chairman of the board.  The chairman
has certain tie breaking powers.
  38
  Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.09, as adjusted for the sale of  the Secured 12% Notes in the
fourth quarter of 2008, and as further adjusted from time to time for stock
splits and other specified events, multiplied by a conversion factor, which is
(i) 1.00 for so long as Nordic's distributions from the Hedrin JV are less than
the amount of its investment, (ii) 1.25 for so long as Nordic's distributions
from the Hedrin JV are less than two times the amount of its investment but
greater than or equal to the amount of its investment amount, (iii) 1.50 for so
long as Nordic's distributions from the Hedrin JV are less than three times the
amount of its investment but greater than or equal to two times the amount of
its investment amount, (iv) 2.00 for so long as Nordic's distributions from the
Hedrin JV are less than four times the amount of its investment but greater than
or equal to three times the amount of its investment amount and (v) 3.00 for so
long as Nordic’s distributions from Hedrin JV are greater than or equal to four
times the amount of its investment.  The put right expires upon the
earlier to occur of (i) February 25, 2018 and (ii) 30 days after the date when
Nordic's distributions from the Hedrin JV exceed five times the amount Nordic
has invested in the Hedrin JV (or 10 days after such date if we have provided
Nordic notice thereof).
 
 Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.09, as adjusted for the sale of  the Secured
12% Notes in the fourth quarter of 2008, and as further adjusted from time to
time for stock splits and other specified events.  The call right is
only exercisable by us if the price of our common stock has closed at or above
$1.40 per share for 30 consecutive trading days.  During the first 30
consecutive trading days in which our common stock closes at or above $1.40 per
share, we may exercise up to 25% of the call right.  During the second
30 consecutive trading days in which our common stock closes at or above $1.40
per share, we may exercise up to 50% of the call right on a cumulative
basis.  During the third consecutive 30 trading days in which our
common stock closes at or above $1.40 per share, we may exercise up to 75% of
the call right on a cumulative basis.  During the fourth consecutive
30 days in which our common stock closes at or above $1.40 per share, we may
exercise up to 100% of the call right on a cumulative basis.  Nordic
may refuse the call, either by paying $1.5 million multiplied by the percentage
of Nordic's investment being called or forfeiting an equivalent portion of the
put right, calculated on a pro rata basis for the percentage of the Nordic
equity interest called by us.   The call right expires on
February 25, 2013.  For purposes of Nordic’s right to put, and our
right to call, all or a portion of Nordic’s equity interest in the Hedrin JV,
the amount of Nordic’s investment is currently $5,000,000.
 
 In
connection with our joint venture agreement, on February 25, 2008, Nordic paid
us a non-refundable fee of $150,000 in exchange for the right to receive a
warrant to purchase up to 11,111,111 shares of our common stock at $0.09 per
share, as adjusted for the sale of the Secured 12% Notes in the fourth quarter
of 2008, and as further adjusted from time to time for stock splits and other
specified events, if Nordic did not exercise all or part of its put right on or
before April 30, 3008.  As of April 30, 2008, Nordic had not exercised
all or any portion of its put right and we issued the warrant to
Nordic.
 
 In connection with the joint venture
agreement, we and Nordic entered into a registration rights agreement, on
February 25, 2008, as modified pursuant to a letter agreement, dated September
17, 2008, pursuant to which we agreed to file with the Securities and Exchange
Commission, or the SEC, by no later than 10 calendar days following the date on
which our Annual Report on Form 10-K for the year ended December 31, 2007 is
required to be filed with the SEC, which was subsequently waived by Nordic until
May 1, 2008, an initial registration statement registering the resale by Nordic
of any shares of our common stock issuable to Nordic through the exercise of the
warrant or the put right.  We filed an initial registration statement
on May 1, 2008, which was declared effective on October 15, 2008.
  39
  We also
have agreed to file with the SEC any additional registration statements which
may be required no later than 45 days after the date we first know such
additional registration statement is required; provided, however, that (i) in
the case of the classification by the FDA of Hedrin as a Class II or Class III
medical device described above and the payment in full by Nordic of the related
final milestone payment of $1.25 million, the registration statement with
respect to the additional shares of our common stock relating to such additional
investment must be filed within 45 days after achievement of such
classification; and (ii) in the event we provide Nordic with notice of exercise
of our right to call all or a portion of Nordic's equity interest in the Hedrin
JV, a registration statement with respect to the shares of our common stock
payable to Nordic in connection with such call right (after giving effect to any
reduction in the number of such shares resulting from Nordic's refusal of all or
a portion of such call in accordance with the terms of our joint venture
agreement) must be filed within 16 days after delivery of such notice to
Nordic.  If we fail to file a registration statement on time or if a
registration statement is not declared effective by the SEC within 105 days of
the required filing date, or otherwise fail to diligently pursue registration
with the SEC in accordance with the terms of the registration rights agreement,
we will be required to pay as partial liquidated damages and not as a penalty,
to Nordic or its assigns, an amount equal to 0.5% of the amount invested in the
Hedrin JV by Nordic pursuant to the joint venture agreement per month until the
registration rights agreement is declared effective by the SEC; provided,
however, that in no event shall the aggregate amount payable by us exceed 9% of
the amount invested in the Hedrin JV by Nordic under the joint venture
agreement.
 
 Secured
10% Notes Payable
 
 On
September 11, 2008, we issued secured 10% promissory notes to certain of our
directors and officers and an employee for aggregate principal amount of
$70,000.  Principal and interest on the notes are payable in cash on
March 10, 2009 unless paid earlier by the Company.  In connection with
the issuance of the notes, the Company issued to the noteholders 5-year warrants
to purchase an aggregate of 140,000 shares of our common stock at an exercise
price of $0.20 per share.  We granted to the noteholders a continuing
security interest in certain specific refunds, deposits and repayments due to us
and expected to be repaid to us in the next several months.  The
secured 10% notes were repaid in February 2009 along with interest
thereon.
 
 Secured
12% Notes Payable
  On
February 3, 2009, we completed a private placement of 345 units, with each unit
consisting of Secured 12% Notes in the principal amount of $5,000 and a warrant
to purchase up to 166,667 shares of our common stock at an exercise price of
$.09 per share which expires on December 31, 2013, for aggregate gross proceeds
of $1,725,000.  The private placement was completed in three closings
which occurred on November 19, 2008 with respect to 207 units, December 23, 2008
with respect to 56 units and February 3, 2009 with respect to 82
units.
 
 To secure
our obligations under the notes, we entered into a security agreement and a
default agreement with the investors. The security agreement provides that the
notes will be secured by a pledge of our assets other than (i) our interest in
the Hedrin joint venture, including, without limitation, our interest in H
Pharmaceuticals K/S and H Pharmaceuticals General Partner ApS, (ii) our rent
deposit for our former office space, (iii) our refund of a prepayment and (iv)
our tax refund for the 2007 fiscal year from the State of New York and City of
New York.  In addition, to provide additional security for our
obligations under the notes, we entered into a default agreement, which provides
that upon an event of default under the notes, we shall, at the request of the
holders of the notes, use our reasonable commercial efforts to either (i) sell a
part or all of our interests in the Hedrin joint venture or (ii) transfer all or
part of our interest in the Hedrin JV to the holders of the notes, as necessary,
in order to fulfill our obligations under the notes, to the extent required and
to the extent permitted by the applicable Hedrin joint venture
agreements.
  40
  On
November 19, 2008, we completed the sale of 207 units in our first closing of
our private placement.  In connection with the first closing, we
issued a warrant to purchase 5,175,010 shares of common stock at an exercise
price of $.09 per share to the placement agent as partial compensation for its
services.  Further, we granted the placement agent the right to
nominate a member of our Board of Directors and such director shall receive all
compensation and benefits provided to our other
directors.  Additionally, upon such director’s appointment to the
Board of Directors, he or she shall be issued a warrant to purchase 1,000,000
shares of our common stock at a per share exercise price equal to the greater of
(i) the fair market value on the date of issuance or (ii) $.09.
 
 On
December 23, 2008, we completed a second closing of our private
placement.  At the second closing, we sold an additional 56 units to
certain investors. In connection with the second closing, we issued to the
placement agent a warrant to purchase 1,400,003 shares of our common stock at an
exercise price of $.09 per share as additional compensation for its
services.
 
 On
February 3, 2009, we completed a third closing of our private
placement.  At the third closing, we sold an additional 82 units to
certain investors.   In connection with the third closing, we
issued to the placement agent a warrant to purchase 2,050,004 shares of our
common stock at an exercise price of $.09 per share as additional compensation
for its services.
 
 In
connection with the private placement, we, the placement agent and the investors
entered into a registration rights agreement.  Pursuant to the
registration rights agreement, we agreed to file a registration statement to
register the resale of the shares of our common stock issuable upon exercise of
the warrants issued to the investors in the private placement, within 20 days of
the final closing date and to cause the registration statement to be declared
effective within 90 days (or 120 days upon full review by the SEC). We filed the
registration statement on February 23, 2009.  On March 11, 2009 we
received a comment letter from the SEC.  We are addressing those
comments and plan to refile the registration statement once those comments have
been addressed.
 
 American
Stock Exchange
  In
September 2007, we received notice from the staff of AMEX, indicating that we
were not in compliance with certain continued listing standards set forth in the
American Stock Exchange Company guide.  Specifically, the American
Stock Exchange notice cited our failure to comply, as of June 30, 2007, with
section 1003(a)(ii) of the AMEX Company Guide as we had less than $4,000,000 of
stockholders’ equity and had losses from continuing operations and /or net
losses in three or four of our most recent fiscal years and with section
1003(a)(iii) which requires us to maintain $6,000,000 of stockholders’ equity if
we have experienced losses from continuing operations and /or net losses in its
five most recent fiscal years.
  In order
to maintain our AMEX listing, we were required to submit a plan to AMEX advising
the exchange of the actions we have taken, or will take, that would bring us
into compliance with all the continued listing standards by April 16,
2008.  We submitted such a plan in October 2007.  If we were
not in compliance with the continued listing standards at the end of the plan
period, or if we did not make progress consistent with the plan during the
period, AMEX staff could initiate delisting proceedings.
  Under the
terms of the Joint Venture Agreement, the number of potentially issuable shares
represented by the put and call features of the Hedrin agreement, and the
warrant issuable to Nordic, would exceed 19.9% of our total outstanding shares
and would be issued at a price below the greater of book or market
value.  As a result, under AMEX regulations, we would not have been
able to complete the transaction without first receiving either stockholder
approval for the transaction, or a formal “financial viability” exception from
AMEX’s stockholder approval requirement.  We estimated that obtaining
stockholder approval to comply with AMEX regulations would take a minimum of 45
days to complete.  We discussed the financial viability exception with
AMEX for several weeks and had neither received the exception nor been denied
the exception.  We determined that our financial condition required us
to complete the transaction immediately, and that the Company’s financial
viability depended on its completion of the transaction without further
delay.
  41
  Accordingly,
to maintain the Company’s financial viability, on February 28, 2008 we announced
that we had formally notified AMEX that we intended to voluntarily delist our
common stock from AMEX.  The delisting became effective on March 26,
2008.
  Our
common stock now trades on the Over the Counter Bulletin Board (“OCTBB”) under
the symbol “MHAN”.  We intend to maintain corporate governance,
disclosure and reporting procedures consistent with applicable law.
 
 Commitments
  General
  We often
contract with third parties to facilitate, coordinate and perform agreed upon
research and development of our product candidates.  To ensure that
research and development costs are expensed as incurred, we record monthly
accruals for clinical trials and nonclinical testing costs based on the work
performed under the contracts.
  These
contracts typically call for the payment of fees for services at the initiation
of the contract and/or upon the achievement of certain
milestones.  This method of payment often does not match the related
expense recognition resulting in either a prepayment, when the amounts paid are
greater than the related research and development costs recognized, or an
accrued liability, when the amounts paid are less than the related research and
development costs recognized.
  Expenses
associated with the clinical trials conducted during 2007 and 2008 were
recognized on this activity based basis.  At December 31, 2007 we
recognized accrued expenses of $74,000 related to these clinical
trials.  At December 31, 2008 all clinical trials had been concluded
and there was no remaining financial commitments.
  Swiss
Pharma Contract LTD, or Swiss Pharma, a clinical site that we used in one of our
obesity trials, gave notice to us that Swiss Pharma believed it was entitled to
receive an additional payment of $322,776 for services in connection with that
clinical trial.  The contract between us and Swiss Pharma provided for
arbitration in the event of a dispute, such as this claim for an additional
payment.  On March 10, 2008, Swiss Pharma filed for arbitration with
the Swiss Chamber of Commerce.  As we did not believe that Swiss
Pharma was entitled to additional payments, we defended our position in
arbitration.  On April 2, 2008, we filed our statement of defense and
counterclaim for recovery of costs incurred by us as a result of Swiss Pharma’s
failure to meet agreed upon deadlines under our contract.  On June 3,
2008, a hearing was held before the arbitrator.  On September 5, 2008,
the arbitrator rendered an award in favor of Swiss Pharma, awarding to Swiss
Pharma a total of approximately $646,000 which amount includes a contract
penalty of approximately $323,000, a final services invoice of approximately
$48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses
incurred in the arbitration process of approximately $245,000, reimbursement of
arbitration costs of approximately $13,000 and interest through September 5,
2008 of approximately $17,000.  Further, the arbitrator ruled that we
must pay interest at the rate of 5% per annum on approximately $371,000, the sum
of the contract penalty of approximately $323,000 and the final services invoice
of approximately $48,000, from October 12, 2007 until paid.  We had
previously recognized a liability to Swiss Pharma in the amount of $104,000 for
the final services invoice. The remainder of the award was expensed in 2008. We
have recognized research and development expense of approximately $267,000,
general and administrative expense of approximately $257,000 and interest
expense of approximately $23,000 during the year ended December 31,
2008.  On January 22, 2009, we received notice that Swiss Pharma
submitted a petition to the Supreme Court of the State of New York, County of
New York seeking to confirm and to enter a judgment on the Arbitration
Award.  On February 17, 2009, we filed an answer to Swiss Pharma's
petition.  A hearing has not yet been scheduled.  We will
continue to accrue interest at the rate of 5% per annum on the approximate
$371,000 amount until such amount has been settled.  We do not have
sufficient cash or other current available assets to satisfy the arbitrator's
award.
  42
  In
February 2007, a former employee of the Company alleged an ownership interest in
two of the Company’s provisional patent applications covering our discontinued
product development program for Oleoyl-estrone.  Also, without
articulating precise legal claims, the former employee contends that the Company
wrongfully characterized the former employee’s separation from employment as a
resignation instead of a dismissal in an effort to harm the former employee’s
immigration sponsorship efforts, and, further, to wrongfully deprive the former
employee of the former employee’s alleged rights in two of the Company’s
provisional patent applications.  The former employee is seeking an
unspecified amount in damages. The Company refutes the former employee’s
contentions and intends to vigorously defend itself should the former employee
file claims against the Company.  There have been no further
developments with respect to these contentions.
  Development
Commitments
  At
present the Company has no development commitments.
  Hedrin
  During
2008, the Company entered into the Hedrin JV agreement.  The Hedrin JV
is responsible for the development and commercialization of Hedrin for the North
American market and all associated costs including clinical trials, if required,
regulatory costs, patent costs, and future milestone payments owed to Thornton
& Ross Ltd., or T&R, the licensor of Hedrin.
  Topical
PTH (1-34)
  In July
2008 the Company announced the results of a phase 2a trial conducted with PTH
1-34 to evaluate the safety and preliminary efficacy of PTH 1-34 in the
treatment of mild to moderate chronic plaque psoriasis.  In the clinical
trial, PTH 1-34 failed to show statistically or clinically meaningful
improvements in the disease.  The Company has conducted no further clinical
activities with the product and is considering the next steps in the program,
including returning the project to IGI under the terms of our license
agreement.
 
 Through
our April 2005 acquisition of Tarpan Therapeutics, Inc., we acquired a
Sublicense Agreement with IGI, Inc. dated April 14, 2004.  Under the
IGI sublicense agreement we hold the exclusive, world-wide, royalty bearing
sublicense to develop and commercialize the licensed
technology.  Under the terms of the IGI sublicense agreement, we are
responsible for the cost of the nonclinical and clinical development of the
project, including research and development, manufacturing, laboratory and
clinical testing and trials and marketing of licensed products.
  43
  The IGI
sublicense agreement requires us to make certain milestone payments as
follows:  $300,000 payable upon the commencement of a Phase 2 clinical
trial; $500,000 upon the commencement of a Phase 3 clinical trial; $1,500,000
upon the acceptance of an NDA application by the FDA; $2,400,000 upon the
approval of an NDA by the FDA; $500,000 upon the commencement of a Phase 3
clinical trial for an indication other than psoriasis; $1,500,000 upon the
acceptance of and NDA application for an indication other than psoriasis by the
FDA; and $2,400,000 upon the approval of an NDA for an indication other than
psoriasis by the FDA.
  During
2007, we achieved the milestone of the commencement of Phase 2 clinical
trial.  As a result $300,000 became payable to IGI.  This
$300,000 is included in research and development expense for the year ended
December 31, 2007.  Payment was made to IGI in February 2008. In
addition, we are obligated to pay IGI, Inc. an annual royalty of 6% on annual
net sales up to $200,000,000.  In any calendar year in which net sales
exceed $200,000,000, we are obligated to pay IGI, Inc. an annual royalty of 9%
on such excess.  Through December 31, 2008, sales have not commenced,
therefore, we have not paid any such royalties.
  IGI, Inc.
may terminate the agreement (i) upon 60 days’ notice if we fail to make any
required milestone or royalty payments, or (ii) if we become bankrupt or if a
petition in bankruptcy is filed, or if we are placed in the hands of a receiver
or trustee for the benefit of creditors.  IGI, Inc. may terminate the
agreement upon 60 days’ written notice and an opportunity to cure in the event
we commit a material breach or default.  Eighteen months from the date
of the IGI sublicense agreement, we may terminate the agreement in whole or as
to any portion of the PTH patent rights upon 90 days’ notice to IGI,
Inc.
  Altoderm
  On April 3, 2007, the Company entered
into a license agreement for “Altoderm” (the “Altoderm Agreement”) with T&R.
Pursuant to the Altoderm Agreement, the Company acquired an exclusive North
American license to certain patent rights and other intellectual property
relating to Altoderm, a topical skin lotion product candidate using sodium
cromoglicate for the treatment of atopic dermatitis. In accordance with the
terms of the Altoderm Agreement, the Company issued 125,000 shares of its common
stock, valued at $112,500, and made a cash payment of $475,000 to T&R upon
the execution of the agreement. These amounts have been included in research and
development expense. Further, the Company agreed to make future milestone
payments to T&R comprised of various combinations of cash and common stock
in respective aggregate amounts of $5,675,000 and 875,000 shares of common stock
upon the achievement of various clinical and regulatory milestones. The Company
also agreed to pay royalties on net sales of products using the licensed patent
rights at rates ranging from 10% to 20%, depending on the level of annual net
sales, and subject to an annual minimum royalty payment of $1 million in each
year following the first commercial sale of Altoderm. The Company may sublicense
the patent rights.  The Company agreed to pay T&R 30% of the
royalties received by the Company under such sublicense agreements.
  Subsequent to December 31, 2008 the
Company terminated the Altoderm Agreement for convenience.  The
Company has no further financial liability or commitment to T&R under the
Altoderm Agreement.
  44
  Altolyn
 
 On April 3, 2007, the Company and
T&R also entered into a license agreement for “Altolyn” (the “Altolyn
Agreement”). Pursuant to the Altolyn Agreement, the Company acquired an
exclusive North American license to certain patent rights and other intellectual
property relating to Altolyn, an oral formulation product candidate using sodium
cromoglicate for the treatment of mastocytosis, food allergies, and inflammatory
bowel disorder. In accordance with the terms of the Altolyn Agreement, the
Company made a cash payment of $475,000 to T&R upon the execution of the
agreement. This amount is included in research and development
expense.  Further, the Company agreed to make future cash milestone
payments to T&R in an aggregate amount of $5,675,000 upon the achievement of
various clinical and regulatory milestones. The Company also agreed to pay
royalties on net sales of products using the licensed patent rights at rates
ranging from 10% to 20%, depending on the level of annual net sales, and subject
to an annual minimum royalty payment of $1 million in each year following the
first commercial sale of Altolyn. The Company may sublicense the patent rights.
The Company agreed to pay T&R 30% of the royalties received by the Company
under such sublicense agreements.
  Subsequent to December 31, 2008 the
Company terminated the Altolyn Agreement for convenience.  The Company
has no further financial liability or commitment to T&R under the Altolyn
Agreement.
  Oleoyl-estrone
  On July
9, 2007, the Company announced the results of its two Phase 2a clinical trials
of oral OE.  The results of both randomized, double-blind, placebo
controlled studies, one in common obesity and the other in morbid obesity,
demonstrated no statistically or clinically meaningful placebo adjusted weight
loss for any of the treatment arms evaluated.  Based on these results,
the Company discontinued its Oleoyl-estrone programs in both common obesity and
morbid obesity during 2007.
  Propofol
Lingual Spray
  On July
9, 2007, the Company announced that it is discontinued development of Propofol
Lingual Spray for pre-procedural sedation.
  Research
and Development Projects
  Hedrin
  In
collaboration with Nordic and through the Hedrin JV we are developing Hedrin for
the treatment of pediculosis (head lice).  To date, Hedrin has been
clinically studied in 326 subjects and is currently marketed as a device in
Western Europe and as a pharmaceutical in the United Kingdom
(U.K.).
  In a
randomized, controlled, equivalence clinical study conducted in Europe by
T&R, Hedrin was administered to 253 adult and child subjects with head louse
infestation.  The study results, published in the British Medical
Journal in June 2005, demonstrated Hedrin’s equivalence when compared to the
insecticide treatment, phenothrin, the most widely used pediculicide in the
U.K.  In addition, according to the same study, the Hedrin-treated
subjects experienced significantly less irritation (2%) than those treated with
phenothrin (9%).
  An
additional clinical study published in the November 2007 issue of PLoS One, an
international, peer-reviewed journal published by the Public Library of Science
(PLoS), demonstrated Hedrin’s superior efficacy compared to a U.K. formulation
of malathion, a widely used insecticide treatment in both Europe and North
America.  In this randomized, controlled, assessor blinded, parallel
group clinical trial, 73 adult and child subjects with head lice infestations
were treated with Hedrin or malathion liquid.  Using intent-to-treat
analysis, Hedrin achieved a statistically significant cure rate of 70% compared
to 33% with malathion liquid.  Using the per-protocol analysis Hedrin
achieved a highly statistically significant cure rate of 77% compared to 35%
with malathion.  In Europe it has been widely documented that head
lice had become resistant to European formulations of malathion, and we believe
this resistance had influenced these study results.  To date, there
have been no reports of resistance to U.S. formulations of
malathion.  Additionally, Hedrin treated subjects experienced no
irritant reactions, and Hedrin showed clinical equivalence to malathion in its
ability to inhibit egg hatching.  Overall, investigators and study
subjects rated Hedrin as less odorous, easier to apply, and easier to wash out,
and 97% of Hedrin treated subjects stated they were significantly more inclined
to use the product again versus 31% of those using malathion.
  45
  Two new,
unpublished Hedrin studies were completed by T&R in 2008.  In the
first, Hedrin achieved a 100% kill rate in vitro, including in malathion
resistant head lice.  In the other, a clinical field study conducted
in Manisa province, a rural area of Western Turkey, Hedrin was administered to
36 adult and child subjects with confirmed head lice
infestations.  Using per protocol analysis, Hedrin achieved a 97% cure
rate.  Using intent-to-treat analysis, Hedrin achieved a 92% cure rate
since 2 subjects were eliminated due to protocol violations.  No
subjects reported any adverse events.
  In the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a medical device.  In January 2009, the U.S.
Food and Drug Administration (“FDA”) Center for Devices and Radiological Health
(“CDRH”) notified H Pharmaceuticals that Hedrin had been classified as a Class
III medical device.  A Class III designation means that a Premarket
Approval (“PMA”) Application will need to be obtained before Hedrin can be
marketed in the U.S.  The Company expects to be required to complete
at least one clinical trial as part of that PMA Application.
  To date,
we have incurred $1,084,000 of project costs for the development of
Hedrin.  During 2008, $14,000 of these costs were
incurred.  We do not expect to incur any future costs as the Hedrin JV
is now responsible for all costs associated with Hedrin.
  Topical
PTH (1-34).
  As a
result of our merger with Tarpan Therapeutics in 2005, we hold an exclusive,
worldwide license to develop and commercialize Topical PTH (1-34) for the
treatment of psoriasis.  Tarpan acquired the exclusive, worldwide
rights pursuant to a 2004 license agreement with IGI, Inc (“IGI”).
  In April
2006, we encountered a stability issue with the original topical PTH (1-34)
product which utilized IGI’s Novosome®
formulation technology.  In order to resolve that stability issue we
created a new topical gel version of PTH (1-34) and filed new patent
applications in the U.S. for this new proprietary formulation.
  In
September 2007, the U.S. FDA accepted our Investigational New Drug (“IND”)
application for this new gel formulation of Topical PTH (1-34), and in October
2007, we initiated and began dosing subjects in a Phase 2a clinical study of
Topical PTH (1-34) for the treatment of psoriasis.  This U.S.,
multi-center, randomized, double-blind, vehicle-controlled, parallel group study
was designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
in patients with mild to moderate psoriasis.  Approximately 54
subjects were enrolled and randomized to receive one of two dose levels of
Topical PTH (1-34), or the gel vehicle (placebo), for an 8 week treatment
period.  In this study the vehicle was the topical gel (“GEL”) without
the active ingredient, PTH (1-34).  In July 2008, we announced the
results of the Phase 2a study where Topical PTH (1-34) failed to demonstrate a
statistically significant or clinically meaningful improvement in
psoriasis.
  In July
2008 we announced the results of a Phase 2a clinical study where PTH (1-34)
failed to show statistically or clinically meaningful improvements in psoriasis
as compared to the vehicle (placebo).  The Company has conducted no
further clinical activities with PTH (1-34) and intends to return the project to
IGI under the terms of the license agreement.
  The gel
vehicle (placebo) used in the above-mentioned study is the Company’s proprietary
topical GEL and it unexpectedly showed evidence of psoriasis improving
properties.  At the end of week 2, 15% of study subjects treated with
the GEL achieved a clear or almost clear state.  At the end of week 4,
20% of subjects treated with the GEL had achieved a clear or almost clear state,
and at the end of week 8, 25% of subjects had achieved a clear or almost clear
state.  The Company owns worldwide rights to this topical GEL and is
exploring the possibility of developing it as an OTC product for mild
psoriasis.
  46
 
 To date,
we have incurred $6,504,000 of project costs related to our development of
Topical PTH (1-34).  These project costs have been incurred since
April 1, 2005, the date of the Tarpan Therapeutics
acquisition.  During 2008, $1,382,000 of these costs were
incurred.
  Altoderm
  In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altoderm in North
America. Altodermis a novel, proprietary
formulation of topical cromolyn sodium and is designed to enhance the absorption
of cromolyn sodium into the skin in order to treat pruritus (itch) associated
with dermatologic conditions including atopic dermatitis (eczema).
  Atopic
Dermatitis (Eczema)
  Atopic
dermatitis, also know as eczema, is a chronic disease of the skin that is
believed to be caused by a combination of hereditary and environmental factors.
The main symptoms of atopic dermatitis include dry, itchy skin leading to rashes
on the face, hands, feet, along with inside the elbows and behind the knees.
Scratching results in redness, swelling, cracking, “weeping” clear fluid, and
crusting or scaling.
  Product
Development
  In a
Phase 3, randomized, double-blind, placebo-controlled, parallel-group, clinical
study (conducted in Europe by T&R.) the compound was administered for 12
weeks to 114 subjects with moderately severe atopic dermatitis. The placebo
(vehicle) used in this study was the Altoderm product without the active
ingredient.  In the study results, published in the British Journal of
Dermatology in February 2005, Altoderm demonstrated a statistically significant
reduction (36%) in atopic dermatitis symptoms. During the study, subjects were
permitted to continue with their existing treatment, in most cases this
consisted of emollients and topical steroids. A positive secondary outcome of
the study was a 35% reduction in the use of topical steroids for the Altoderm
treated subjects.  Further analysis of the clinical data, performed by
Manhattan Pharmaceuticals, showed that Altoderm treated subjects also
experienced a 57% reduction in pruritus.
  On March
6, 2008, Manhattan Pharmaceuticals announced it had successfully completed a
pre-IND meeting with the FDA.  Based on a review of the submitted
package for Altoderm, including data from the two previously reported Phase 3
clinical studies, the FDA determined that following completion of certain
nonclinical studies, and the acceptance of an IND, Phase 2 clinical studies may
be initiated in the U.S.  The FDA also concurred that the proposed
indication of pruritus associated with dermatologic conditions including atopic
dermatitis can be pursued.
  In a
second, Phase 3, randomized, double-blind, vehicle-controlled clinical study
(also conducted in Europe by T&R) Altoderm was safe and well tolerated, and
showed a trend toward improvement in pruritus, but the efficacy results were
inconclusive.  Altoderm treated subjects and vehicle only treated
subjects experienced a similar improvement (each greater than 30%), and
therefore, the study did not achieve statistical significance.
  Subsequent to December 31, 2008 the
Company terminated the Altoderm Agreement for convenience.  The
Company has no further financial liability or commitment to T&R under the
Altoderm Agreement.
  To date
we have incurred $1,110,000 for the development of Altoderm.  During
2008, $98,000 of these costs were incurred.
  47
  Altolyn
  In April
2007 we entered into a license agreement with T&R, pursuant to which we
acquired exclusive rights to develop and commercialize Altolyn in North America.
Altolynis a novel,
proprietary oral tablet formulation of cromolyn sodium designed to treat
mastocytosis and possibly other gastrointestinal disorders such as food allergy
and symptoms of irritable bowel syndrome.
  On March
6, 2008, Manhattan Pharmaceuticals announced it had successfully completed a
pre-IND meeting with the FDA.  Based on a review of the submitted
package for Altolyn, the FDA concurred that the proposed indication of
mastocytosis can be pursued and that the 505(b)(2) NDA would be an acceptable
approach provided a clinical bridge is established between Altolyn and
Gastrocrom®, the oral liquid formulation of cromolyn sodium currently approved
in the U.S. to treat mastocytosis.  Section 505(b)(2) of the Food,
Drug and Cosmetic Act allows the FDA to approve a follow-on drug on the basis of
data in the scientific literature or data used by FDA in the approval of other
drugs.The FDA also affirmed that a single, Phase 3 study demonstrating the
efficacy of Altolyn over placebo, may be sufficient to support a product
approval in the U.S.  In addition, the FDA also concurs that no
additional nonclinical studies will be required to support an IND
application.  The Company is working with T&R and the current U.K.
manufacturer of Altolyn to develop a Good Manufacturing Process (“cGMP”)
compliant manufacturing process.
  Subsequent to December 31, 2008 the
Company terminated the Altolyn Agreement for convenience.  The Company
has no further financial liability or commitment to T&R under the Altolyn
Agreement.
  To date
we have incurred $831,000 for the development of Altolyn.  During
2008, $98,000 of these costs were incurred.
  Oleoyl-estrone
  On July
9, 2007, the Company announced the results of its two Phase 2a clinical trials
of oral OE.  The results of both randomized, double-blind, placebo
controlled studies, one in common obesity and the other in morbid obesity,
demonstrated no statistically or clinically meaningful placebo adjusted weight
loss for any of the treatment arms evaluated.  Based on these results,
the Company discontinued its Oleoyl-estrone programs in both common obesity and
morbid obesity.
  To date,
we have incurred $15,510,000 for the development of OE, none of which was
incurred during 2008.
  Propofol
Lingual Spray
  On July
9, 2007, the Company announced that it discontinued development of Propofol
Lingual Spray for pre-procedural sedation.
  To date,
we have incurred $2,984,000 for the development of Propofol Lingual Spray, none
of which was incurred during 2008.
  48
  Summary
of Contractual Commitments
  Employment
Agreement
  The Company has employment agreements
with two employees for the payment of aggregate annual base salary of $675,000
as well as performance based bonuses.  These agreements have a
remaining term of three months for one employee and six months for the second
employee and have a remaining obligation of $226,000 as of December 31,
2008.  As per the terms of the Secured 12% Notes sold in the fourth
quarter of 2008 and the first quarter of 2009 management, comprised of the two
employees under contract, has agreed to reduce their salaries effective as of
October 1, 2008.  If the Company sells less than $1.5 million of
Secured 12% Notes then their salaries shall be reduced by
one-third.  If the Company sells at least $1.5 million but less than
$2 million of Secured 12% Notes then their salaries shall be reduced by
20%.  The Company sold $1.725 million of Secured 12% Notes, management
therefore was paid 80% of their salaries during the fourth quarter of 2008. Also
as per the terms of the Secured 12% Notes the reduction in management’s salaries
shall be further reduced to 10% if the Company realizes gross proceeds of
$500,000 or more from other sources and shall be reduced to 0% if the Company
realizes gross proceeds of $1,000,000 or more from other sources.  In
February 2009 the Company received a $500,000 milestone payment from the Hedrin
JV; therefore management’s salaries are currently reduced by 10%.
  Leases
  Rent
expense for the years ended December 31, 2008 and 2007 was $139,636 and
$141,012, respectively.  Future minimum rental payments subsequent to
December 31, 2008 under an operating lease for the Company’s office facility are
as follows:
  Years Ending December 31,
                              
                              Commitment2009
                              
                              $
                              63,9002010
      and subsequent
                              
                              $
                              0
  Off-Balance
Sheet Arrangements
  We have
not entered into any off-balance sheet arrangements.
  Critical
Accounting Policies
  In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations.  The SEC indicated that
a “critical accounting policy” is one which is both important to the portrayal
of the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period.  Actual results could differ from those
estimates.
  49
  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, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
transition method. Statement 123(R) revised Statement 123 to eliminate the
option to use the intrinsic value method and required the Company to expense the
fair value of all employee options over the vesting period.  Under the
modified prospective transition method, the Company recognized compensation cost
for the years ended December 31, 2008 and 2007 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.
  New
Accounting Pronouncements
  In
February 2008, the FASB issued two Staff Positions on SFAS 157:
(1) FASB Staff Position No. FAS 157-1 (“FAS 157-1”),
“Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13,” and
(2) FASB Staff Position No. FAS 157-2 (“FAS 157-2”),
“Effective Date of FASB Statement No 157.” FAS 157-1 excludes FASB
Statement No. 13, Accounting for Leases, as well as other accounting
pronouncements that address fair value measurements on lease classification or
measurement under Statement 13, from SFAS 157’s scope. FAS157-2 partially
defers Statement 157’s effective date.  The adoption of FAS 157-1
and  FAS 157-2 did not have a material impact on its financial
statements.
  50
  In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 "Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active"
("FAS 157-3"), which is effective upon issuance for all financial statements
that have not been issued. FAS 157-3 clarifies the application of SFAS 157, in a
market that is not active.  FAS 157-3 does not have a material impact
on the Company’s financial position, financial performance or cash
flows.
  In March
2008, the FASB issued SFAS No. 161 "Disclosures About Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS
161 amends SFAS 133 by requiring expanded disclosures about an entity's
derivative instruments and hedging activities. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative instruments. SFAS 161 is effective for the Company as of January 1,
2009. The Company does not believe that SFAS 161 will have any impact on its
financial statements.
  In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). SFAS 163 requires recognition of a claim
liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. SFAS 163 carifies
how FAS 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim
liabilities. SFAS 163 also requires expanded disclosures about financial
guarantee insurance contracts. SFAS 163 is effective for years beginning after
December 15, 2008, and interim periods within those years, except for certain
disclosure requirements which are effective for the first period (including
interim periods) beginning after May 23, 2008.  The Company does not
believe that SFAS 163 will have any impact on its financial
statements.
  The FASB
and the Securities and Exchange Commission had issued certain other accounting
pronouncements as of December 31, 2008 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, 2008 and
2007 and for the period from August 6, 2001 (inception) to December 31, 2008 or
that will have a significant effect at the time they become
effective.
  In
December 2007, the FASB issued SFAS No. 141(R), a revised version of
SFAS No. 141,“Business Combinations”
(“SFAS 141R”).  The revision is intended to simplify existing guidance
and converge rulemaking under U.S. generally accepted accounting principles with
international accounting standards. SFAS 141R applies prospectively to business
combinations where the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date. The Company does not expect the
adoption of SFAS 141(R) to have a significant impact on our results of
operations or financial position.
  In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock" (“EITF 07-5”).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of EITF
07-5 on its financial position and results of operations.
  51
  ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  For a
list of the financial statements filed as part of this report, see the Index to
Financial Statements beginning at Page F-1 of this Annual Report.
  ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
  None.
  ITEM
9A(T).    CONTROLS AND PROCEDURES.
  Evaluation
of Disclosure Controls and Procedures
  As of
December 31, 2008, 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,
2008 that have materially affected, or are likely to materially affect, our
internal controls over financial reporting.
  Our
management, including our Chief Executive Officer and its Chief Financial
Officer, does not expect that disclosure controls or internal controls over
financial reporting will prevent all errors or all instances of fraud, even as
the same are improved to address any deficiencies. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
  Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls.
  Management’s
Report on Internal Control
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting.  As defined by the SEC,
internal control over financial reporting is a process designed by, or under the
supervision of our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the financial statements in accordance with U.S. generally
accepted accounting principles.
  52
  Our
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  In
connection with the preparation of our annual financial statements, management
has undertaken an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control – Integrated framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO
Framework.  Management’s assessment included an evaluation of the
design of our internal control over financial reporting and testing of the
operational effectiveness of those controls.
  Based on
this evaluation, management has concluded that our internal control over
financial reporting is effective as of December 31, 2008.
  This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide only
management’s report on internal control in this report.
  ITEM
9B.    OTHER INFORMATION
  On March
28, 2008 the employment agreement between the Company and Douglas Abel, the
Company’s president and chief executive officer, was extended by mutual
agreement for a period of one year, through April 1, 2009.
  53
  PART III
  ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
 
 Directors
 
 The name
and age of each of our six directors as of March 27, 2009, his position with us,
his principal occupation, and the period during which such person has served as
a director of our company are set forth below.  All directors hold
office until the next annual meeting of shareholders or until their respective
successors are elected and qualified.
 
 Name
                        
                        Age
                        
                        Position(s) Held
                        
                        Director
                          SinceDouglas
      Abel
                        
                        47
                        
                        President,
      Chief Executive Officer and Director
                        
                        2005Neil
      Herskowitz
                        
                        52
                        
                        Director
                        
                        2004Malcolm
      Hoenlein
                        
                        65
                        
                        Director
                        
                        2004Timothy
      McInerney
                        
                        48
                        
                        Director
                        
                        2004Richard
      I. Steinhart
                        
                        51
                        
                        Director
                        
                        2004Michael
      Weiser, M.D.
                        
                        46
                        
                        Director
                        
                        2003
 
 Douglas
Abel has been our President and Chief Executive Officer and a director of
our company since April 2005.  Mr. Abel was President and CEO of
Tarpan Therapeutics, Inc., a privately-held biopharmaceutical company, from
November 2004 until April 2005, when Tarpan was acquired by us. Prior to
becoming President and CEO of Tarpan, Mr. Abel served as Vice President of the
Dermatology Business Unit at Biogen Idec where he worked from August 2000 to
November 2004. While at Biogen, he led more than 100 employees to support the
launch of AMEVIVE®. Before that, Mr. Abel was at Allergan Pharmaceuticals from
December 1987 to August of 2000, with his most recent position being Director of
BOTOX® Marketing. Mr. Abel received his A.B. in chemistry from Lafayette College
and an M.B.A. from Temple University.
 
 Neil
Herskowitz was appointed to our Board of Directors in July 2004. He has
served as the Managing Member of ReGen Partners LLC, an investment fund located
in New York, and as the President of its affiliate, Riverside Contracting LLC
since June 1998. Mr. Herskowitz currently serves as a director of Innovive
Pharmaceuticals (OTCBB: IVPH) a publicly traded pharmaceutical development
company. He also serves on the board of directors of Starting Point Services for
Children, a not-for-profit corporation, and of Vacation Village, a 220-unit
development in Sullivan County, New York. Mr. Herskowitz received a B.B.A. in
Finance from Bernard M. Baruch College in 1978.
 
 Malcolm
Hoenlein was appointed to our Board of Directors in July 2004. Since
January 2001, he is also  a director of Keryx Biopharmaceuticals, Inc.
(Nasdaq: KERX). Mr. Hoenlein currently serves as the Executive Vice Chairman of
the Conference of Presidents of Major American Jewish Organizations, a position
he has held since 1986. He also serves as a director of Bank Leumi. Mr. Hoenlein
received his B.A. from Temple University and his M.A. from the University of
Pennsylvania.
  Timothy
McInerney has been a director of our company since July 2004.  Mr.
McInerney serves as a partner at Riverbank Capital Securities, Inc., a position
he has held since June 2007.  Mr. McInerney currently serves on the
board of directors of ZIOPHARM Oncology Inc. (NASDAQ: ZIOP).  From 1992 to
March 2007, Mr. McInerney was a Managing Director of Paramount BioCapital, Inc.
where he oversaw the overall distribution of Paramount’s private equity
product.  Prior to 1992, Mr. McInerney was a research analyst focusing on
the biotechnology industry at Ladenburg, Thalman & Co.  Prior to that,
Mr. McInerney held equity sales positions at Bear, Stearns & Co. and
Shearson Lehman Brothers, Inc.  Mr. McInerney also worked in sales and
marketing for Bristol-Myers Squibb.  He received his B.S. in pharmacy from
St. John’s University at New York.  He also completed a post-graduate
residency at the New York University Medical Center in drug information
systems.
  54
  Richard I.
Steinhart has been a director of our company since July 2004. Since April
2006, Mr. Steinhart has served as Chief Financial Officer of Electro-Optical
Sciences, Inc., a publicly-held medical device company. From May 1992 to April
2006, Mr. Steinhart was principal of Forest Street Capital, a boutique
investment banking, venture capital, and management consulting firm. Prior to
Forest Street Capital, from May 1991 to May 1992, he was the Vice President and
Chief Financial Officer of Emisphere Technologies, Inc., a publicly held
biopharmaceutical company that is working to develop and commercialize a
proprietary oral drug delivery system. Prior to joining Emisphere Technologies,
Mr. Steinhart spent seven years at CW Group, Inc., a venture capital firm
focused on medical and healthcare investments, where he was a General Partner
and Chief Financial Officer. Mr. Steinhart has previously served as a director
of a number of privately-held companies, including ARRIS Pharmaceuticals, Inc.,
a biotechnology company involved with rational drug design; Membrex, Inc., a
laboratory equipment manufacturing company; and Photest, Inc., a diagnostics
company. He began his career working as a certified public accountant and
continues to be a New York State Certified Public Accountant. Mr. Steinhart
holds a Bachelors of Business Administration and Masters of Business
Administration from Pace University.
 
 Michael Weiser,
M.D., Ph.D., has served as a director of our company since February
2003.  Dr. Weiser currently serves as founder and co-chairman of Actin
Biomed, a position he has held since December 2006.  Previously, he served
as Director of Research of Paramount BioSciences, Inc.  Dr. Weiser
completed his Ph.D. in Molecular Neurobiology at Cornell University Medical
College and received his M.D. from New York University School of Medicine, where
he also completed a Postdoctoral Fellowship in the Department of Physiology and
Neuroscience.  Dr. Weiser currently serves on the boards of directors of
Hana Biosciences, Inc. (NASDAQ: HNAB), Chelsea Therapeutics International Ltd.
(NASDAQ: CHTP), Emisphere Technologies Inc. (NASDAQ: EMIS), ZIOPHARM Oncology
Inc. (NASDAQ: ZIOP), and VioQuest Pharmaceuticals Inc. (OTCBB: VQPH), as well as
several other privately held biotechnology companies.
  There are
no family relationships among any of our executive officers, directors and key
employees.
  Independence
of the Board of Directors
  Our
common stock has not been listed on a national securities exchange since we
voluntarily de-listed our shares from the American Stock Exchange, or AMEX,
effective March 26, 2008 and therefore, we are not subject to any corporate
governance requirements regarding independence of board or committee
members.  However, we have chosen the definition of independence
contained in the AMEX rules  as a benchmark to evaluate the
independence of its directors.  Under the AMEX listing standards, an
"independent director" of a company means a person who is not an officer or
employee of the company or its subsidiaries and who the board of directors has
affirmatively determined does not have a relationship that would interfere with
the exercise of independent judgment in carrying out the responsibilities of a
director.  After review of all relevant transactions or relationships
between each director, or any of his family members, and our company, our senior
management and our independent registered public accounting firm, the Board has
determined that all of our directors are independent directors within the
meaning of the applicable AMEX listing standard, except for Mr. Abel, our
President and Chief Executive Officer.
  55
  Board
Committees
  The Board
of Directors has three standing committees: an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee. The following
table provides membership for each of the Board committees:
  Name of Committee
                    
                    MembershipAudit
                    
                    Messrs.
      Herskowitz, Hoenlein and Steinhart (Chair)Compensation
                    
                    Messrs.
      Herskowitz, Hoenlein, Steinhart and Weiser (Chair)Nominating
      and Governance
                    
                    Messrs.
      Herskowitz, Hoenlein and Steinhart
(Chair)
 
 Audit
Committee
  The Audit
Committee oversees our accounting and financial reporting process. For these
purposes, the Audit Committee performs several functions. For example, the
Committee evaluates and assesses the qualifications of the independent
registered public accounting firm; determines the engagement of the independent
registered public accounting firm; determines whether to retain or terminate the
existing independent registered public accounting firm; reviews and approves the
retention of the independent registered public accounting firm to perform any
non-audit services; reviews the financial statements to be included in our
Annual Report on Form 10-K; and discusses with management and the independent
registered public accounting firm the results of the annual audit and the
results of our quarterly financial statements. The Board of Directors adopted a
written Audit Committee Charter, a copy of which can be found on our company
website at www.manhattanpharma.com
..
  Our
Board of Directors has reviewed the definition of independence for Audit
Committee members and has determined that each member of our Audit Committee is
independent (as independence for audit committee members is currently defined
under applicable SEC rules and the relevant AMEX listing
standards.  The Board has further determined that Mr. Steinhart
qualifies as an “audit committee financial expert,” as defined by applicable
rules of the SEC.
 
 Compensation
Committee
  The
Compensation Committee of the Board of Directors oversees our compensation
policies, plans and programs. The Compensation Committee reviews and approves
corporate performance goals and objectives relevant to the compensation of our
executive officers and other senior management; reviews and recommends to the
Board the compensation and other terms of employment of our Chief Executive
Officer and our other executive officers; administers our equity incentive and
stock option plans; and makes recommendations to the Board concerning the
issuance of awards pursuant to those plans. All current members of the
Compensation Committee, except for Dr. Weiser who serves as Chair of the
Compensation Committee, are independent (as independence is currently defined
under applicable AMEX listing standards).  The Board of Directors has
adopted a written charter of the Compensation Committee, a copy of which can be
found on our company website at www.manhattanpharma.com.
 
 Nominating and
Governance Committee
  The
Nominating and Governance Committee considers and recommends to the Board
persons to be nominated for election by the stockholders as directors. In
addition to nominees recommended by directors, the Nominating and Governance
Committee will consider nominees recommended by stockholders if submitted in
writing to our Secretary at the address of Company’s principal offices. The
Board believes that any candidate for director, whether recommended by
stockholders or by the Board, should be considered on the basis of all factors
relevant to the needs of our company and the credentials of the candidate at the
time the candidate is proposed. Such factors include relevant business and
industry experience and demonstrated character and judgment. All current members
of the Nominating and Corporate Governance Committee are independent (as
independence is currently defined under applicable AMEX listing standards). The
Board of Directors adopted a written charter of the Nominating and Governance
Committee, a copy of which can be found on our company website at www.manhattanpharma.com.
  56
 
 Communication
with the Board of Directors
 
 Although
we have not adopted a formal process for stockholder communications with our
Board of Directors, we believe stockholders should have the ability to
communicate directly with the Board so that their views can be heard by the
Board or individual directors, as applicable, and that appropriate and timely
responses are provided to stockholders. All communications regarding general
matters should be directed to our Secretary at the address below and should
prominently indicate on the outside of the envelope that it is intended for the
complete Board of Directors or for any particular director(s). If no designation
is made, the communication will be forwarded to the entire board. Stockholder
communications to the Board should be sent to:   Corporate
Secretary,  Attention: Board of Directors (or name(s) of particular
directors), Manhattan Pharmaceuticals, Inc., 48 Wall Street, New York, NY
10005.
 
 Code
of Ethics
 
 We have
adopted a Code of Business Conduct and Ethics that applies to all officers,
directors and employees of our company. A copy of our Code of Business Conduct
and Ethics is available on our company’s website at www.manhattanpharma.com.
If we make any substantive amendments to the Code of Business Conduct and Ethics
or grant any waiver from a provision of the code to an executive officer or
director, we will promptly disclose the nature of the amendment or waiver by
filing with the SEC a current report on Form 8-K.
 
 Executive
Officers
 
 Set forth
below are the names, ages and titles of all of our executive officers as of
February 13, 2009.  All directors hold office until the next annual
meeting of stockholders or until their respective successors are elected and
qualified.
  Name
                      
                      Age
                      
                      PositionDouglas
      Abel
                      
                      47
                      
                      President
      & Chief Executive Officer and DirectorMichael
      G. McGuinness
                      
                      55
                      
                      Chief
      Operating and Financial Officer &
Secretary
  The
biographies of our executive officers are set forth below.
 
 Douglas
Abel has been President and Chief Executive Officer and a director of our
company since April 2005. His complete biography is set forth above under the
caption “Management - Directors.”
 
 Michael G.
McGuinness has been our Chief Financial Officer and Secretary since July
2006. Mr. McGuinness was appointed Chief Operating Officer on April 1,
2008.  Prior to joining Manhattan, Mr. McGuinness served as chief
financial officer of Vyteris Holdings (Nevada), Inc. (OTCBB: VYHN), a
product-based drug delivery company, from September 2001 to April 2006, and from
1998 to 2001 he was chief financial officer of EpiGenesis Pharmaceuticals, a
privately-held biotechnology company. Mr. McGuinness received a BBA in public
accounting from Hofstra University.
  None of
our executive officers is related to any other executive officer or to any of
our directors.
  57
 
  ITEM
11.  EXECUTIVE COMPENSATION
  Summary
Compensation of Executive Officers
  The
following table sets forth all of the compensation awarded to, earned by or paid
to (i) each individual serving as our principal executive officer during our
last completed fiscal year and (ii) the two most highly compensated executive
officers, other than the principal executive officer, that served as an
executive officer at the conclusion of the fiscal year ended December 31, 2008
and who received total compensation in excess of $100,000 during such fiscal
year (collectively, the “named executives”).
  NonqualifiedNon-Equity
                                    
                                    
                                    DeferredOption
                                    
                                    
                                    IncentivePlan
                                    
                                    
                                    Compensation
                                    
                                    
                                    All OtherName and PrincipalPosition
                                    
                                    Year
                                    
                                    Salary
                                    
                                    
                                    Bonus
                                    
                                    
                                    Awards
                                    
                                    
                                    Compensation
                                    
                                    
                                    Earnings
                                    
                                    
                                    Compensation
                                    
                                    
                                    TotalDouglas
      Abel
                                    
                                    2008
                                    
                                    $
                                    338,750
                                    
                                    
                                    $
                                    0
                                    (2)
                                    
                                    $
                                    153,244
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    34,000
                                    (3)
                                    
                                    $
                                    525,994Chief
      Executive Officer and President
                                    
                                    2007
                                    
                                    $
                                    345,000
                                    
                                    
                                    $
                                    90,000
                                    (2)
                                    
                                    $
                                    910,224
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    42,333
                                    (3)
                                    
                                    $
                                    1,387,557Michael
      McGuinness
                                    
                                    2008
                                    
                                    $
                                    263,750
                                    
                                    
                                    $
                                    0
                                    (2)
                                    
                                    $
                                    199,274
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    9,000
                                    (5)
                                    
                                    $
                                    472,024Chief
      Operating and Financial Officer, Secretary
                                    
                                    2007
                                    
                                    $
                                    238,333
                                    
                                    
                                    $
                                    50,000
                                    (2)
                                    
                                    $
                                    95,528
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    9,000
                                    (5)
                                    
                                    $
                                    392,861Alan
      G. Harris (1)
                                    
                                    2008
                                    
                                    $
                                    49,167
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    49,167Chief
      Medical Officer
                                    
                                    2007
                                    
                                    $
                                    288,333
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    292,530
                                    (4)
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    9,000
                                    (5)
                                    
                                    $
                                    589,863
  
  (1)
                  Dr.
      Harris’ employment with us ended effective December 31,
    2007.
  (2)
                  The
      Company accrued $180,000 for Mr. Abel and $100,00 for Mr. McGuinness as of
      December 31, 2007 for such bonuses but had not paid such bonuses as of
      that date.  Payment of such bonuses were contingent upon our
      raising additional financing and were to be paid as
      follows:  (i) 50% when we have consummated a financing
      transaction with gross proceeds to the Company of at least $1,000,000 (net
      of commissions) and (ii) the remaining 50% when we have consummated a
      financing transaction with gross proceeds (net of commissions) to us of at
      least $2.5  million (cumulative, including the $1 million
      financing transaction referred to above).  We reached the
      condition (i) with the initial closing of the Hedrin JV transaction and
      such 50% was paid.  We reached the condition (ii) with the
      closing of Secured 12% Notes transactions, however we did not pay the
      second 50% as we needed to retain the cash to fund
      operations.  Mr. Abel and Mr. McGuinness have agreed to forfeit
      the second 50% payment.
  (3)
                  For
      2008 represents a payment in the amount of $25,000, which amount
      represents the approximate amount of additional expense incurred by Mr.
      Abel relating to his commuting between Boston and New York, without a tax
      “gross up”, and a matching contributions by us pursuant to our company’s
      401(k) retirement plan of $9,000.  For 2007 represents a payment
      in the amount of $33,333, which represents the approximate amount of
      additional expense incurred by Mr. Abel relating to his commuting between
      Boston and New York and a tax “gross up” to cover the additional tax
      liability to Mr. Abel from such payment, and a matching contributions by
      us pursuant to our company’s 401(k) retirement plan of
    $9,000.
  (4)
                  Represents
      the amount of share-based costs recognized by us during 2008 and 2007
      under SFAS No. 123(R).   See Note 3 to our Financial
      Statements included in our annual reports for 2008 and 2007 on Form 10-K
      for the assumptions made in the
valuation.
  (5)
                  Represents
      matching contributions by us pursuant to our company’s 401(k) retirement
      plan.
  58
  Outstanding
Equity Awards at Fiscal Year-End
  The following table sets forth
information regarding the unexercised options held by each of our named
executive officers as of December 31, 2008.
  Option AwardsName
                                                
                                                Number of
                                                  Securities
                                                  Underlying
                                                  Unexercised
                                                  Options (#)
                                                  Exercisable
                                                
                                                
                                                Number of
                                                  Securities
                                                  Underlying
                                                  Unexercised
                                                  Options (#)
                                                  Unexercisable
                                                
                                                
                                                Option
                                                  Exercise Price
                                                  ($)
                                                
                                                Option
                                                  Expiration
                                                  DateDouglas
      Abel
                                                
                                                
                                                2,923,900
                                                
                                                
                                                
                                                0
                                                
                                                
                                                $
                                                1.50
                                                
                                                04/01/201583,333
                                                
                                                
                                                
                                                166,667
                                                
                                                
                                                $
                                                0.95
                                                
                                                04/25/2017433,333
                                                
                                                
                                                
                                                866,667
                                                
                                                
                                                $
                                                0.17
                                                
                                                03/25/2018Michael
      McGuinness
                                                
                                                
                                                146,666
                                                
                                                
                                                
                                                73,334
                                                
                                                
                                                $
                                                0.70
                                                
                                                07/10/201640,000
                                                
                                                
                                                
                                                20,000
                                                
                                                
                                                $
                                                1.35
                                                
                                                07/10/2016106,667
                                                
                                                
                                                
                                                213,333
                                                
                                                
                                                $
                                                0.95
                                                
                                                04/25/2017366,667
                                                
                                                
                                                
                                                733,333
                                                
                                                
                                                $
                                                0.17
                                                
                                                03/25/2018
  Employment
Agreements
  Douglas
Abel.We
entered into an employment agreement and an extension to that employment
agreement with Mr. Abel dated April 1, 2005, whereby Mr. Abel agreed to serve as
our President and Chief Executive Officer for a period of four years in exchange
for (i) an annual base salary of $300,000, subject to a retroactive increase in
the amount of $25,000 upon our completing a financing transaction of at least
$5,000,000, (ii) a signing bonus in the amount of $200,000, which was payable in
two installments during the first year of the agreement, (iii) a discretionary
performance-based bonus in an amount equal to up to 50% of Mr. Abel’s base
salary, and (iv) an option to purchase 2,923,900 shares of our common stock at
$1.50 per share with three-year annual vesting, purchasable for a 10-year term.
In accordance with the terms of his employment agreement and as a result of our
private placement financing that we completed in August 2005, Mr. Abel’s salary
was increased to $325,000 retroactive to April 1, 2005.   On
November 19, 2008, at the first closing of our Secured 12% Notes private
placement, we entered an amendment to the employment agreement, which provide
for a reduction of up to one-third of the salary payable to Mr. Abel until we
shall have received at least $2,500,000 of gross proceeds from the sale of the
units or other sales of securities or from other revenue received by us in the
operation of our business or any combination of the foregoing.
 
 The
employment agreement contains customary provisions relating to confidentiality,
work-product assignment, non-competition and non-solicitation. In the event Mr.
Abel’s employment is terminated by us (other than for cause) during the term of
the agreement, including a termination upon a change of control (as defined in
the agreement), we are required to pay a severance payment ranging from between
6 and 12 month of base salary, depending upon the circumstances of such
termination.
 
 Michael G.
McGuinness.Mr. McGuinness’
employment with us is governed by an employment agreement dated July 7, 2006.
The agreement provides for an initial three-year term of employment ending July
2009, subject to additional one-year renewal periods upon the mutual agreement
of the parties. Pursuant to the agreement, Mr. McGuinness is entitled to an
annual base salary of $205,000 and an annual bonus, payable in the discretion of
our Board, of up to 30 percent of his annual base salary. Mr. McGuinness is also
entitled to certain other fringe benefits that are made available to our senior
executives from time to time, including medical and dental insurance and
participation in our 401(k) plan.  On November 19, 2008, at the first
closing of our Secured 12% Notes private placement, we entered an amendment to
the employment agreement, which provide for a reduction of up to one-third of
the salary payable to Mr. McGuinness until we shall have received at least
$2,500,000 of gross proceeds from the sale of the units or other sales of
securities or from other revenue received by us in the operation of our business
or any combination of the foregoing.
  59
  In
addition, in accordance with the terms of the employment agreement, we issued to
Mr. McGuinness two 10-year stock options pursuant to our 2003 Stock Option Plan.
The first option relates to 220,000 shares of common stock and is exercisable at
a price of $0.70, the closing price of our common stock on the date of his
employment agreement. The second option relates to 60,000 shares and is
exercisable at a price of $1.35 per share. Both options vest in three annual
installments commencing July 10, 2007. To the extent Mr. McGuinness’ employment
with us is terminated prior to the end of such 10-year term, the options shall
remain exercisable for a period of 90 days.
 
 Mr.
McGuinness’ employment agreement further provides that in the event we terminate
his employment with us other than as a result of death, for “cause,”
“disability” or upon a “change of control” (as those terms are defined in the
agreement), then (1) Mr. McGuinness will continue receiving his base salary and
fringe benefits for a period of six months following such termination, provided,
that our obligation to pay such compensation shall be offset by any amounts
received by Mr. McGuinness from subsequent employment during such 6-month
period, and (2) the vesting of the stock options issued to Mr. McGuinness in
accordance with the employment agreement will accelerate and be deemed vested as
of the date of termination and will remain exercisable for a period of 90 days
following such termination. In the event we terminate Mr. McGuinness’ employment
during the term of the agreement upon a “change of control” and, if at the time
of such termination, the aggregate value of our outstanding common stock is less
than $80 million, then (i) Mr. McGuinness will continue receiving his base
salary and fringe benefits for a period of six months following such termination
and (ii) the portions of the stock options issued in accordance with the
employment agreement that have vested as of the date of such termination or that
are scheduled to vest in the calendar year of such termination will be deemed
vested and will remain exercisable for a period of 90 days following such
termination.
  Compensation
of Directors
  Non-employee directors are eligible to
participate in our Non-employee Director Compensation Arrangement, which was
adopted on January 30, 2007.  Under the arrangement, non-employee
directors are granted an option to purchase 50,000 shares of common stock upon
their initial election or appointment to the board.  Thereafter on an
annual basis, non-employee directors are entitled to an option to purchase
50,000 shares of common stock.  Each non-employee director is entitled
to a retainer of $20,000 per year, payable on a quarterly basis. In addition,
each such director shall be entitled to a fee of $1,000 for each meeting of the
Board attended in person, or $500 for attending a meeting by telephone or other
electronic means.  Each non-employee director serving on a committee
of the Board is entitled to a fee of $1,000 for each meeting of such committee
attended by such director in person, or $500 for attending a committee meeting
by telephone or other electronic means.  Each non-employee director is
also entitled to reimbursement for reasonable out-of-pocket expenses incurred in
connection with the performance of his service as a director, including without
limitation, travel related expenses incurred in connection with attendance at
Board or Board committee meetings.
  Due to our need to retain funds for the
Company’s operations payment of fees to our directors were suspended for all
periods subsequent to March 31, 2008.
  60
  The
following table shows the compensation earned by each of our non-employee
directors for the year ended December 31, 2008:
 
 Name
                              
                              Fees Earned
                                orPaid in
                                Cash
                              
                              
                              Option
                                Awards(1)
                              
                              
                              All Other
                                Compensation
                              
                              
                              TotalNeil
      Herskowitz
                              (2)
                              $
                              6,500
                              
                              
                              $
                              14,767
                              
                              
                              $
                              -
                              
                              
                              $
                              21,267Malcolm
      Hoenlein
                              (3)
                              $
                              6,000
                              
                              
                              $
                              14,767
                              
                              
                              $
                              -
                              
                              
                              $
                              20,767Timothy
      McInerney
                              (4)
                              $
                              5,500
                              
                              
                              $
                              14,767
                              
                              
                              $
                              -
                              
                              
                              $
                              20,267Richard
      Steinhart
                              (5)
                              $
                              6,500
                              
                              
                              $
                              14,767
                              
                              
                              $
                              -
                              
                              
                              $
                              21,267Michael
      Weiser
                              (6)
                              $
                              5,500
                              
                              
                              $
                              14,767
                              
                              
                              $
                              -
                              
                              
                              $
                              20,267
  (1)
                  Represents
      the amount of share-based costs recognized by us during 2008 under SFAS
      No. 123(R).   See Note 3 to our Financial Statements
      included in our annual report for 2008 on Form 10-K for the assumptions
      made in the valuation.
  (2)
                  As
      of March 27, 2009, Mr. Herskowitz had options to purchase an aggregate of
      216,010 shares of our common stock.
  (3)
                  As
      of March 27, 2009, Mr. Hoenlein had options to purchase an aggregate of
      216,010 shares of our common stock.
  (4)
                  As
      of March 27, 2009, Mr. McInerney had options to purchase an aggregate of
      250,000 shares of our common stock.
  (5)
                  As
      of March 27, 2009, Mr. Steinhart had options to purchase an aggregate of
      216,010 shares of our common stock.
  (6)
                  As
      of March 27, 2009, Mr. Weiser had options to purchase an aggregate of
      230,000 shares of our common stock.
  Compensation
Committee Interlocks and Insider Participation
 
 There were no interlocks or other
relationships with other entities among our executive officers and directors
that are required to be disclosed under applicable SEC regulations relating to
compensation committee interlocks and insider
participation.
  61
  ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENMENT
AND RELATED STOCKHOLDER MATTERS.
 
 The following table sets forth
information regarding ownership of shares of our common stock, as of February
13, 2009:
 
 o
                    by
      each person known by us to be the beneficial owner of 5% or more of our
      common stock;
 
 o
                    by
      each of our directors and executive officers;
  and
 
 o
                    by
      all of our directors and executive officers as a
  group.
 
 Except as otherwise indicated, each
person and each group shown in the table has sole voting and investment power
with respect to the shares of common stock indicated.  For purposes of
the table below, in accordance with Rule 13d-3 under the Securities Exchange Act
of 1934, as amended, a person is deemed to be the beneficial owner, of any
shares of our common stock over which he or she has or shares, directly or
indirectly, voting or investment power or of which he or she has the right to
acquire beneficial ownership at any time within 60 days. As used in this
prospectus, "voting power" is the power to vote or direct the voting of shares
and "investment power" includes the power to dispose or direct the disposition
of shares.  Common stock beneficially owned and percentage ownership
as of March 27, 2009 was based on 70,624,232 shares
outstanding.  Unless otherwise indicated, the address of each
beneficial owner is c/o Manhattan Pharmaceuticals, Inc., 48 Wall Street, New
York, NY 10005.
 
 Number of
                                    Shares
                                    Beneficially
                                    Owned (#)
                                  
                                  
                                  Percentage
                                    Beneficially
                                    Owned (%)Name
      of Beneficial Owners, Officers and DirectorsDouglas
      Abel (1)
                                  
                                  
                                  4,036,232
                                  
                                  
                                  
                                  5.41
                                  %Michael
      McGuinness (2)
                                  
                                  
                                  1,167,334
                                  
                                  
                                  
                                  1.63
                                  %Michael
      Weiser (3)
                                  
                                  
                                  2,595,985
                                  
                                  
                                  
                                  3.66
                                  %Timothy
      McInerney (4)
                                  
                                  
                                  1,024,191
                                  
                                  
                                  
                                  1.44
                                  %Neil
      Herskowitz (5)
                                  
                                  
                                  188,311
                                  
                                  
                                  
                                  0.27
                                  %Richard
      I. Steinhart (6)
                                  
                                  
                                  183,869
                                  
                                  
                                  
                                  0.26
                                  %Malcolm
      Hoenlien (7)
                                  
                                  
                                  380,462
                                  
                                  
                                  
                                  0.54
                                  %All
      directors and officers as a group (8)(7
      persons)
                                  
                                  
                                  9,576,384
                                  
                                  
                                  
                                  12.43
                                  %Lester
      Lipschutz (9)1650
      Arch Street, Philadelphia, PA 19103
                                  
                                  
                                  8,941,873
                                  
                                  
                                  
                                  12.66
                                  %Lindsay
      Rosenwald (10)787
      Seventh Avenue, New York, NY 10019
                                  
                                  
                                  4,023,259
                                  
                                  
                                  
                                  5.61
                                  %Nordic
      Biotech Venture Fund II K/S(11)Ostergrade
      5, 3rd floor, DK-1100Copenhagen
      K, Denmark
                                  
                                  
                                  66,666,666
                                  
                                  
                                  
                                  48.56
                                  %
 
 There
were no directors, officers or beneficial owners of more than 10% of any class
of equity securities of the Company or any other person subject to section 16 of
the Exchange Act that failed to file on a timely basis reports required by
section 16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years.
  62
  (1)
                    Includes 3,957,232 shares
      issuable upon exercise of vested portions of options and 24,000 shares
      issuable upon exercise of
warrants.
 (2)
                  Includes 1,133,334 shares
      issuable upon exercise of vested portions of options and 24,000 shares
      issuable upon exercise of
warrants.
 (3)
                  Includes 196,668 shares issuable
      upon the exercise of vested portions of options, and 151,754 shares
      issuable upon exercise of
warrants.
 (4)
                  Includes 216,668 shares issuable
      upon exercise of vested portions of options; and 139,863 shares issuable
      upon exercise of warrants.
 (5)
                  Includes 182,678 shares issuable
      upon exercise of vested portions of options, and 43,444 shares issuance
      upon exercise of warrants; 77,288 shares held by Riverside Contracting,
      LLC, a limited liability company of which Mr. Herskowitz is a member
      holding 50% ownership and 44,168 shares held by ReGen Capital II, LLC, a
      limited liability company of which Mr. Herskowitz is a member holding 50%
      ownership.
 (6)
                  Includes 182,678 shares issuable
      upon exercise of vested portions of
  options.
 (7)
                  Includes 182,678 shares issuable
      upon exercise of vested portions of
  options.
 (8)
                  Includes 5,861,936 shares
      issuable upon exercise of vested portions of options; 383,061 shares
      issuable upon the exercise of warrants; 77,288 shares held by Riverside
      Contracting, LLC, a limited liability company of which Mr. Herskowitz is a
      member holding 50% ownership and 44,168 shares held by ReGen Capital II,
      LLC, a limited liability company of which Mr. Herskowitz is a member
      holding 50% ownership.
 (9)
                  Includes
      8,941,873 shares of Common Stock held by separate trusts for the benefit
      of Dr. Rosenwald or his family with respect to which Mr. Lipschutz is
      either trustee or investment manager and in either case has investment and
      voting power. Mr. Lipschutz disclaims beneficial ownership of these
      shares, except to the extent of his pecuniary interest therein, if
      any.   The foregoing information is derived from a Schedule
      13G filed on behalf of the reporting person on August 1,
    2007
 (10)
                  Includes
      3,183,497 shares held directly by Dr. Rosenwald, 1,040,658 shares issuable
      upon the exercise of warrants, 80 shares held by the Dr. Rosenwald's wife,
      over which Dr. Rosenwald may be deemed to have sole voting and dispositive
      power, although he disclaims beneficial ownership of such shares except
      with regard to his pecuniary interest therein, if any, and 33 shares held
      by Dr. Rosenwald’s children, over which Dr. Rosenwald may be deemed to
      have sole voting and dispositive power, although he disclaims beneficial
      ownership of such shares except with regard to his pecuniary interest
      therein, if any.  The foregoing information is derived from a
      Schedule 13G/A filed on behalf of the reporting person on February 13,
      2008.
 (11)
                  Includes
      55,555,555 shares issuable upon exercise of Nordic's right to put all or a
      portion of Nordic Biotech Venture Fund II K/S' equity interest in H
      Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a Danish
      limited partnership, of which we and Nordic are partners
      and  11,111,111 shares issuable upon exercise of an outstanding
      warrant held by Nordic.  Florian Schonharting and Christian
      Hansen have voting and investment control over such
      securities.
  63
 
 ITEM
13.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  Oleoylestrone
Developments, SL
 
 Pursuant to the terms of a license
agreement dated February 15, 2002 between us and Oleoylestrone Developments, SL,
or OED, which was terminated in November 2007, we had an exclusive, worldwide
license to U.S. and foreign patents and patent applications relating to certain
technologies. Although we were not obligated to pay royalties to OED, the
license agreement required us to make certain performance-based milestone
payments.  As of February 13, 2009, OED held approximately 5.6% of our
outstanding common stock.  Additionally, Mr. Pons, a former member of
our board of directors, is the chief executive officer of OED.
 
 We also entered into a consulting
agreement with OED, which became effective in February 2002 and was terminated
along with the termination of the license agreement in November
2007.  Pursuant to our consulting agreement, we paid OED a fee of
$6,250 per month   The fees associated with the consulting
agreement were expensed as incurred.  Pursuant the consulting
agreement, OED agreed to appoint a member to serve as a member of our Scientific
Advisory Board and to render consulting and advisory services to
us.  Such services included 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.   For
the periods ended December 31, 2007 and 2006 and from inception, fees paid to
OED were $68,750, $325,000 and $931,250, respectively.
 
 Paramount
BioCapital, Inc.
 
 In February 2007, we engaged
Paramount BioCapital, Inc., as our placement agent in connection with the
private placement. In consideration for its services, we paid aggregate cash
commissions of approximately $600,000 and issued to Paramount a 5-year warrant
to purchase an aggregate of 509,275 shares at an exercise price of $1.00 per
share. At the time of the engagement, Timothy McInerney was an employee of
Paramount BioCapital, Inc. or one of its affiliates. The sole shareholder of
Paramount BioCapital, Inc. is Lindsay A. Rosenwald, M.D. Dr. Rosenwald
beneficially owns more than 5% of our common stock.  On March 30,
2007, we entered into a series of subscription agreements with various
institutional and other accredited investors for the issuance and sale in a
private placement of an aggregate of 10,185,502 shares of our common stock for
total gross proceeds of approximately $8.56 million. Of the total amount of
shares issued, 10,129,947 were sold at a per share price of $0.84, and an
additional 55,555 shares were sold to an entity affiliated with Neil Herskowitz,
a director of Manhattan, at a per share price of $0.90, the closing sale price
of our common stock on March 29, 2007. Pursuant to the subscription agreements,
we also issued to the investors 5-year warrants to purchase an aggregate of
3,564,897 shares of our common stock at an exercise price of $1.00 per share.
The warrants are exercisable during the period commencing September 30, 2007 and
ending March 30, 2012.
 
 Private
Placement
 
 As described above, on March 30,
2007, we issued and sold in a private placement transaction an aggregate of
10,185,502 shares of our common stock.  Of the total amount of shares
issued, 10,129,947 were sold at a per share price of $0.84, and an additional
55,555 shares were sold to an entity affiliated with Neil Herskowitz, a director
of Manhattan, at a per share price of $0.90, the closing sale price of our
common stock on March 29, 2007. In addition to the shares of common stock, we
also issued to the investors 5-year warrants to purchase an aggregate of
3,564,897 shares of our common stock at an exercise price of $1.00 per share.
The warrants are exercisable during the period commencing September 30, 2007 and
ending March 30, 2012.  Accordingly, we received net proceeds of $7.9
million from the sale of these shares and warrants.  We engaged
Paramount BioCapital, Inc., as our placement agent in connection with the
private placement, as discussed above.
  64
  The
Hedrin JV
 
 We and
Nordic Biotech Venture Fund II K/S, or Nordic, entered into a joint venture
agreement on January 31, 2008, which was amended on February 18, 2008 and on
June 9, 2008.  Pursuant to the joint venture agreement, in February
2008, (i) Nordic contributed cash in the amount of $2.5 million to H
Pharmaceuticals K/S (formerly Hedrin Pharmaceuticals K/S), a newly formed Danish
limited partnership, or the Hedrin JV, in exchange for 50% of the equity
interests in the Hedrin JV, and (ii) we contributed certain assets to North
American rights (under license) to our Hedrin product to the Hedrin JV in
exchange for $2.0 million in cash and 50% of the equity interests in the Hedrin
JV.  On or around June 30, 2008, in accordance with the terms of the
joint venture agreement, Nordic contributed an additional $1.25 million in cash
to the Hedrin JV, $1.0 million of which was distributed to us and equity in the
Hedrin JV was distributed to each of us and Nordic sufficient to maintain our
respective ownership interests at 50%.
 
 Pursuant
to the joint venture agreement, upon the classification by the U.S. Food and
Drug Administration, or the FDA, of Hedrin as a Class II or Class III medical
device, Nordic was required to contribute to the Hedrin JV an additional $1.25
million in cash, $0.5 million of which was to be distributed to us and equity in
the Hedrin JV was to be distributed to each of us and Nordic sufficient to
maintain our respective ownership interests at 50%.    The
FDA notified the Hedrin JV that Hedrin has been classified as a Class III
medical device and in February 2009, Nordic made the $1.25 million investment in
the Hedrin JV, the Hedrin JV made the $0.5 million milestone payment to us and
equity in the Hedrin JV was distributed to us and Nordic Nordic sufficient to
maintain our respective ownership interests at 50%.  In accordance
with the terms of the joint venture agreement, the Hedrin JV has received a
total of $1.5 million cash to be applied toward the development and
commercialization of Hedrin in North America.
 
 The
Hedrin JV will be responsible for the development and commercialization of
Hedrin for the North American market and all associated costs including clinical
trials, if required, regulatory costs, patent costs, and future milestone
payments owed to Thornton & Ross Ltd., or T&R, the licensor of
Hedrin.  The Hedrin JV will engage us to provide management services
to the Hedrin JV in exchange for an annualized management fee, which for 2008,
on an annualized basis, is $527,000.   The profits of the Hedrin
JV will be shared by us and Nordic in accordance with our respective equity
interests in the Hedrin JV, of which we each currently hold 50%, except that
Nordic is entitled to receive a minimum return each year from the Hedrin JV
equal to 6% on Hedrin sales, as adjusted for any change in Nordic’s equity
interest in the Hedrin JV, before any distribution is made to us.  If
the Hedrin JV realizes a profit in excess of the Nordic minimum return in any
year, then such excess shall first be distributed to us until our distribution
and the Nordic minimum return are in the same ratio as our respective equity
interests in the Hedrin JV and then the remainder, if any, is distributed to
Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5 million) plus 10% per year, less the cumulative distributions
received by Nordic from the Hedrin JV before any distribution is made to
us.  If the Hedrin JV’s assets in liquidation exceed the Nordic
liquidation preference amount, then any excess shall first be distributed to us
until our distribution and the Nordic liquidation preference amount are in the
same ratio as our respective equity interests in the Hedrin JV and then the
remainder, if any, is distributed to Nordic and us in the same ratio as our
respective equity interests.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.
  65
  Pursuant
to the terms of the joint venture agreement, Nordic has the right to nominate
one person for election or appointment to our board of directors.  The
Hedrin JV's board of directors consists of four members, two members appointed
by us and two members appointed by Nordic.  Nordic has the right to
appoint one of the directors as chairman of the board.  The chairman
has certain tie breaking powers.  In the event that the final payment
milestone described above is not achieved by March 30, 2009, then the Hedrin JV
's board of directors will increase to five members, two appointed by us and
three appointed by Nordic.
 
 Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.14, as adjusted from time to time for stock splits and other specified
events, multiplied by a conversion factor, which is (i) 1.00 for so long as
Nordic's distributions from the Hedrin JV are less than the amount of its
investment, (ii) 1.25 for so long as Nordic's distributions from the Hedrin JV
are less than two times the amount of its investment but greater than or equal
to the amount of its investment amount, (iii) 1.50 for so long as Nordic's
distributions from the Hedrin JV are less than three times the amount of its
investment but greater than or equal to two times the amount of its investment
amount, (iv) 2.00 for so long as Nordic's distributions from the Hedrin JV are
less than four times the amount of its investment but greater than or equal to
three times the amount of its investment amount and (v) 3.00 for so long as
Nordic’s distributions from Hedrin JV are greater than or equal to four times
the amount of its investment.  The put right expires upon the earlier
to occur of (i) February 25, 2018 and (ii) 30 days after the date when Nordic's
distributions from the Hedrin JV exceed five times the amount Nordic has
invested in the Hedrin JV (or 10 days after such date if we have provided Nordic
notice thereof).
 
 Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.14, as adjusted from time to time for stock splits and
other specified events.  The call right is only exercisable by us if
the price of our common stock has closed at or above $1.40 per share for 30
consecutive trading days.  During the first 30 consecutive trading
days in which our common stock closes at or above $1.40 per share, we may
exercise up to 25% of the call right.  During the second 30
consecutive trading days in which our common stock closes at or above $1.40 per
share, we may exercise up to 50% of the call right on a cumulative
basis.  During the third consecutive 30 trading days in which our
common stock closes at or above $1.40 per share, we may exercise up to 75% of
the call right on a cumulative basis.  During the fourth consecutive
30 days in which our common stock closes at or above $1.40 per share, we may
exercise up to 100% of the call right on a cumulative basis.  Nordic
may refuse the call, either by paying $1.5 million multiplied by the percentage
of Nordic's investment being called or forfeiting an equivalent portion of the
put right, calculated on a pro rata basis for the percentage of the Nordic
equity interest called by us.   The call right expires on
February 25, 2013.  For purposes of Nordic’s right to put, and our
right to call, all or a portion of Nordic’s equity interest in the Hedrin JV,
the amount of Nordic’s investment is currently $5,000,000.
 
 Issuance
of Secured Promissory Notes and Warrants
 
 On
September 11, 2008, we issued a secured promissory note in the principal amount
of $12,000 to each of Douglas Abel, our President and Chief Executive Officer
and a director of our company; Michael Weiser, a director of our company;
Timothy McInerny, a director of our company; Neil Herskowitz, a director of our
company, and Michael McGuiness, our Chief Financial Officer and Chief Operating
Officer.  Principal and interest on the notes are payable in cash on
March 10, 2009 unless paid earlier by us.  In connection with the
issuance of the notes, we issued to each noteholder a 5-year warrant to purchase
24,000 shares of our common stock at an exercise price of $0.20 per
share.  We granted to the noteholders a continuing security interest
in certain specific refunds, deposits and repayments due to us and expected to
be repaid to us in the next several months. The secured 10% notes were repaid in
February 2009 along with interest thereon.
  66
  We believe that all of the transactions
set forth above were made on terms no less favorable to us than could have been
obtained from unaffiliated third parties.  All such transactions have
been reviewed by the audit committee of our Board of Directors and approved by
them.  All future transactions between us and our officers, directors
and principal shareholders and their affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by our audit committee or another independent committee of our Board of
Directors.
  67
  ITEM
14.  PRINCIPAL ACCOUNTANTING FEES AND SERVICES.
  Fees
Billed to the Company by Its Independent Auditors
  The
following is a summary of the fees billed to us by J.H. Cohn LLP, our
independent registered public accounting firm for professional services rendered
for fiscal years ended December 31, 2008 and 2007:
  J.H. Cohn LLPFee Category
                                    
                                    Fiscal 2008 Fees
                                    
                                    
                                    Fiscal 2007 FeesAudit
      Fees
                                    
                                    $
                                    149,818
                                    
                                    
                                    $
                                    103,940Audit-Related
      Fees (1)
                                    
                                    
                                    29,403
                                    
                                    
                                    
                                    11,520Tax
      Fees (2)
                                    
                                    
                                    12,500
                                    
                                    
                                    
                                    18,708All
      Other Fees (3)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
      Fees
                                    
                                    $
                                    191,721
                                    
                                    
                                    $
                                    134,168
  
  (1)
                  Audit-Related
      Fees consist principally of assurance and related services that are
      reasonably related to the performance of the audit or review of the
      Company’s financial statements but not reported under the caption “Audit
      Fees.”  These fees include review of registration
      statements.
  (2)
                  Tax
      Fees consist of fees for tax compliance, tax advice and tax
      planning.
  (3)
                  All
      Other Fees consist of aggregate fees billed for products and services
      provided by the independent registered public accounting firm, other than
      those disclosed above.
  Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm
  At
present, our audit committee approves each engagement for audit or non-audit
services before we engage our independent registered public accounting firm to
provide those services.  Our audit committee has not established any
pre-approval policies or procedures that would allow our management to engage
our independent registered public accounting firm to provide any specified
services with only an obligation to notify the audit committee of the engagement
for those services. None of the services provided by our independent registered
public accounting firm for fiscal 2008 was obtained in reliance on the waiver of
the pre-approval requirement afforded in SEC regulations.
  68
  ITEM
15.  EXHIBITS LIST
  The
following documents are included or incorporated by reference in this
report.
  Exhibit No.
                    
                    Description2.1
                    
                    Agreement
      and Plan of Merger among the Company, Manhattan Pharmaceuticals
      Acquisition Corp. and Manhattan Research Development, Inc. (formerly
      Manhattan Pharmaceuticals, Inc.) dated December 17, 2002 (incorporated by
      reference to Exhibit 2.1 from Form 8-K filed March 5,
    2003).2.2
                    
                    Agreement
      and Plan of Merger among the Registrant, Tarpan Therapeutics, Inc. and
      Tarpan Acquisition Corp., dated April 1, 2005 (incorporated by reference
      to Exhibit 2.1 of the Registrant’s Form 8-K/A filed June 15,
      2005).3.1
                    
                    Certificate
      of incorporation, as amended through September 25, 2003 (incorporated by
      reference to Exhibit 3.1 to the Registrant’s Form 10-QSB for the quarter
      ended September 30, 2003).3.2
                    
                    Bylaws,
      as amended to date (incorporated by reference from Registrant’s
      registration statement on Form SB-2, as amended (File
      No.33-98478)).4.1
                    
                    Specimen
      common stock certificate (incorporated by reference from Registrant’s
      registration statement on Form SB-2, as amended (File
      No.33-98478)).4.2
                    
                    Form
      of warrant issued by Manhattan Research Development, Inc., which
      automatically converted into warrants to purchase shares of the
      Registrant’s common stock upon the merger transaction with such company
      (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB
      for the quarter ended March 31, 2003).4.3
                    
                    Form
      of warrant issued to placement agents in connection with the Registrant’s
      November 2003 private placement of Series A Convertible Preferred Stock
      and the Registrant’s January 2004 private placement (incorporated by
      reference to Exhibit 4.18 to the Registrant’s Registration Statement on
      Form SB-2 filed January 13, 2004 (File No.
333-111897)).4.4
                    
                    Form
      of warrant issued to investors in the Registrant’s August 2005 private
      placement (incorporated by reference to Exhibit 4.1 of the Registrant’s
      Current Report on Form 8-K filed September 1, 2005).4.5
                    
                    Form
      of warrant issued to placement agents in the Registrant’s August 2005
      private placement (incorporated by reference to Exhibit 4.2 of the
      Registrant’s Form 8-K filed September 1, 2005).4.6
                    
                    Warrant,
      dated April 30, 2008, issued to Nordic Biotech Venture Fund II K/S
      (incorporated by reference to Exhibit 4.6 of the Registrant’s Registration
      Statement on Form S-1 filed on May 1, 2008 (File No.
      333-150580)).4.7
                    
                    Form
      of Warrant issued to Noteholders on September 11, 2008 (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed on
      September 15, 2008)4.8
                    
                    Form
      of Warrant issued to Noteholders on November 19, 2008 (incorporated by
      reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K
      filed on November 25, 2008)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).
  69
 
 10.2
                            
                            Form
      of Notice of Stock Option Grant issued to employees of the Registrant from
      April 12, 2000 to February 21, 2003 (incorporated by reference to Exhibit
      99.2 of the Registrant’s Registration Statement non Form S-8 filed March
      24, 1998 (File 333-48531)).10.3
                            
                            Schedule
      of Notices of Stock Option Grants, the form of which is attached hereto as
      Exhibit 4.2.10.4
                            
                            Form
      of Stock Option Agreement issued to employees of the Registrant from April
      12, 2000 to February 21, 2003 (incorporated by reference to Exhibit 99.3
      to the Registrant’s Registration Statement on Form S-8 filed March 24,
      1998 (File 333-48531)).10.5
                            
                            License
      Agreement dated on or about February 28, 2002 between Manhattan Research
      Development, Inc. (f/k/a Manhattan Pharmaceuticals, Inc.) and
      Oleoyl-Estrone Developments SL (incorporated by reference to Exhibit 10.6
      to the Registrant’s Amendment No. 2 to Form 10-QSB/A for the quarter ended
      March 31, 2003 filed on March 12, 2004).10.6
                            
                            License
      Agreement dated April 4, 2003 between the Registrant and NovaDel Pharma,
      Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s
      Amendment No. 1 to Form 10-QSB/A for the quarter ended June 30, 2003 filed
      on March 12, 2004).++10.7
                            
                            2003
      Stock Option Plan (incorporated by reference to Exhibit 4.1 to
      Registrant’s Registration Statement on Form S-8 filed February 17,
      2004).10.8
                            
                            Employment
      Agreement dated April 1, 2005, between the Registrant and Douglas Abel
      (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K/A
      filed June 15, 2005).10.9
                            
                            Sublicense
      Agreement dated April 14, 2004 between Tarpan Therapeutics, Inc., the
      Registrant’s wholly-owned subsidiary, and IGI, Inc. (incorporated by
      reference to Exhibit 10.109 to IGI Inc.’s Form 10-Q for the quarter ended
      March 31, 2004 (File No. 001-08568).10.10
                            
                            Form
      of subscription agreement between the Registrant and the investors in the
      Registrant’s August 2005 private placement (incorporated by reference as
      Exhibit 10.1 to the Registrant’s Form 8-K filed September 1,
      2005).10.11
                            
                            Separation
      Agreement between the Registrant and Alan G. Harris December 21, 2007
      (incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K
      filed March 31, 2008.)10.12
                            
                            Employment
      Agreement dated July 7, 2006 between the Registrant and Michael G.
      McGuinness (incorporated by reference to Exhibit 10.1 of the Registrant’s
      Form 8-K filed July 12, 2006.)10.13
                            
                            Summary
      terms of compensation plan for Registrant’s non-employee directors
      (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
      February 5, 2007).10.14
                            
                            Form
      of Stock Option Agreement issued under the Registrant’s 2003 Stock Option
      Plan (Incorporated by reference to Exhibit 10.15 to the Registrant's Form
      10-KSB filed April 2, 2078.)10.15
                            
                            Exclusive
      License Agreement for “Altoderm” between Thornton & Ross Ltd. and
      Manhattan Pharmaceuticals, Inc. dates April 3, 2007. (Incorporated by
      reference to Exhibit 10.3 of the registrant’s form 10-Q for the quarter
      ended June 30, 2007 filed on August 14, 2007.)10.16
                            
                            Exclusive
      License Agreement for “Altolyn” between Thornton &Ross Ltd. and
      Manhattan Pharmaceuticals, Inc. dated April 3,
      2007.  (Incorporated by reference to Exhibit 10.4 of the
      registrant’s form 10-Q for the quarter ended June 30, 2007 filed on August
      14,
2007.)
  70
 
 10.17
                      
                      Exclusive
      License Agreement for “Hedrin” between Thornton &Ross Ltd. , Kerris,
      S.A. and Manhattan Pharmaceuticals, Inc. dated June 26, 2007.
      (Incorporated by reference to Exhibit 10.5 of the registrant’s form 10-Q
      for the quarter ended June 30, 2007 filed on August 14,
    2007.)10.18
                      
                      Supply
      Agreement for “Hedrin” between Thornton & Ross Ltd. and Manhattan
      Pharmaceuticals, Inc. dated June 26, 2007. (Incorporated by reference to
      Exhibit 10.6 of the registrant’s form 10-Q for the quarter ended June 30,
      2007 filed on August 14, 2007.)10.19
                      
                      Joint
      Venture Agreement between Nordic Biotech Fund II K/S and Manhattan
      Pharmaceuticals, Inc. to develop and commercialize “Hedrin” dated January
      31, 2008.10.20
                      
                      Amendment
      No. 1, dated February 25, 2008, to the Joint Venture Agreement between
      Nordic Biotech Fund II K/S and Manhattan Pharmaceuticals, Inc. to develop
      and commercialize “Hedrin” dated January 31, 2008 (Incorporated by
      reference to Exhibit 10.20 to the Registrant's Form 10-K filed March 31,
      2008).10.21
                      
                      Omnibus
      Amendment to Joint Venture Agreement and Additional Agreements, dated June
      9, 2008, among Manhattan Pharmaceuticals, Inc., Hedrin Pharmaceuticals
      K/S, Hedrin Pharmaceuticals General Partner ApS and Nordic Biotech Venture
      Fund II K/S.10.22
                      
                      Assignment
      and Contribution Agreement between Hedrin Pharmaceuticals K/S and
      Manhattan Pharmaceuticals, Inc. dated February 25,
      2008.  (Incorporated by reference to Exhibit 10.21 to the
      Registrant's Form 10-K filed March 31, 2008.)10.23
                      
                      Registration
      Rights Agreement between Nordic Biotech Venture Fund II K/S and Manhattan
      Pharmaceuticals, Inc. dated February 25, 2008.  (Incorporated by
      reference to Exhibit 10.22 to the Registrant's Form 10-K filed March 31,
      2008.)10.24
                      
                      Letter
      Agreement, dated September 17, 2008, between Nordic Biotech Venture Fund
      II K/S and Manhattan Pharmaceuticals, Inc.10.25
                      
                      Amendment
      to Employment Agreement by and between Manhattan Pharmaceuticals, Inc. and
      Douglas Abel (Incorporated by reference to Exhibit 10.23 to the
      Registrant's Form 10-K filed March 31, 2008.)10.26
                      
                      Form
      of Secured Promissory Note, dated September 11, 2008 (Incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed on September 15, 2008)10.27
                      
                      Securities
      Purchase Agreement, dated November 19, 2008, by and among the Registrant
      and the investors listed on Exhibit A-1 and A-2
      thereto  (incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.28
                      
                      Registration
      Rights Agreement, dated November 19, 2008, by and among the Registrant,
      the Placement Agent and the investors listed on Exhibit A thereto
      (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
      Report on Form 8-K filed on November 25, 2008)10.29
                      
                      Security
      Agreement, dated November 19, 2008, by and among the Registrant and each
      person named on Exhibit A-1 and A-2 of the Securities Purchase
      Agreement  (incorporated by reference to Exhibit 10.3 to the
      Registrant’s Current Report on Form 8-K filed on November 25,
      2008)
 
  71
 
 10.30
                    
                    Default
      Agreement, dated November 19, 2008, by and among the Registrant and the
      persons and entities listed on Schedule A thereto  (incorporated
      by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
      8-K filed on November 25, 2008)10.31
                    
                    Form
      of 12% Senior Secured Promissory Note (incorporated by reference to
      Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on
      November 25, 2008)10.32
                    
                    Amendment
      No. 2 to the Employment Agreement between the Registrant and Douglas Abel,
      dated November 19, 2008  (incorporated by reference to Exhibit
      10.7 to the Registrant’s Current Report on Form 8-K filed on November 25,
      2008)10.33
                    
                    Amendment
      No. 1 to the Employment Agreement between the Registrant and Michael
      McGuinness, dated November 19, 2008  (incorporated by reference
      to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on
      November 25, 2008)10.34
                    
                    Form
      of Placement Agent Warrant (incorporated by reference to Exhibit 10.9 to
      the Registrant’s Current Report on Form 8-K filed on November 25,
      2008)23.1
                    
                    Consent
      of J.H. Cohn LLP31.1
                    
                    Certification
      of Principal Executive Officer31.2
                    
                    Certification
      of Principal Financial Officer32.1
                    
                    Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
  
 ++
                    Confidential treatment has been
      granted as to certain portions of this exhibit pursuant to Rule 24b-2 of
      the Securities Exchange Act of 1934, as
  amended.
  72
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act, of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 31, 2009.
  Manhattan
      Pharmaceuticals, Inc.By:
                          /s/ Douglas AbelDouglas AbelChief
      Executive Officer and
President
 
 In accordance with the Securities
Exchange Act, this report has been signed below by the following persons on
behalf of Manhattan Pharmaceuticals, Inc. and in the capacities and on the dates
indicated.
 
 Signature
                      
                      Title
                      
                      Date/s/ Douglas Abel
                      
                      Chief Executive Officer, President and
                      
                      March 31, 2009Douglas
      Abel
                      
                      Director (principal executive officer)/s/ Michael G. McGuinness
                      
                      Secretary and Chief Financial Officer
                      
                      March 31, 2009Michael
      G. McGuinness
                      
                      (principal accounting and financial officer)/s/ Neil Herskowitz
                      
                      Director
                      
                      March 31, 2009Neil
      Herskowitz/s/ Malcolm Hoenlein
                      
                      Director
                      
                      March 31, 2009Malcolm
      Hoenlein/s/ Timothy McInerney
                      
                      Director
                      
                      March 31, 2009Timothy
      McInerney/s/ Richard Steinhart
                      
                      Director
                      
                      March 31, 2009Richard
      Steinhart/s/ Michael Weiser
                      
                      Director
                      
                      March 31, 2009Michael
      Weiser




73




Index to Financial
Statements




PageReport
      of Independent Registered Public Accounting Firm
                
                F-2Balance
      Sheets as of December 31, 2008 and 2007
                
                F-3Statements
      of Operations for the Years Ended December 31, 2008 and 2007 and the
      cumulative period from August 6, 2001 (inception) to December 31,
      2008
                
                F-4Statement
      of Stockholders’ Equity (Deficiency) for the Years Ended December 31, 2008
      and 2007 and the cumulative period from August 6, 2001 (inception) to
      December 31, 2008
                
                F-5Statements
      of Cash Flows for the Years Ended December 31, 2008 and 2007 and the
      cumulative period from August 6, 2001 (inception) to December 31,
      2008
                
                F-7Notes
      to Financial Statements
                
                F-8


F-1


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board
of Directors and Stockholders


Manhattan
Pharmaceuticals, Inc.




We have
audited the accompanying balance sheets of Manhattan Pharmaceuticals, Inc. (a
development stage company) as of December 31, 2008 and 2007, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended, and for the period from August 6, 2001 (date of inception)
to December 31, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Manhattan Pharmaceuticals, Inc. as
of December 31, 2008 and 2007, and its results of operations and cash flows for
the years then ended and for the period from August 6, 2001 (date of inception)
to December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has incurred net losses and negative cash
flows from operating activities from its inception through December 31, 2008 and
has an accumulated deficit and negative working capital as of December 31,
2008.  These matters raise substantial doubt about the Company’s
ability to continue as a going concern.  Management’s plans regarding
these matters are also described in Note 2.  The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




/s/ J.H.
Cohn LLP




Roseland,
New Jersey


March 30,
2009





F-2




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Balance
Sheets





December
      31,
                
                
                December
      31,2008
                
                
                2007AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                106,023
                
                
                $
                649,686Restricted
      cash
                
                
                730,499
                
                
                
                -Prepaid
      expenses
                
                
                37,718
                
                
                
                215,852Total
      current assets
                
                
                874,240
                
                
                
                865,538Property
      and equipment, net
                
                
                9,072
                
                
                
                44,533Secured
      12% notes payable issue costs
                
                
                330,756
                
                
                
                -Other
      assets
                
                
                34,895
                
                
                
                70,506Total
      assets
                
                $
                1,248,963
                
                
                $
                980,577Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Secured
      10% notes payable
                
                $
                70,000
                
                
                $
                -Accounts
      payable
                
                
                542,296
                
                
                
                1,279,485Accrued
      expenses
                
                
                874,072
                
                
                
                592,177Total
      current liabilities
                
                
                1,486,368
                
                
                
                1,871,662Secured
      12% notes payable, net
                
                
                1,174,107
                
                
                
                -Interest
      payable on secured 12% notes payable
                
                
                15,237Exchange
      obligation
                
                
                2,949,176
                
                
                
                -Total
      liabilities
                
                
                5,624,888
                
                
                
                1,871,662Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no shares issued and
      outstanding at December 31, 2008 and 2007
                
                
                -
                
                
                
                -Common
      stock, $.001 par value. Authorized 150,000,000 shares; 70,624,232 shares
      issued and outstanding at December 31, 2008 and December 31,
      2007
                
                
                70,624
                
                
                
                70,624Additional
      paid-in capital
                
                
                54,821,379
                
                
                
                54,037,361Deficit
      accumulated during the development stage
                
                
                (59,267,928
                )
                
                
                (54,999,070
                )Total
      stockholders’ deficiency
                
                
                (4,375,925
                )
                
                
                (891,085
                )Total
      liabilities and stockholders' deficiency
                
                $
                1,248,963
                
                
                $
                980,577





See
accompanying notes to consolidated financial statements.


F-3





MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Statements
of Operations





Years ended December 31,
                      
                      
                      Cumulative
                        period from
                        August 6, 2001
                        (inception) to
                        December 31,2008
                      
                      
                      2007
                      
                      
                      2008Revenue
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Costs
      and expenses:Research
      and development
                      
                      
                      1,802,792
                      
                      
                      
                      8,535,687
                      
                      
                      
                      28,291,835General
      and administrative
                      
                      
                      2,609,910
                      
                      
                      
                      3,608,270
                      
                      
                      
                      16,462,273In-process
      research and development charge
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      11,887,807Impairment
      of intangible assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,248,230Loss
      on disposition of intangible assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,213,878Total
      operating expenses
                      
                      
                      4,412,702
                      
                      
                      
                      12,143,957
                      
                      
                      
                      59,104,023Operating
      loss
                      
                      
                      (4,412,702
                      )
                      
                      
                      (12,143,957
                      )
                      
                      
                      (59,104,023
                      )Other
      (income) expense:Equity
      in losses of Hedrin JV
                      
                      
                      250,000
                      
                      
                      
                      
                      
                      
                      
                      250,000Interest
      and other income
                      
                      
                      (458,634
                      )
                      
                      
                      (112,181
                      )
                      
                      
                      (1,280,531
                      )Interest
      expense
                      
                      
                      64,790
                      
                      
                      
                      476
                      
                      
                      
                      90,824Realized
      gain on sale of marketable equity securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (76,032
                      )Total
      other income
                      
                      
                      (143,844
                      )
                      
                      
                      (111,705
                      )
                      
                      
                      (1,015,739
                      )Net
      loss
                      
                      
                      (4,268,858
                      )
                      
                      
                      (12,032,252
                      )
                      
                      
                      (58,088,284
                      )Preferred
      stock dividends (including imputed amounts)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,179,644
                      )Net
      loss applicable to common shares
                      
                      $
                      (4,268,858
                      )
                      
                      $
                      (12,032,252
                      )
                      
                      $
                      (59,267,928
                      )Net
      loss per common share:Basic
      and diluted
                      
                      $
                      (0.06
                      )
                      
                      $
                      (0.18
                      )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                      
                      
                      70,624,232
                      
                      
                      
                      68,015,075





See
accompanying notes to consolidated financial statements.


F-4


MANHATTAN
PAHRMACEUTICALS, INC.


(A
Development Stage Company


Statement
of Stockholders' Equity (Deficiency)





Series A
                        convertible
                        preferred
                        stock
                        shares
                      
                      
                      Series A
                        convertible
                        preferred
                        stock
                        amount
                      
                      
                      Common
                        stock
                        shares
                      
                      
                      Common
                        stock
                        amount
                      
                      
                      Additional
                        paid-in
                        capital
                      
                      
                      Subscription
                        receivable
                      
                      
                      Deficit
                        accumulated
                        during
                        development
                        stage
                      
                      
                      Dividends
                        payablein
                        SeriesA
                        preferred
                        stock
                      
                      
                      Accumulated
                        other
                        comprehensive
                        income(loss)
                      
                      
                      Unearned
                        consulting
                        services
                      
                      
                      Total
                        stockholders’
                        equity
                        (deficiency)Stock
      issued at $0.0004 per share for subscription receivable
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      10,167,741
                      
                      
                      $
                      10,168
                      
                      
                      $
                      (6,168
                      )
                      
                      $
                      (4,000
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (56,796
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (56,796
                      )Balance
      at December 31, 2001
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,167,741
                      
                      
                      
                      10,168
                      
                      
                      
                      (6,168
                      )
                      
                      
                      (4,000
                      )
                      
                      
                      (56,796
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (56,796
                      )Proceeds
      from subscription receivable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,000Stock
      issued at $0.0004 per share for license rights
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,541,935
                      
                      
                      
                      2,542
                      
                      
                      
                      (1,542
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,000Stock
      options issued for consulting services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60,589
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (60,589
                      )
                      
                      
                      -Amortization
      of unearned consulting services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      22,721
                      
                      
                      
                      22,721Common
      stock issued at $0.63 per share, net of expenses
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,043,332
                      
                      
                      
                      3,043
                      
                      
                      
                      1,701,275
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,704,318Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      (1,037,320
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,037,320
                      )Balance
      at December 31, 2002
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,753,008
                      
                      
                      
                      15,753
                      
                      
                      
                      1,754,154
                      
                      
                      
                      -
                      
                      
                      
                      (1,094,116
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (37,868
                      )
                      
                      
                      637,923Common
      stock issued at $0.63 per share, net of expenses
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,321,806
                      
                      
                      
                      1,322
                      
                      
                      
                      742,369
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      743,691Effect
      of reverse acquisition
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,287,582
                      
                      
                      
                      6,287
                      
                      
                      
                      2,329,954
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,336,241Amortization
      of unearned consulting costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      37,868
                      
                      
                      
                      37,868Unrealized
      loss on short-term investments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (7,760
                      )
                      
                      
                      -
                      
                      
                      
                      (7,760
                      )Payment
      for fractional shares for stock combination
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (300
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (300
                      )Preferred
      stock issued at $10 per share, net of expenses
                      
                      
                      1,000,000
                      
                      
                      
                      1,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,045,176
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,046,176Imputed
      preferred stock dividend
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      418,182
                      
                      
                      
                      -
                      
                      
                      
                      (418,182
                      )
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,960,907
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,960,907
                      )Balance
      at December 31, 2003
                      
                      
                      1,000,000
                      
                      
                      
                      1,000
                      
                      
                      
                      23,362,396
                      
                      
                      
                      23,362
                      
                      
                      
                      14,289,535
                      
                      
                      
                      -
                      
                      
                      
                      (7,473,205
                      )
                      
                      
                      -
                      
                      
                      
                      (7,760
                      )
                      
                      
                      -
                      
                      
                      
                      6,832,932Exercise
      of stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      27,600
                      
                      
                      
                      27
                      
                      
                      
                      30,073
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      30,100Common
      stock issued at $1.10, net of expenses
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,368,952
                      
                      
                      
                      3,369
                      
                      
                      
                      3,358,349
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,361,718Preferred
      stock dividend accrued
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (585,799
                      )
                      
                      
                      585,799
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Preferred
      stock dividends paid by issuance of shares
                      
                      
                      24,901
                      
                      
                      
                      25
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      281,073
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (282,388
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,290
                      )Conversion
      of preferred stock to common stock at $1.10 per share
                      
                      
                      (170,528
                      )
                      
                      
                      (171
                      )
                      
                      
                      1,550,239
                      
                      
                      
                      1,551
                      
                      
                      
                      (1,380
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Warrants
      issued for consulting services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      125,558
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (120,968
                      )
                      
                      
                      4,590Amortization
      of unearned consulting costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      100,800
                      
                      
                      
                      100,800Unrealized
      gain on short-term investments and reversal of unrealized loss on
      short-term investments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      20,997
                      
                      
                      
                      -
                      
                      
                      
                      20,997Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,896,031
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,896,031
                      )Balance
      at December 31, 2004
                      
                      
                      854,373
                      
                      
                      
                      854
                      
                      
                      
                      28,309,187
                      
                      
                      
                      28,309
                      
                      
                      
                      18,083,208
                      
                      
                      
                      -
                      
                      
                      
                      (13,955,035
                      )
                      
                      
                      303,411
                      
                      
                      
                      13,237
                      
                      
                      
                      (20,168
                      )
                      
                      
                      4,453,816


F-5


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Statement
of Stockholders' Equity (Deficiency)





Series A
                      convertible
                      preferred
                      stockshares
                    
                    
                    Series A
                      convertible
                      preferred
                      stock
                      amount
                    
                    
                    Common
                      stockshares
                    
                    
                    Common
                      stock
                      amount
                    
                    
                    Additional
                      paid-in
                      capital
                    
                    
                    Subscription
                      receivable
                    
                    
                    Deficit
                      accumulated
                      during
                      development
                      stage
                    
                    
                    Dividends
                      payable in
                      Series A
                      preferred
                      stock
                    
                    
                    Accumulated
                      other
                      comprehensive
                      income (loss)
                    
                    
                    Unearned
                      consulting
                      services
                    
                    
                    Total
                      stockholders’
                      equity
                      (deficiency)Common
      stock issued at $1.11 and $1.15, net of expenses
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    11,917,680
                    
                    
                    $
                    11,918
                    
                    
                    $
                    12,238,291
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    12,250,209Common
      stock issued to vendor at $1.11 per share in satisfaction of accounts
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    675,675
                    
                    
                    
                    676
                    
                    
                    
                    749,324
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    750,000Exercise
      of stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    32,400
                    
                    
                    
                    33
                    
                    
                    
                    32,367
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    32,400Exercise
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    279,845
                    
                    
                    
                    279
                    
                    
                    
                    68,212
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    68,491Preferred
      stock dividend  accrued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (175,663
                    )
                    
                    
                    175,663
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Preferred
      stock dividends paid by issuance of shares
                    
                    
                    41,781
                    
                    
                    
                    42
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    477,736
                    
                    
                    
                    -
                    
                    
                    
                    —
                    
                    
                    
                    (479,074
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,296
                    )Conversion
      of preferred stock to common stock at $1.10 per share
                    
                    
                    (896,154
                    )
                    
                    
                    (896
                    )
                    
                    
                    8,146,858
                    
                    
                    
                    8,147
                    
                    
                    
                    (7,251
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    66,971
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,168
                    
                    
                    
                    87,139Reversal
      of unrealized gain on short-term investments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12,250
                    )
                    
                    
                    -
                    
                    
                    
                    (12,250
                    )Stock
      issued in connection with acquisition of Tarpan Therapeutics,
      Inc.
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,731,052
                    
                    
                    
                    10,731
                    
                    
                    
                    11,042,253
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,052,984Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (19,140,997
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (19,140,997
                    )Balance
      at December 31, 2005
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60,092,697
                    
                    
                    
                    60,093
                    
                    
                    
                    42,751,111
                    
                    
                    
                    -
                    
                    
                    
                    (33,271,695
                    )
                    
                    
                    -
                    
                    
                    
                    987
                    
                    
                    
                    -
                    
                    
                    
                    9,540,496Cashless
      exercise of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    27,341
                    
                    
                    
                    27
                    
                    
                    
                    (27
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    —Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,675,499
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,675,499Unrealized
      loss on short-term investments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (987
                    )
                    
                    
                    —
                    
                    
                    
                    (987
                    )Costs
      associated with private placement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (15,257
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (15,257
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (9,695,123
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (9,695,123
                    )Balance
      at December 31, 2006
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60,120,038
                    
                    
                    
                    60,120
                    
                    
                    
                    44,411,326
                    
                    
                    
                    -
                    
                    
                    
                    (42,966,818
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,504,628Common
      stock issued at $0.84 and $0.90 per shares, net of
expenses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,185,502
                    
                    
                    
                    10,186
                    
                    
                    
                    7,841,999
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,852,185Common
      stock issued to directors at $0.72 per share in satisfaction of accounts
      payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    27,776
                    
                    
                    
                    28
                    
                    
                    
                    19,972
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,000Common
      stock issued to in connection with in-licensing agreement at $0.90 per
      share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    125,000
                    
                    
                    
                    125
                    
                    
                    
                    112,375
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    112,500Common
      stock issued to in connection with in-licensing agreement at $0.80 per
      share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    150,000
                    
                    
                    
                    150
                    
                    
                    
                    119,850
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    120,000Exercise
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,327
                    
                    
                    
                    15
                    
                    
                    
                    7,219
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,234Cashless
      exercise of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,589
                    
                    
                    
                    -
                    
                    
                    
                    (6
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (6
                    )Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,440,956
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,440,956Warrants
      issued for consulting
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    83,670
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    83,670Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12,032,252
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12,032,252
                    )Balance
      at December 31, 2007
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    70,624,232
                    
                    
                    
                    70,624
                    
                    
                    
                    54,037,361
                    
                    
                    
                    -
                    
                    
                    
                    (54,999,070
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (891,085
                    )Sale
      of warrant
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    150,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    150,000Share-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    463,890
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    463,890Warrants
      issued with secured 12% notes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    170,128
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    170,128Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,268,858
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,268,858
                    )Balance
      at December 31, 2008
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    70,624,232
                    
                    
                    $
                    70,624
                    
                    
                    $
                    54,821,379
                    
                    
                    $
                    -
                    
                    
                    $
                    (59,267,928
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (4,375,925
                    )





See
accompanying notes to financial statements.


F-6


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Statements
of Cash Flows





Years Ended,
                  
                  
                  Cumulativeperiod from
                    August 6, 2001
                    (inception) to
                    December 31,2008
                  
                  
                  2007
                  
                  
                  2008Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (4,268,858
                  )
                  
                  $
                  (12,032,252
                  )
                  
                  $
                  (58,088,284
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                  
                  
                  250,000
                  
                  
                  
                  -
                  
                  
                  
                  250,000Share-based
      compensation
                  
                  
                  463,890
                  
                  
                  
                  1,440,956
                  
                  
                  
                  3,828,873Interest
      and amortization of OID and issue costs on Secured 12%
    Notes
                  
                  
                  38,574
                  
                  
                  
                  -
                  
                  
                  
                  38,574Shares
      issued in connection with in-licensing agreement
                  
                  
                  -
                  
                  
                  
                  232,500
                  
                  
                  
                  232,500Warrants
      issued to consultant
                  
                  
                  -
                  
                  
                  
                  83,670
                  
                  
                  
                  83,670Amortization
      of intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  145,162Gain
      on sale of marketable equity securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (76,032
                  )Depreciation
                  
                  
                  26,106
                  
                  
                  
                  48,345
                  
                  
                  
                  221,931Non
      cash portion of in-process research and development charge
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,721,623Loss
      on impairment and disposition of intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,462,108Other
                  
                  
                  18,327
                  
                  
                  
                  -
                  
                  
                  
                  23,917Changes
      in operating assets and liabilities, net of acquisitions:Increase
      in restricted cash
                  
                  
                  (730,499
                  )
                  
                  
                  -
                  
                  
                  
                  (730,499
                  )Decrease
      in prepaid expenses and other current assets
                  
                  
                  178,134
                  
                  
                  
                  48,734
                  
                  
                  
                  20,527Decrease
      (increase)  in other assets
                  
                  
                  35,611
                  
                  
                  
                  -
                  
                  
                  
                  (49,895
                  )Decrease
      in accounts payable
                  
                  
                  (737,189
                  )
                  
                  
                  (93,812
                  )
                  
                  
                  962,509Increase
      in accrued expenses
                  
                  
                  281,895
                  
                  
                  
                  42,148
                  
                  
                  
                  333,751Net
      cash used in operating activities
                  
                  
                  (4,444,009
                  )
                  
                  
                  (10,229,711
                  )
                  
                  
                  (38,619,565
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  (8,973
                  )
                  
                  
                  (9,134
                  )
                  
                  
                  (239,608
                  )Cash
      paid in connection with acquisitions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (26,031
                  )Net
      cash provided from the purchase and sale of short-term
      investments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  435,938Proceeds
      from sale of license
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200,001Net
      cash (used in) provided by investing activities
                  
                  
                  (8,973
                  )
                  
                  
                  (9,134
                  )
                  
                  
                  370,300Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                  
                  
                  2,699,176
                  
                  
                  
                  
                  
                  
                  
                  2,699,176Sale
      of warrant
                  
                  
                  150,000
                  
                  
                  
                  
                  
                  
                  
                  150,000Proceeds
      from sale of Secured 10% Notes
                  
                  
                  70,000
                  
                  
                  
                  
                  
                  
                  
                  70,000Proceeds
      from sale of Secured 12% Notes
                  
                  
                  990,143
                  
                  
                  
                  
                  
                  
                  
                  1,005,143Repayments
      of notes payable to stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (884,902
                  )Proceeds
      (costs) related to sale of common stock, net
                  
                  
                  -
                  
                  
                  
                  7,852,185
                  
                  
                  
                  25,896,262Proceeds
      from sale of preferred stock, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,046,176Proceeds
      from exercise of warrants and stock options
                  
                  
                  -
                  
                  
                  
                  7,228
                  
                  
                  
                  138,219Other,
      net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  235,214Net
      cash provided by (used in) financing activities
                  
                  
                  3,909,319
                  
                  
                  
                  7,859,413
                  
                  
                  
                  38,355,288Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (543,663
                  )
                  
                  
                  (2,379,432
                  )
                  
                  
                  106,023Cash
      and cash equivalents at beginning of period
                  
                  
                  649,686
                  
                  
                  
                  3,029,118
                  
                  
                  
                  -Cash
      and cash equivalents at end of period
                  
                  $
                  106,023
                  
                  
                  $
                  649,686
                  
                  
                  $
                  106,023Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  475
                  
                  
                  $
                  1,665
                  
                  
                  $
                  26,033Supplemental
      disclosure of noncash investing and financing activities:Investment
      in Hedrin JV
                  
                  $
                  250,000
                  
                  
                  $
                  -
                  
                  
                  $
                  250,000Warrants
      issued with Secured 12% Notes
                  
                  
                  170,128
                  
                  
                  
                  -
                  
                  
                  
                  170,128Common
      stock issued in satisfaction of accounts payable
                  
                  
                  -
                  
                  
                  
                  20,000
                  
                  
                  
                  770,000Imputed
      and accrued preferred stock dividend
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,179,644Conversion
      of preferred stock to common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,067Preferred
      stock dividends paid by issuance of shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  759,134Issuance
      of common stock for acquisitions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,389,226Issuance
      of common stock in connection with in-licensing agreement
                  
                  
                  -
                  
                  
                  
                  232,500
                  
                  
                  
                  232,500Marketable
      equity securities received in connection with sale of
    license
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  359,907Warrants
      issued to consultant
                  
                  
                  -
                  
                  
                  
                  83,670
                  
                  
                  
                  83,670Net
      liabilities assumed over assets acquired in business
      combination
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (675,416
                  )Cashless
      exercise of warrants
                  
                  
                  -
                  
                  
                  
                  6
                  
                  
                  
                  33





See
accompanying notes to financial statements.


F-7


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





(1)
            Merger
      and Nature of Operations





2003
Reverse Merger




On
February 21, 2003, the Company (formerly known as “Atlantic Technology Ventures,
Inc.”) completed a reverse acquisition of privately held Manhattan Research
Development, Inc. (“Manhattan Research”) (formerly Manhattan Pharmaceuticals,
Inc.), a Delaware corporation.  At the effective time of the merger,
the outstanding shares of common stock of Manhattan Research automatically
converted into  shares of the Company’s common stock representing 80
percent of the Company’s outstanding voting stock after giving effect to the
merger. Since the stockholders of Manhattan Research received the majority of
the voting shares of the Company, the merger was accounted for as a reverse
acquisition whereby Manhattan Research was the accounting acquirer (legal
acquiree) and the Company was the accounting acquiree (legal acquirer) under the
purchase method of accounting.  In connection with the merger, the
Company changed its name from “Atlantic Technology Ventures, Inc.” to “Manhattan
Pharmaceuticals, Inc.”  The results of the combined operations have
been included in the Company’s financial statements since February
2003.




As
described above, the Company resulted from the February 21, 2003 reverse merger
between Atlantic Technology Ventures, Inc. (“Atlantic”), which was incorporated
on May 18, 1993, and privately-held Manhattan Research Development, Inc.,
incorporated on August 6, 2001.  The Company was incorporated in the
State of Delaware.  In connection with the merger, the former
stockholders of Manhattan Research received a number of shares of Atlantic's
common stock so that following the merger they collectively owned 80 percent of
the outstanding shares.  Upon completion of the merger, Atlantic
changed its name to Manhattan Pharmaceuticals, Inc. and thereafter adopted the
business of Manhattan Research.




The
Company is a biopharmaceutical company focused on developing and commercializing
innovative pharmaceutical therapies for underserved patient
populations.  The Company acquires rights to these technologies by
licensing or otherwise acquiring an ownership interest, funding their research
and development and eventually either bringing the technologies to market or
out-licensing.  We currently have two product candidates in
development:  HedrinTM, a novel, non-insecticide treatment of
pediculitis (head lice) which is being developed by the Hedrin JV, see note 6,
and a topical product for the treatment of psoriasis.  During 2007,
the Company discontinued development of Oleoyl-estrone and Propofol Lingual
Spray.




Acquisition
of Tarpan Therapeutics, Inc.




In April
2005, the Company merged with Tarpan Therapeutics, Inc., a Delaware corporation
(“Tarpan”), and Tarpan Acquisition Corp., a Delaware corporation. The
acquisition of Tarpan has been accounted for by the Company under the purchase
method of accounting 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.  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.


F-8





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(2)
            Liquidity
      and Basis of Presentation




Liquidity




The
Company incurred a net loss of $4,268,858 and negative cash flows from operating
activities of $4,444,009 for the year ended December 31, 2008 and $12,032,252
and negative cash flows from operating activities of $10,229,711 for the year
ended December 31, 2007.  The net loss applicable to common shares
from date of inception, August 6, 2001, to December 31, 2008 amounts to
$59,267,928.




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




The
Company received approximately $1.8 million in February 2008 and approximately
$0.9 million in June 2008 from a joint venture agreement.  This joint
venture agreement is more fully described in Note 8.  The Company also
received $70,000 in Secured 10% Notes in September 2008 and $1.0 million from
the sale of Secured 12% Notes in November and December 2008. These notes are
more fully described in Notes 10 and 11.




Management
believes that the Company will continue to incur net losses through at least
December 31, 2009 and for the foreseeable future thereafter.  Based on
the resources of the Company available at December 31, 2008, the net proceeds of
$500,000 received in February 2009 from a joint venture agreement and net
proceeds of $360,000 received from the sale of additional Secured 12% Notes in
February 2009, management believes that the Company has sufficient capital to
fund its operations through 2009.  Management believes that the
Company will need additional equity or debt financing or will need to generate
positive cash flow from a joint venture agreement, see Note 6, or generate
revenues through licensing of its products or entering into strategic alliances
to be able to sustain its operations into 2010.  Furthermore, we will
need additional financing thereafter to complete development and
commercialization of our products.  There can be no assurances that we
can successfully complete development and commercialization of our
products.




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




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


F-9





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(3)
            Summary
      of Significant Accounting Policies




Basis
of Presentation




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




Use
of Estimates




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




Research
and Development




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




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




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




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.


F-10





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Computation
of Net Loss per Common Share




Basic net
loss per common share is calculated by dividing net loss applicable to common
shares by the weighted-average number of common shares outstanding for the
period.  Diluted net loss per common share is the same as basic net
loss per common share, since potentially dilutive securities from stock options,
stock warrants and convertible preferred stock would have an antidilutive effect
because the Company incurred a net loss during each period
presented.  The amounts of potentially dilutive securities excluded
from the calculation were 80,068,144 and 16,903,292 shares at December 31, 2008
and 2007, respectively.  These amounts do not include the shares
issuable upon the exercise of the put or call rights issued in connection with
the Hedrin JV (see Note 8) which were subject to anti-dilution rights upon the
issuance of warrants with the Secured 12% Notes (see Note 11); the 41,666,667
shares of common stock issuable upon exercise of the put or call rights and the
up to 13,888,889 additional shares which may become issuable upon exercise of a
conditionally issuable put or call rights.




Share-Based
Compensation




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




Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
transition method. Statement 123(R) revised Statement 123 to eliminate the
option to use the intrinsic value method and required the Company to expense the
fair value of all employee options over the vesting period.  Under the
modified prospective transition method, the Company recognized compensation cost
for the years ended December 31, 2008 and 2007 which includes a) period
compensation cost related to share-based payments granted prior to, but not yet
vested, as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123; and b) period
compensation cost related to share-based payments granted on or after January 1,
2006, based on the grant date fair value estimated in accordance with Statement
123(R). In accordance with the modified prospective method, the Company has not
restated prior period results.




The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.  For the years ended
December 31, 2008 and 2007, the Company recognized share-based employee
compensation cost of $462,311 and $1,447,560, respectively, in accordance with
Statement 123(R).  The Company did not capitalize any share-based
compensation cost.


F-11





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




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, 2008 and 2007 respectively, net of
amortization, the Company recognized an increase to general and administrative
and research and development expenses of $1,579 for the year ended December 31,
2008 and a reduction to general and administrative and research and development
expenses of $6,604 for the year ended December 31, 2007 The Company has
allocated share-based compensation costs to general and administrative and
research and development expenses as follows:


2008
                  
                  
                  2007General
      and administrative expense:Share-based
      employee compensation cost
                  
                  $
                  341,706
                  
                  
                  $
                  891,897Share-based
      consultant and non-employee cost
                  
                  
                  158
                  
                  
                  
                  10,550341,864
                  
                  
                  
                  902,447Research
      and development expenseShare-based
      employee compensation cost
                  
                  
                  120,605
                  
                  
                  
                  555,663Share-based
      consultant and non-employee cost
                  
                  
                  1,421
                  
                  
                  
                  (17,154
                  )122,026
                  
                  
                  
                  538,509Total
      share-based cost
                  
                  $
                  463,890
                  
                  
                  $
                  1,440,956




To
compute compensation expense in 2008 and 2007 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 Nos. 107 and 110.  The expected forfeiture rates
are based on the historical employee forfeiture experiences. To determine the
risk-free interest rate, the Company utilized the U.S. Treasury yield curve in
effect at the time of grant with a term consistent with the expected term of the
Company’s awards.  The Company has not declared a dividend on its
common stock since its inception and has no intentions of declaring a dividend
in the foreseeable future and therefore used a dividend yield of
zero.




The
following table shows the weighted average assumptions the Company used to
develop the fair value estimates for the determination of the compensation
charges in 2008 and 2007:




2008
                    
                    
                    2007Expected
      volatility
                    
                    
                    92%
                    
                    
                    
                    93%Dividend
      yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      term (in years)
                    
                    
                    5 - 10
                    
                    
                    
                    5 - 10Risk-free
      interest rate
                    
                    
                    2.81%
                    
                    
                    
                    3.6% - 4.9%Forfeiture
      rate
                    
                    
                    2%
                    
                    
                    
                    7%


F-12





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





Financial
Instruments




At
December 31, 2008 and 2007, the fair values of cash and cash equivalents and
accounts payable approximate their carrying values due to the short-term nature
of these instruments.  At December 31, 2008, the fair values of the
secured notes payable approximate their carrying values due to the recent
issuance of the notes.




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, 2008 or 2007.




Equity
in Joint Venture





The
Company accounts for its investment in joint venture (See Note 6) using the
equity method of accounting. Under the equity method, the Company records its
pro-rata share of joint venture income or losses and adjusts the basis of its
investment accordingly.




New
Accounting Pronouncements




In
February 2008, the FASB issued two Staff Positions on SFAS 157:
(1) FASB Staff Position No. FAS 157-1 (“FAS 157-1”),
“Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13,” and
(2) FASB Staff Position No. FAS 157-2 (“FAS 157-2”),
“Effective Date of FASB Statement No 157.” FAS 157-1 excludes
SFAS 13, “Accounting for Leases”, as well as other accounting
pronouncements that address fair value measurements on lease classification or
measurement under SFAS 13, from SFAS 157’s scope. FAS157-2 partially defers
SFAS 157’s effective date.  The adoption of FAS 157-1 and  FAS
157-2 did not have a material impact on its financial statements.




In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 "Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active"
("FAS 157-3"), which is effective upon issuance for all financial statements
that have not been issued. FAS 157-3 clarifies the application of SFAS 157, in a
market that is not active.  FAS 157-3 does not have a material impact
on the Company’s financial position, financial performance or cash
flows.


F-13





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




In March
2008, the FASB issued SFAS No. 161 "Disclosures About Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS
161 amends SFAS 133 by requiring expanded disclosures about an entity's
derivative instruments and hedging activities. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative instruments. SFAS 161 is effective for the Company as of January 1,
2009. The Company does not believe that SFAS 161 will have any impact on its
financial statements.




In May
2008 the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts” (“SFAS 163”). SFAS 163 requires recognition of a claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation. SFAS 163 clarifies how SFAS 60
applies to financial guarantee insurance contracts, including the recognition
and measurement to be used to account for premium revenue and claim liabilities.
SFAS 163 also requires expanded disclosures about financial guarantee insurance
contracts. SFAS 163 is effective for years beginning after December 15, 2008,
and interim periods within those years, except for certain disclosure
requirements which are effective for the first period (including interim
periods) beginning after May 23, 2008.  The Company does not believe
that SFAS 163 will have any impact on its financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), a revised version of
SFAS No. 141,“Business Combinations”
(“SFAS 141R”).  The revision is intended to simplify existing guidance
and converge rulemaking under U.S. generally accepted accounting principles with
international accounting standards. SFAS 141R applies prospectively to business
combinations where the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date. The Company does not expect the
adoption of SFAS 141(R) to have a significant impact on our results of
operations or financial position.




In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock" (“EITF 07-5”).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of EITF
07-5 on its financial position and results of operations.


F-14





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(4)
              Property
      and Equipment




Property
and equipment consists of the following at December 31:




2008
                    
                    
                    2007Property
      and equipment
                    
                    $
                    35,905
                    
                    
                    $
                    226,010Less
      accumulated depreciation
                    
                    
                    (26,833
                    )
                    
                    
                    (181,477
                    )Net
      property and equipment
                    
                    $
                    9,072
                    
                    
                    $
                    44,533




(5)
            Stockholders’
      Equity




As
described in Note 1 the Company completed a reverse acquisition of privately
held Manhattan Research Development, Inc. on February 21, 2003.  In
July 2003, the Board of Directors adopted a resolution authorizing an amendment
to the certificate of incorporation providing for a 1-for-5 combination of the
Company’s common stock.  The resolution approving the 1-for-5
combination was thereafter consented to in writing by holders of a majority of
the Company’s outstanding common stock and became effective in September
2003.  Accordingly, all share and per share information in these
financial statements has been restated to retroactively reflect the 1-for-5
combination and the effects of the Reverse Merger.




2001


During
2001, the Company issued 10,167,741 shares of its common stock to investors for
subscriptions receivable of $4,000 or $0.0004 per share. During 2002, the
Company received the $4,000 subscription receivable.




2002


During
2002, the Company issued 2,541,935 shares of its common stock to Oleoyl-estrone
Developments, S.L. (“OED”) in conjunction with a license agreement (the OED
License Agreement”), as more fully described in Note 8. We valued these shares
at their then estimated fair value of $1,000.




During
2002, the Company issued options to purchase 1,292,294 shares of its common
stock in conjunction with several consulting agreements. The fair value of these
options was $60,589.  The Company expensed $22,721 in 2002 and $37,868
in 2003.




During
2002 and 2003, the Company completed two private placements.  During
2002, the Company issued 3,043,332 shares of its common stock at $0.63 per share
and warrants to purchase 304,333 of its common stock in a private placement.
After deducting commissions and other expenses relating to the private
placement, the Company received net proceeds of $1,704,318.




2003


During
2003, the Company issued an additional 1,321,806 shares of its common stock at
$0.63 per share and warrants to purchase 132,181 shares of its common stock.
After deducting commissions and other expenses relating to the private
placement, the Company received net proceeds of $743,691. In connection with
these private placements, the Company issued to the placement agent warrants to
purchase 1,658,753 shares of its common stock.


F-15





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




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.




2004


During
2004, the Company issued 3,368,952 shares of its common stock at a price of
$1.10 per share in a private placement. After deducting commissions and other
expenses relating to the private placement, the Company received net proceeds of
$3,361,718. In connection with the common stock private placement and the
Convertible Preferred private placement, the Company issued to the placement
agents a warrant to purchase 1,235,589 shares of its common stock.




During
2004, the Company recorded a dividend on the Convertible Preferred of
$585,799.  24,901 shares of Convertible Preferred were issued in
payment of $282,388 of this in-kind dividend.  Also during 2004,
170,528 shares of Convertible Preferred were converted into 1,550,239 shares of
the Company’s common stock at $1.10 per share.




During
2004, the Company issued 27,600 shares of common stock upon the exercise of
stock options.




During
2004, the Company issued warrants to purchase 110,000 shares of its common stock
in conjunction with three consulting agreements. The fair value of these
warrants was $120,968.  The Company expensed $100,800 in 2004 and
$20,168 in 2005.




2005


In August
2005, the Company issued 11,917,680 shares of its common stock and warrants to
purchase 2,383,508 shares of its common stock in a private placement at $1.11
and $1.15 per share.  After deducting commissions and other expenses
relating to the private placement the Company received net proceeds of
$12,250,209.  Paramount BioCapital, Inc. (“Paramount”), an affiliate
of a significant stockholder of the Company, acted as placement agent and was
paid cash commissions and expenses of $967,968 of which $121,625 was paid to
certain selected dealers engaged by Paramount in the private
placement.  The Company also issued warrants to purchase 595,449
shares of common stock to Paramount and certain select dealers, of which
Paramount received warrants to purchase 517,184 common
shares.  Timothy McInerney and Dr. Michael Weiser, each a director of
the Company, were employees of Paramount BioCapital, Inc. at the time of the
transaction.




During
2005, the Company recorded a dividend on the Convertible Preferred of
$175,663.  41,781 shares of Convertible Preferred were issued in
payment of this $175,663 in-kind dividend and the unpaid portion of the 2004
in-kind dividend, $303,411.  Also during 2005, the remaining 896,154
shares of Convertible preferred were converted into 8,146,858 shares of the
Company’s common stock.


F-16


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
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.




2006


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




2007


On March
30, 2007, the Company entered into a series of subscription agreements with
various institutional and other accredited investors for the issuance and sale
in a private placement of an aggregate of 10,185,502 shares of its common stock
for total net proceeds of approximately $7.85 million, after deducting
commissions and other costs of the transaction. Of the total amount of shares
issued, 10,129,947 were sold at a per share price of $0.84, and an additional
55,555 shares were sold to an entity affiliated with a director of the Company,
at a per share price of $0.90, the closing sale price of the common stock on
March 29, 2007. Pursuant to the subscription agreements, the Company also issued
to the investors 5-year warrants to purchase an aggregate of 3,564,897 shares of
common stock at an exercise price of $1.00 per share. The warrants are
exercisable during the period commencing September 30, 2007 and ending March 30,
2012.  Gross and net proceeds from the private placement were
$8,559,155 and $7,852,185, respectively.




Pursuant
to these subscription agreements the Company filed a registration statement on
Form S-3 covering the resale of the shares issued in the private placement,
including the shares issuable upon exercise of the investor warrants and the
placement agent warrants, with the Securities and Exchange Commission on May 9,
2007, which was declared effective by the Securities and Exchange Commission on
May 18, 2007.




The
Company engaged Paramount, an affiliate of a significant stockholder of the
Company, as its placement agent in connection with the private placement. In
consideration for its services, the Company paid aggregate cash commissions of
approximately $600,000 and issued to Paramount a 5-year warrant to purchase an
aggregate of 509,275 shares at an exercise price of $1.00 per
share.


F-17





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




2008




During
2008, the Company issued warrants to purchase 140,000 shares of its common stock
to directors, officers and an employee in conjunction with the secured 10%
notes, see note 8.




During
2008, the Company issued a PUT for the issuance of 55.6 million shares of its
common stock and a warrant to purchase 11.1 million shares of its common stock
in conjunction with a joint venture transaction, see notes 6 and 9.




During
2008, the Company issued warrants to purchase 50.4 million shares of its common
stock to the investors and the placement agent in conjunction with the sale of
the secured 12% notes, see note 10.




(6)
            Joint
      Venture




In
February 2008, the Company and Nordic Biotech Advisors ApS through its
investment fund Nordic Biotech Venture Fund II K/S (“Nordic”) entered into a
50/50 joint venture agreement (the “Hedrin JV Agreement”) to develop and
commercialize the Company's North American rights (under license) to its Hedrin
product.




Pursuant
to the Hedrin JV Agreement, Nordic formed a new Danish limited partnership,
Hedrin Pharmaceuticals K/S, (the "Hedrin JV") and provided it with initial
funding of $2.5 million and the Company assigned and transferred its North
American rights in Hedrin to the Hedrin JV in return for a $2.0 million cash
payment from the Hedrin JV and equity in the Hedrin JV representing 50% of the
nominal equity interests in the Hedrin JV.  At closing the Company
recognized an investment in the Hedrin JV of $250,000 and an exchange obligation
of $2,054,630.  The exchange obligation represents the Company’s
obligation to Nordic to issue the Company’s common stock in exchange for all or
a portion of Nordic’s equity interest in the Hedrin JV upon the exercise by
Nordic of the put issued to Nordic in the Hedrin JV Agreement
transaction.  The put is described below.




The
original terms of the Hedrin JV Agreement also provided  that should
the Hedrin JV be successful in achieving a payment milestone, namely that by
September 30, 2008, the FDA determines to treat Hedrin as a medical device,
Nordic will purchase an additional $2.5 million of equity in the Hedrin JV,
whereupon the Hedrin JV will pay the Company an additional $1.5 million in cash
and issue additional equity in the JV valued at $2.5 million, thereby
maintaining the Company’s 50% ownership interest in the Hedrin
JV.  These terms have been amended as described below.




In June
2008, the Hedrin JV Agreement was amended (the "Hedrin JV Amended
Agreement").  Under the amended terms Nordic invested an additional
$1.0 million, for a total of $3.5 million, in the Hedrin JV and made an advance
of $250,000 to the Hedrin JV and the Hedrin JV made an additional $1.0 million
payment, for a total of $3.0 million, to the Company.  The Hedrin JV
also distributed additional ownership equity sufficient for each of the Company
and Nordic to maintain their ownership interest at 50%.  Under the
amended terms, upon classification of Hedrin by the FDA as a Class II or Class
III medical device Nordic is obligated to invest an additional $1.25 million,
for a total investment of $5 million, into the Hedrin JV,  the Hedrin
JV is obligated to pay an additional $0.5 million, for a total of $3.5 million,
to the Company, the $250,000 that Nordic advanced to the Hedrin JV in June
becomes an equity investment in the Hedrin JV by Nordic and the Hedrin JV is
obligated to issue to the Company and Nordic additional ownership interest in
the Hedrin JV, thereby maintaining each of the Company’s and Nordic’s 50%
ownership interest in the Hedrin JV.  Subsequent to December 31, 2008,
the FDA classified Hedrin as a Class III medical device, see Note
16.


F-18





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
Company’s exchange obligation increased by $894,546 as a result of the June 2008
closing.  The $894,546 represents the gross amount paid in June 2008
by the Hedrin JV to the Company of $1,000,000 offset by the costs of the Hedrin
JV Agreement transaction recognized by the Company subsequent to the February
closing.




During
the year ended December 31, 2008, the Company recognized $250,000 of equity in
the losses of the Hedrin JV, thereby reducing the carrying value of its
investment to $0.  During the year ended December 31, 2008 the Hedrin
JV had losses of $658,000, the Company’s share of the losses is $329,000,
leaving $79,000 share of losses of the Hedrin JV that were not recognized by the
Company.   At December 31, 2008, the Company’s exchange
obligation is $2,949,176.




Nordic
has an option to put all or a portion of its equity interest in the Hedrin JV to
the Company in exchange for the Company’s common stock.  The shares of
the Company’s common stock to be issued upon exercise of the put will be
calculated by multiplying the percentage of Nordic’s equity in the Hedrin JV
that Nordic decides to put to the Company multiplied by the dollar amount of
Nordic’s investment in Limited Partnership divided by $0.09, as adjusted from
time to time, see note 12.  The put option is exercisable immediately
and expires at the earlier of ten years or when Nordic’s distributions from the
Limited Hedrin JV exceed five times the amount Nordic invested in the Hedrin
JV.




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




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




The
Hedrin JV has engaged the Company to provide management services to the Limited
Partnership in exchange for a management fee, which for 2008, on an annualized
basis, is $527,000.  As of December 31, 2008, the Company has
recognized $446,806 of other income from management fees earned from the Hedrin
JV which is included in the Company’s statement of operations for the year ended
December 31, 2008 as a component of interest and other income.


F-19





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Nordic
paid to the Company a non-refundable fee of $150,000 at the closing for the
right to receive a warrant covering 11.1 million shares of the Company’s common
stock, as adjusted due to the 12% Notes Transaction, see note 11, exercisable
for $0.09 per share, as adjusted due to the 12% Notes Transaction, see note
11.  The warrant is issuable 90 days from closing, provided Nordic has
not exercised all or a part of its put, as described below.  The
Company issued the warrant to Nordic on April 30, 2008.  The per share
exercise price of the warrant was initially based on the volume weighted average
price of the Company’s common stock for the period prior to the signing of the
Hedrin JV Agreement and has been subsequently adjusted due the 12% Notes
Transaction, see note 11.




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




After the
closing, at Nordic's request, the Company will nominate a person identified by
Nordic to serve on the Company’s Board of Directors.  Nordic has
nominated a person, however, that person has declined to stand for appointment
to the Company’s Board of Directors.




The
Company granted Nordic registration rights for the shares to be issued upon
exercise of the warrant, the put or the call.  The Company filed an initial
registration statement on May 1, 2008.  The registration statement was
declared effective on October 15, 2008.  The Company is required to
file additional registration statements, if required, within 45 days of the date
the Company first knows that such additional registration statement was
required.  The Company is required to use commercially reasonable efforts
to cause the additional registration statements to be declared effective by the
Securities and Exchange Commission (“SEC”) within 105 calendar days from the
filing date (the "Effective Date").  If the Company fails to file a
registration statement on time or if a registration statement is not declared
effective by the SEC within 105 days of filing the Company will be required to
pay to Nordic, or its assigns, an amount in cash, as partial liquidated damages,
equal to 0.5% per month of the amount invested in the Hedrin JV by Nordic until
the registration statement is declared effective by the SEC.  In no event
shall the aggregate amount payable by the Company exceed 9% of the amount
invested in the Hedrin JV by Nordic.




The
profits of the Hedrin JV will be shared by the Company and Nordic in accordance
with their respective equity interests in the Limited Partnership, which are
currently 50% to each, except that Nordic will get a minimum distribution from
the Hedrin JV equal to 5% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Limited Partnership.  If the Hedrin JV
realizes a profit equal to or greater than a 10% royalty on Hedrin sales, then
profits will be shared by the Company and Nordic in accordance with their
respective equity interests in the Limited Partnership.  However, in
the event of a liquidation of the Limited Partnership, Nordic’s distribution in
liquidation will be at least equal to the amount Nordic invested in the Hedrin
JV ($5 million if the payment milestone described above is met, $3.5 million if
it is not met) plus 10% per year, less the cumulative distributions received by
Nordic from the Hedrin JV.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.


F-20





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





(7)
            American
      Stock Exchange





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




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




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




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




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




(8)
            Secured
      10% Notes Payable





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


F-21





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





(9)
            Secured
      12% Notes Payable





On
November 19 and December 23, 2008, the Company completed the first and second
closings on a financing transaction (the “12% Notes
Transaction”).  The Company sold $1,315,000 of 12% senior secured
notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase
43.8 million shares of the Company’s common stock at $0.09 per
share.  The warrants expire on December 31, 2013.  Net
proceeds of $1,048,000 were realized from the first and second
closings.  In addition, $58,000 of issuance costs were paid outside of
the first and second closings.   Per the terms of the 12% Notes
Transaction the net proceeds were paid into a deposit account  (the
“Deposit Account”) and are to be paid out to the Company in monthly installments
of $106,000 retroactive to October 1, 2008.  Per the terms of the 12%
Notes Transaction the monthly installments are to be used exclusively to fund
the current operating expenses of the Company.  The Company received
$318,000 of such monthly installments during 2008.  The remaining
balance at December 31, 2008 in the Deposit Account of approximately $730,000 is
reflected in the accompanying balance sheet as of December 31, 2008 as
restricted cash.




The
financing transaction has a $1,000,000 minimum amount, which has been met and a
$2,500,000 maximum amount.  The financing transaction was still active
at December 31, 2008.  The third and final closing on this financing
transaction occurred in February 2009, see Note 15, that brought the cumulative
total to $1,725,000.




National
Securities Corporation (“National”) was the placement agent for the 12% Notes
Transaction.  National’s compensation for acting is placement agent is
a cash fee of 10% of the gross proceeds received, a non-accountable expense
allowance of 1.5% of the gross proceeds, reimbursement of certain expenses and a
warrant to purchase such number of shares of the Company’s common stock equal to
15% of the shares underlying the warrants issued to the
investors.  For the first and second closings the Company paid
National a total of  $155,000 in placement agent fees, a
non-accountable expense allowance and reimbursement of certain
expenses.  In addition, the Company issued warrants to purchase 6.6
million shares of the Company’s common stock at $0.09 per
share.  These warrants were valued at $22,191 and are a component of
Secured 12% notes payable issue costs.  The warrant expires on
December 13, 2013.




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


F-22





MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





In
connection with the private placement, the Company, the placement agent and the
investors entered into a registration rights agreement.  Pursuant to
the registration rights agreement, we agreed to file a registration statement to
register the resale of the shares of our common stock issuable upon exercise of
the warrants issued to the investors in the private placement, within 20 days of
the final closing date and to cause the registration statement to be declared
effective within 90 days (or 120 days upon full review by the Securities and
Exchange Commission). we filed the registration statement on February 23,
2009.  On March 11, 2009 we received a comment letter from the
SEC.  We are addressing those comments and plan to refile the
registration statement once those comments have been addressed.




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




Shares
                      IssuableUpon
                      Exercise of
                      Nordic's Put
                    
                    
                    Additional
                      Shares
                      IssuableUpon
                      Exercise of
                      Nordic's Put,
                      if Certain
                      Conditions
                      Are Met
                    
                    
                    Shares
                      IssuableUpon
                      Exercise of
                      Nordic's
                      Warrant
                    
                    
                    Total Shares
                      IssuableUpon
                      Exercise of
                      Nordic's Put
                      and WarrantBefore
      the 12% Notes Transaction
                    
                    
                    26,785,714
                    
                    
                    
                    8,928,572
                    
                    
                    
                    7,142,857
                    
                    
                    
                    42,857,143Antidilution
      shares
                    
                    
                    14,880,953
                    
                    
                    
                    4,960,317
                    
                    
                    
                    3,968,254
                    
                    
                    
                    23,809,524After
      the 12% Notes Transaction
                    
                    
                    41,666,667
                    
                    
                    
                    13,888,889
                    
                    
                    
                    11,111,111
                    
                    
                    
                    66,666,667




The
conditions for the additional shares becoming issuable upon the exercise of
Nordic’s PUT were met subsequent to December 31, 2008, see note 16.




The
Company incurred a total of approximately $347,000 of costs in the issuance of
the $1,315,000 of Secured 12% Notes sold in 2008.  These costs were
capitalized and are being amortized over the life of the Secured 12% Notes into
interest expense.  During the year ended December 31, 2008, the amount
amortized into interest expense was approximately $16,000.  The
remaining unamortized balance of approximately $331,000 is reflected in the
accompanying balance sheet as of December 31, 2008 as a non-current asset,
secured 12% notes payable issue costs.


F-23


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




The
Company recognized an original issue discount (the “OID”) of approximately
$148,000 on the issuance of the Secured 12% Notes sold in the first and second
closings for the value of the warrants issued to the investors.  The
OID is being amortized over the life of the Secured 12% Notes into interest
expense.  During the year ended December 31, 2008 the amount amortized
into interest expense was approximately $7,000.  The remaining
unamortized balance of approximately $141,000 has been netted against the face
amount of the Secured 12% Notes in the accompanying balance sheet as of December
31, 2008.




As per
the terms of the 12% Notes Transaction the Company’s officers agreed to certain
modifications of their employment agreements, more fully described in Note
14.




(10)
            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.  In May 2007,
the Company increased the number of shares of common stock reserves for issuance
under the 2003 Plan by 3,000,000 shares.  At December 31, 2008,
10,400,000 shares were authorized for issuance.  The options have a
maximum term of 10 years and vest over a period determined by the Company’s
Board of Directors (generally 3 years) and are issued at an exercise price equal
to or greater than the fair market value of the shares at the date of
grant.  The 2003 Plan expires on December 10, 2013 or when all options
have been granted, whichever is sooner.  Under the 2003 Plan, the
Company granted employees options to purchase an aggregate of 2,967,500 shares
of common stock at an exercise price of $0.17 during the year ended December 31,
2008.  In addition, 27,776 shares of common stock were issued during
2007 under the 2003 Plan.




At
December 31, 2008, there were 875,628 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, 2008 options to purchase 1,137,240 shares were outstanding and no shares
were reserved for future stock option grants under the 1995
Plan.


F-24


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





A summary
of the status of the Company’s stock options as of December 31, 2008 and changes
during the year then ended is presented below:




2008Shares
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term
      (years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at beginning of year
                  
                  
                  8,033,838
                  
                  
                  $
                  1.222Granted
                  
                  
                  2,967,500
                  
                  
                  $
                  0.170Exercised
                  
                  
                  -Cancelled
                  
                  
                  (367,502
                  )
                  
                  $
                  0.512Outstanding
      at end of year
                  
                  
                  10,633,836
                  
                  
                  $
                  0.934
                  
                  
                  
                  6.940
                  
                  
                  $
                  -Options
      exercisable at year-end
                  
                  
                  8,067,186
                  
                  
                  $
                  1.122
                  
                  
                  
                  6.300
                  
                  
                  $
                  -Weighted-average
      fair value of  options granted during the
    year
                  
                  $
                  0.13




As of
December 31, 2008 and 2007, the total compensation cost related to nonvested
option awards not yet recognized is $425,660 and  $539,046,
respectively.  The weighted average period over which it is expected
to be recognized is approximately 1.18 and 0.5 years,
respectively.


F-25


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS





The
following table summarizes the information about stock options outstanding at
December 31, 2008:




Exercise Price
                    
                    Number of
                      Options
                      Outstanding
                    
                    
                    Remaining
                      Contractual
                      Life (years)
                    
                    
                    Number of
                      Options
                      Exercisable$
                    0.12
                    
                    
                    50,000
                    
                    
                    
                    8.98
                    
                    
                    
                    16,6670.17
                    
                    
                    2,900,000
                    
                    
                    
                    9.24
                    
                    
                    
                    1,050,0150.20
                    
                    
                    65,000
                    
                    
                    
                    3.24
                    
                    
                    
                    65,0000.22
                    
                    
                    163,750
                    
                    
                    
                    3.14
                    
                    
                    
                    163,7500.28
                    
                    
                    12,000
                    
                    
                    
                    3.08
                    
                    
                    
                    12,0000.28
                    
                    
                    10,000
                    
                    
                    
                    1.28
                    
                    
                    
                    10,0000.28
                    
                    
                    10,000
                    
                    
                    
                    2.14
                    
                    
                    
                    10,0000.70
                    
                    
                    220,000
                    
                    
                    
                    7.53
                    
                    
                    
                    146,6670.72
                    
                    
                    315,000
                    
                    
                    
                    8.09
                    
                    
                    
                    126,6680.80
                    
                    
                    876,490
                    
                    
                    
                    4.15
                    
                    
                    
                    876,4900.89
                    
                    
                    16,667
                    
                    
                    
                    7.43
                    
                    
                    
                    16,6670.95
                    
                    
                    670,000
                    
                    
                    
                    8.32
                    
                    
                    
                    290,0000.97
                    
                    
                    440,000
                    
                    
                    
                    5.74
                    
                    
                    
                    440,0001.00
                    
                    
                    290,696
                    
                    
                    
                    6.03
                    
                    
                    
                    290,6961.35
                    
                    
                    108,333
                    
                    
                    
                    7.07
                    
                    
                    
                    86,6661.35
                    
                    
                    60,000
                    
                    
                    
                    7.53
                    
                    
                    
                    40,0001.35
                    
                    
                    300,000
                    
                    
                    
                    7.09
                    
                    
                    
                    300,0001.38
                    
                    
                    100,000
                    
                    
                    
                    6.46
                    
                    
                    
                    100,0001.45
                    
                    
                    25,000
                    
                    
                    
                    6.66
                    
                    
                    
                    25,0001.50
                    
                    
                    2,923,900
                    
                    
                    
                    6.25
                    
                    
                    
                    2,923,9001.65
                    
                    
                    1,077,000
                    
                    
                    
                    5.08
                    
                    
                    
                    1,077,000Total
                    
                    
                    10,633,836
                    
                    
                    
                    
                    
                    
                    
                    8,067,186


F-26


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(11)
            Stock
      Warrants




The
following table summarizes the information about warrants to purchase shares of
our common stock outstanding at December 31, 2008:




Exercise Price
                        
                        Number of
                          Warrants
                          Outstanding
                        
                        
                        Remaining
                          Contractual
                          Life (years)
                        
                        
                        Number of
                          Warrants
                          Exercisable$
                        0.09
                        
                        
                        50,408,434
                        
                        
                        
                        5.00
                        
                        
                        
                        50,408,4340.09
                        
                        
                        11,111,111
                        
                        
                        
                        4.33
                        
                        
                        
                        11,111,1110.20
                        
                        
                        140,000
                        
                        
                        
                        4.75
                        
                        
                        
                        140,0000.28
                        
                        
                        150,000
                        
                        
                        
                        4.64
                        
                        
                        
                        150,0000.78
                        
                        
                        10,000
                        
                        
                        
                        1.98
                        
                        
                        
                        10,0001.00
                        
                        
                        3,564,897
                        
                        
                        
                        4.25
                        
                        
                        
                        3,564,8971.00
                        
                        
                        509,275
                        
                        
                        
                        4.25
                        
                        
                        
                        509,2751.10
                        
                        
                        326,499
                        
                        
                        
                        1.04
                        
                        
                        
                        326,4991.44
                        
                        
                        2,161,767
                        
                        
                        
                        2.65
                        
                        
                        
                        2,161,7671.44
                        
                        
                        540,449
                        
                        
                        
                        2.65
                        
                        
                        
                        540,4491.44
                        
                        
                        135,135
                        
                        
                        
                        2.65
                        
                        
                        
                        135,1351.49
                        
                        
                        221,741
                        
                        
                        
                        2.67
                        
                        
                        
                        221,7411.49
                        
                        
                        55,000
                        
                        
                        
                        2.67
                        
                        
                        
                        55,0001.90
                        
                        
                        10,000
                        
                        
                        
                        1.21
                        
                        
                        
                        10,0001.90
                        
                        
                        90,000
                        
                        
                        
                        1.21
                        
                        
                        
                        90,00069,434,308
                        
                        
                        
                        
                        
                        
                        
                        69,434,308




(12)
            Related-Party
      Transactions




Oleoylestrone
Developments, SL




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




Total
milestone payments under the license agreement of $0, $0 and $675,000 and
consulting fees of $267,241, $68,750 and $698,491 are included in the
accompanying statements of operations for the years ended December 31, 2008 and
2007 and for the cumulative period from August 6, 2001 to December 31,
2008.


F-27


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Paramount
BioCapital, Inc.




One
member of the Company’s board of directors, Timothy McInerney, was  an
employee of Paramount or one of its affiliates until April
2007.  Another member of the Company’s board of directors, Michael
Weiser, was an employee of Paramount until December 2006.  In
addition, two former members of the Company’s board of directors, Joshua Kazam
and David Tanen, were employed by Paramount through August 2004 and were
directors of the Company until September 2005.  The sole shareholder
of Paramount is Lindsay A. Rosenwald, M.D.  Dr. Rosenwald beneficially
owns more than 5 percent of the Company’s common stock as of December 31, 2008
and various trusts established for Dr. Rosenwald’s or his family’s benefit, held
in excess of 12% of the Company’s common stock as of December 31,
2008.  In November 2003, the Company paid to Paramount approximately
$460,000 as commissions earned in consideration for placement agent services
rendered in connection with the private placement of the Company’s Series A
Convertible Preferred Stock, which amount represented 7 percent of the value of
the shares sold by Paramount in the offering.  In addition, in January
2004, the Company paid approximately $260,000 as commissions earned in
consideration for placement agent services rendered by Paramount in connection
with a private placement of the Company’s common stock, which amount represented
7 percent of the value of the shares sold by Paramount in the private
placement.  In connection with both private placements and as a result
of their employment with Paramount, Mr. Kazam, Mr. McInerney and Dr. Weiser were
allocated 5-year placement agent warrants to purchase 60,174, 58,642 and 103,655
shares of the Company’s common stock, respectively, at a price of $1.10 per
share.




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




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


F-28


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




(13)
            Income
      Taxes




There was
no current or deferred income tax expense for the years ended December 31,
2008 or 2007 because of the Company’s operating losses.




The
components of deferred tax assets as of December 31, 2008 and 2007 are as
follows:




2008
                  
                  
                  2007Deferred
      tax assets:Tax
      loss carryforwards
                  
                  $
                  23,947,000
                  
                  
                  $
                  22,513,000Research
      and development credit
                  
                  
                  1,769,000
                  
                  
                  
                  1,769,000In-process
      research and development charge
                  
                  
                  4,850,000
                  
                  
                  
                  4,850,000Share-based
      compensation
                  
                  
                  1,459,000
                  
                  
                  
                  1,270,000Other
                  
                  
                  -
                  
                  
                  
                  85,000Gross
      deferred tax assets
                  
                  
                  32,025,000
                  
                  
                  
                  30,487,000Less
      valuation allowance
                  
                  
                  (32,025,000
                  )
                  
                  
                  (30,487,000
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -




The
reasons for the difference between actual income tax benefit for the years ended
December 31, 2008 and 2007 and the amount computed by applying the
statutory Federal income tax rate to losses before income tax benefit are as
follows:




2008
                  
                  
                  2007Amount
                  
                  
                  % of
                    Pre-tax
                    loss
                  
                  
                  Amount
                  
                  
                  % of
                    Pre-tax
                    lossFederal
      income tax benefit at statutory rate
                  
                  $
                  (1,451,000
                  )
                  
                  
                  (34.0
                  )%
                  
                  $
                  (4,102,000
                  )
                  
                  
                  (34.0
                  )%State
      income taxes, net of federal tax
                  
                  
                  (290,000
                  )
                  
                  
                  (6.8
                  )%
                  
                  
                  (820,000
                  )
                  
                  
                  (6.8
                  )%Research
      and development credits
                  
                  
                  (130,000
                  )
                  
                  
                  (3.0
                  )%
                  
                  
                  (366,000
                  )
                  
                  
                  (3.0
                  )%Other
                  
                  
                  1,000
                  
                  
                  
                  0.0
                  %
                  
                  
                  1,000
                  
                  
                  
                  0.0
                  %Change
      in valuation allowance
                  
                  
                  1,870,000
                  
                  
                  
                  43.8
                  %
                  
                  
                  5,287,000
                  
                  
                  
                  43.9
                  %$
                  -
                  
                  
                  
                  0.0
                  %
                  
                  $
                  -
                  
                  
                  
                  0.0
                  %




A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.  The
net change in the total valuation allowance for the years ended December 31,
2008 and 2007 was an increase of $1,870,000 and $5,287,000,
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-29


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




At
December 31, 2008, the Company had unused Federal and state net operating
loss carryforwards of approximately $60,426,000 and $56,963,000,
respectively.  The net operating loss carryforwards expire in various
amounts through 2028 for Federal and state income tax purposes.  The
Tax Reform Act of 1986 contains provisions which limit the ability to utilize
net operating loss carryforwards in the case of certain events including
significant changes in ownership interests.  Accordingly, a
substantial portion of the Company’s net operating loss carryforwards above will
be subject to annual limitations (currently approximately $100,000) in
reducing  any future year’s taxable income. At December 31, 2008, the
Company also had research and development credit carryforwards of approximately
$1,769,000 for Federal income tax purposes which expire in various amounts
through 2028.




The
Company files income tax returns in the U.S. Federal, State and Local
jurisdictions.  With certain exceptions, the Company is no longer
subject to U.S. Federal and state income tax examinations by tax authorities for
years prior to 2005.  However, net operating loss carryforwards and
tax credits generated from those prior years could still be adjusted upon
audit.  The Company adopted the provisions of FIN 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” on
January 1, 2007 with no material impact to the financial
statements.  The Company recognizes interest and penalties to
uncertain tax position in income tax expense in the statement of
operations.




The
Company had no unrecognized tax benefits at December 31, 2008 that would affect
the annual effective tax rate.  Further, the Company is unaware of any
positions for which it is reasonably possible that the total amounts of
unrecognized tax benefits will significantly increase or decrease within the
next twelve months.




(14)
            License
      and Consulting Agreements




IGI
Agreement for PTH (1-34)


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




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




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


F-30


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




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, 2008, the Company has not paid any such royalties.




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




Hedrin
License Agreement


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




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




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




In
February 2008 the Company assigned and transferred its rights in Hedrin to a
joint venture, see note 6.


F-31


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Altoderm
License Agreement


On April
3, 2007, the Company entered into a license agreement for “Altoderm” (the
“Altoderm Agreement”) with T&R. Pursuant to the Altoderm Agreement, the
Company acquired an exclusive North American license to certain patent rights
and other intellectual property relating to Altoderm, a topical skin lotion
product candidate using sodium cromoglicate for the treatment of atopic
dermatitis. In accordance with the terms of the Altoderm Agreement, the Company
issued 125,000 shares of its common stock, valued at $112,500, and made a cash
payment of $475,000 to T&R upon the execution of the agreement. These
amounts have been included in research and development expense. Further, the
Company agreed to make future milestone payments to T&R comprised of various
combinations of cash and common stock in respective aggregate amounts of
$5,675,000 and 875,000 shares of common stock upon the achievement of various
clinical and regulatory milestones. The Company also agreed to pay royalties on
net sales of products using the licensed patent rights at rates ranging from 10%
to 20%, depending on the level of annual net sales, and subject to an annual
minimum royalty payment of $1 million in each year following the first
commercial sale of Altoderm. The Company may sublicense the patent
rights.  The Company agreed to pay T&R 30% of the royalties
received by the Company under such sublicense agreements.




Subsequent
to December 31, 2008, the Company terminated the Altoderm Agreement for
convenience.  The Company has no further financial liability or
commitment to T&R under the Altoderm Agreement.




Altolyn
License Agreement


On April
3, 2007, the Company and T&R also entered into a license agreement for
“Altolyn” (the “Altolyn Agreement”). Pursuant to the Altolyn Agreement, the
Company acquired an exclusive North American license to certain patent rights
and other intellectual property relating to Altolyn, an oral formulation product
candidate using sodium cromoglicate for the treatment of mastocytosis, food
allergies, and inflammatory bowel disorder. In accordance with the terms of the
Altolyn Agreement, the Company made a cash payment of $475,000 to T&R upon
the execution of the agreement. This amount is included in research and
development expense.  Further, the Company agreed to make future cash
milestone payments to T&R in an aggregate amount of $5,675,000 upon the
achievement of various clinical and regulatory milestones. The Company also
agreed to pay royalties on net sales of products using the licensed patent
rights at rates ranging from 10% to 20%, depending on the level of annual net
sales, and subject to an annual minimum royalty payment of $1 million in each
year following the first commercial sale of Altolyn. The Company may sublicense
the patent rights. The Company agreed to pay T&R 30% of the royalties
received by the Company under such sublicense agreements.




Subsequent
to December 31, 2008, the Company terminated the Altolyn Agreement for
convenience.  The Company has no further financial liability or
commitment to T&R under the Altolyn Agreement.




OED
License Agreement for Oleoyl-estrone


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


F-32


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




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




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




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




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




NovaDel
Agreement for Propofol Lingual Spray


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




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


F-33


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




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




(15)
            Commitments
      and Contingencies




Swiss
Pharma


The
Company has been involved in an arbitration proceeding in
Switzerland with Swiss Pharma Contract LTD (“Swiss Pharma”), a clinical
site that the Company used in one of its obesity trials.  On September
5, 2008, the sole arbitrator in Switzerland rendered an award in favor of
Swiss Pharma, awarding to Swiss Pharma a total of approximately $646,000 which
amount includes a  contract penalty of approximately $323,000, a final
services invoice of approximately $48,000, reimbursement of certain of Swiss
Pharma’s legal and other expenses incurred in the arbitration process of
approximately $245,000, reimbursement of arbitration costs of approximately
$13,000 and interest through September 5, 2008 of approximately $17,000. 
Further, the arbitrator ruled that the Company must pay interest at the rate of
5% per annum on approximately $371,000, the sum of the contract penalty of
approximately $323,000 and the final services invoice of approximately $48,000,
from October 12, 2007 until paid.




The
Company had previously recognized a liability to Swiss Pharma in the amount of
approximately $104,000 for the final services invoice.  The remainder
of the award, approximately $542,000, was expensed in September
2008.  The Company has recognized research and development expense of
approximately $267,000, general and administrative expense of approximately
$257,000 and interest expense of approximately $23,000 during the year ended
December 31, 2008.  The Company will continue to accrue interest at
the rate of 5% per annum on the approximate $371,000 until such amount has been
settled.




The
Company does not have sufficient cash or other current assets to satisfy the
arbitrator's award.




On
January 22, 2009, the Company received notice that Swiss Pharma submitted a
petition to the Supreme Court of New York State, County of New York seeking to
confirm and to enter a judgment on the arbitration award.  On February
17, 2009, the Company filed an answer to that complaint.  A hearing
has not yet been scheduled.




Contentions
of a Former Employee


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


F-34


MANHATTAN
PHARMACEUTICALS, INC.


(a
Development Stage Company)


NOTES TO
FINANCIAL STATEMENTS




Employment
Agreement


The
Company has employment agreements with two employees for the payment of
aggregate annual base salary of $675,000 as well as performance based
bonuses.  These agreements have a remaining term of three months for
one employee and six months for the second employee and have a remaining
obligation of $226,000 as of December 31, 2008.  As per the terms of
the 12% Notes Transaction, see Note 10, management, comprised of the two
employees under contract, has agreed to reduce their salaries effective as of
October 1, 2008.  If the Company sells less than $1.5 million of
Secured 12% Notes then their salaries shall be reduced by
one-third.  If the Company sells at least $1.5 million but less than
$2 million of Secured 12% Notes then their salaries shall be reduced by
20%.  The Company sold $1.725 million of Secured 12% Notes, management
therefore was paid 80% of their salaries during the fourth quarter of
2008.




Leases


Rent
expense for the years ended December 31, 2008 and 2007 was $139,636 and
$141,012, respectively.  Future minimum rental payments subsequent to
December 31, 2008 under an operating lease for the Company’s office facility are
as follows:




Years Ending December 31,
                    
                    Commitment2009
                    
                    $
                    63,9002010
      and subsequent
                    
                    $
                    0




F-35




(16)
            Subsequent
      events




Joint
Venture




In
January 2009 the FDA classified Hedrin as a Class III medical
device.  As a result, and as per the terms of the Hedrin JV Agreement,
as amended in June 2008, the $250,000 that Nordic advanced to the Hedrin JV in
June 2008 became an equity investment in the Hedrin JV by Nordic and Nordic
invested an additional $1.25 million in the Hedrin JV, for a total investment of
$5.0 million.  Also as a result of this classification of Hedrin and
as per the terms of the Hedrin JV Agreement, as amended in June 2008, the Hedrin
JV made a $500,000 milestone payment to the Company in February 2009 and the
Hedrin JV distributed additional ownership equity sufficient for the Company and
Nordic to maintain their ownership interest at 50% each.




Secured
12% Notes Payable




In
February 2009 the third and final closing occurred of the 12% Notes
Transaction.  In this final closing an additional $410,000 of Secured
12% Notes were sold.  Net proceeds of $360,000 were realized and paid
into the Deposit Account.  Per the terms of the 12% Notes Transaction,
$200,000 was paid to the Company out of the Deposit Account for the specific
purpose of making payments on its outstanding accounts payable balances as of
September 30, 2008.  Also per the terms of the 12% Notes Transaction,
the monthly installments to be paid to the Company from the Deposit Account were
increased to $113,300 from $106,000.




The
Company incurred additional issuance costs of $50,000, for a total of $375,000,
and recognized additional OID of $46,000, for a total of
$194,000.  Included in the $50,000 of issuance costs was $47,000 paid
to National, for a total of $202,000.




The
Company issued five-year warrants to the investors to purchase an additional 14
million shares of the Company’s common stock at $0.09 per share, for a total of
58 million shares, and issued a five-year warrant to National to purchase an
additional 2 million shares of the Company’s common stock at $0.09 per share,
for a total of 8.6 million shares.


F-36


Index to Exhibits Filed with
this Report




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




F-37