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 **UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  
 **FO** **RM
        10-KSB**
 
  x
              Annual
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the fiscal year ended December 31,
                  2005
  o
              Transition
                  Report pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 for the transition period from
                  ___to___
  Commission
        File Number  1-32639
  **MANHATTAN
        PHARMACEUTICALS, INC.**
 (Exact
        name of issuer as specified in its charter)
  Delaware
              36-3898269(State
                  or other jurisdiction of incorporation or organization)
              (IRS
                  Employer Identification No.)810
                  Seventh Avenue, 4thFloor, New York, New York
              10019(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 (212)
        582-3950
 (Issuer’s
        telephone number)
   
 (Former
        Name, Former Address and Former Fiscal Year, if Changed Since Last
        Report)
 
 **Securities
        registered pursuant to Section 12(b) of the Exchange Act:**
  **Title
                  of each class**
              
              **Name
                  of each exchange on which registered**Common
                  Stock, $0.001 par value
              
              American
                  Stock Exchange
  **Securities
                  registered pursuant to Section 12(g) of the Exchange Act:**None
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act. o
  Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
        for
        such shorter period that the issuer was required to file such reports), and
        (2)
        has been subject to such filing requirements for the past 90 days. Yes x No o
  Check
        if
        there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
        S-B is not contained herein, and no disclosure will be contained, to the
        best of
        registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No
x
  The
        issuer’s revenues for the fiscal year ended December 31, 2005 were **** $0.
  The
        aggregate market value of the common stock of the issuer held by non-affiliates
        of the issuer on March 24, 2006 based on the closing price of the common
        stock
        as reported on the American Stock Exchange on such date was $54,939,388
        .
  As
        of
        March 24, 2006 there were 60,092,697 outstanding shares of common stock,
        par value $.001 per share.
  Traditional
        Small Business Disclosure Format: Yes oNo
x
 
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  TABLE
        OF CONTENTS
 **Page****PART
                  I**Item
                  1
              Description
                  of Business
              1Item
                  2
              Legal
                  Proceedings
              24Item
                  3
              Description
                  of Property
              24Item
                  4
              Submission
                  of Matters to a Vote of Security
                  Holders
              24**PART
                  II**Item
                  5
              Market
                  for Common Equity and Related Stockholder
                  Matters
              24Item
                  6
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations or Plan of Operations
              25Item
                  7
              Consolidated
                  Financial Statements
              36Item
                  8
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              36Item
                  8A
              Controls
                  and Procedures
              36Item
                  8B
              Other
                  Information
              36**PART
                  III**Item
                  9
              Directors,
                  Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a) of the Exchange
                  Act
              37Item
                  10
              Executive
                  Compensation
              41Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matter
              44Item
                  12
              Certain
                  Relationships and Related
                  Transactions
              46Item
                  13
              Exhibits
                  List
              48Item
                  14
              Principal
                  Accountant Fees and Services
              49Index
                  to Consolidated Financial
                  Statements
              F-1
 
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 **Index
              to Financial
              Statements**
  References
        to the “Company,” the “Registrant,” “we,” “us,” or “our” or in this Annual
        Report on Form 10-KSB refer to Manhattan Pharmaceuticals, Inc., a Delaware
        corporation, and our consolidated subsidiaries, together taken as a whole,
        unless the context indicates otherwise.
  **Forward-Looking
        Statements**
  This
        annual report on Form 10-KSB contains forward-looking statements within the
        meaning of Section 27A of the Securities Act of 1933, as amended, or the
        Securities Act, and Section 21E of the Exchange Act. Any statements about
        our expectations, beliefs, plans, objectives, assumptions or future events
        or
        performance are not historical facts and may be forward-looking. These
        statements are often, but not always, made through the use of words or phrases
        such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “may,” “intend”
and similar words or phrases. Accordingly, these statements involve estimates,
        assumptions and uncertainties that could cause actual results to differ
        materially from those expressed in them. These statements are therefore subject
        to risks and uncertainties, known and unknown, which could cause actual results
        and developments to differ materially from those expressed or implied in
        such
        statements. Such risks and uncertainties relate to, among other factors:
 
 ·
              the
                  development of our drug candidates; the regulatory approval of
                  our drug
                  candidates;
 ·
              our
                  use of clinical research centers and other contractors;
 ·
              our
                  ability to find collaborative partners for research, development
                  and
                  commercialization of potential
                  products;
 ·
              acceptance
                  of our products by doctors, patients or payers;
 ·
              our
                  ability to market any of our products;
 ·
              our
                  history of operating losses;
 ·
              our
                  ability to compete against other companies and research institutions;
 ·
              our
                  ability to secure adequate protection for our intellectual property;
 ·
              our
                  ability to attract and retain key personnel;
 ·
              availability
                  of reimbursement for our product candidates;
 ·
              the
                  effect of potential strategic transactions on our business;
 ·
              our
                  ability to obtain adequate financing; and
 ·
              the
                  volatility of our stock price.
 
 Further,
        any forward-looking statement speaks only as of the date on which it is made,
        and we undertake no obligation to update any forward-looking statement or
        statements to reflect events or circumstances after the date on which such
        statement is made or to reflect the occurrence of unanticipated events. New
        factors emerge from time to time, and it is not possible for us to predict
        which
        factors will arise. In addition, we cannot assess the impact of each factor
        on
        our business or the extent to which any factor, or combination of factors,
        may
        cause actual results to differ materially from those contained in any
        forward-looking statements.
 
 **PART
        I**
  **ITEM
                1.**
              **DESCRIPTION
                  OF BUSINESS**
  **Overview**
  We
        are
        engaged in the business of developing and commercializing biomedical and
        pharmaceutical technologies. We aim to acquire proprietary rights to these
        technologies by licensing or otherwise acquiring an ownership interest, funding
        their research and development and eventually bringing the technologies to
        market. We do not have any drugs or other products available for sale, but
        we
        are currently researching and developing three biomedical
        technologies:
  ·
              Oleoyl-estrone,
                  an orally administered hormone attached to a fatty-acid that has
                  been
                  shown to cause significant weight loss in preclinical animal studies
                  regardless of dietary
                  modifications;
  ·
              PTH
                  (1-34), a peptide that regulates epidermal cell growth and differentiation
                  currently under development as a topical treatment for psoriasis
                  and
                  additional hyperproliferative skin disorders.
  ·
              Lingual
                  spray propofol, a proprietary lingual spray technology is used
                  to deliver
                  propofol for pre-procedural sedation prior to diagnostic, therapeutic
                  or
                  endoscopic procedures.
   -1-
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
  Although
        we are primarily focused on developing these technologies, we continue to
        seek
        to acquire proprietary rights to other biomedical and pharmaceutical
        technologies, by licensing or acquiring an ownership interest, funding their
        research and development and bringing the technologies to market.
  Pursuant
        to an Agreement and Plan of Merger dated April 1, 2005 (the “Agreement”) between
        us, Tarpan Therapeutics, Inc., a Delaware corporation (“Tarpan”), and Tarpan
        Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary
        (“TAC”), TAC merged with and into Tarpan, with Tarpan remaining as the surviving
        corporation and our wholly-owned subsidiary. Tarpan was a privately-held,
        New
        York based biopharmaceutical company developing dermatological therapeutics.
        Through the merger, we acquired Tarpan’s primary product candidate, PTH (1-34),
        a peptide believed to be a regulator of epidermal cell growth and
        differentiation. In consideration for their shares of Tarpan capital stock
        and
        in accordance with the Agreement, the stockholders of Tarpan received an
        aggregate of approximately 10,731,000 shares, representing approximately
        20% of
        our then outstanding common stock. This transaction was accounted for as
        a
        purchase of Tarpan by the Company. As a result of the merger, we assumed
        Tarpan’s outstanding indebtedness of approximately $651,000, which resulted from
        a series of promissory notes issued to Paramount BioCapital Investments,
        LLC and
        Horizon BioMedical Ventures, LLC, both of which are owned or controlled by
        Dr.
        Lindsay Rosenwald. The notes were amended at the time of the merger to provide
        that one-half of the outstanding indebtedness was payable upon completion
        of the
        merger and the remaining one-half will be payable at such time as we raise
        at
        least $5 million in new financing. As a result of our August 2005 private
        placement, we have now satisfied the remaining balance of this indebtedness.
 
 Several
        of Tarpan’s former stockholders are directors or significant stockholders of our
        company. At the time of  the merger, Dr. Rosenwald and various trusts
        established for the benefit of Dr. Rosenwald and members of his immediate
        family
        collectively beneficially owned approximately 46 percent of Tarpan’s common
        stock and beneficially owned approximately 26 percent our common stock (Dr.
        Rosenwald disclaims beneficial ownership of shares held by such trusts, except
        to the extent of any pecuniary interest). In addition, Joshua Kazam, David
        Tanen, Dr. Michael Weiser and Timothy McInerney, all of whom were then members
        of our board of directors, collectively owned approximately 13.4 percent
        of
        Tarpan’s outstanding common stock. Dr. Weiser and Mr. McInerney are also
        employed by Paramount BioCapital, Inc., an entity owned and controlled by
        Dr.
        Rosenwald. As a result of such relationships between us and Tarpan, our board
        of
        directors established a special committee to consider and approve the merger.
        The special committee consisted of three disinterested directors, none of
        whom
        had any prior relationship with Tarpan.
 
 We
        were
        incorporated in Delaware in May 1993 under the name “Atlantic Pharmaceuticals,
        Inc.” and, in March 2000, we changed our name to “Atlantic Technology Ventures,
        Inc.” On February 21, 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. with the impact of the
        “acquisition” of Atlantic Technology Ventures, Inc. as of February 21,
        2003.
  -2-
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 
 **Oleoyl-estrone**
 
 We
        acquired the rights to develop and commercialize oleoyl-estrone, a hormone
        modified by an attachment to a fatty acid, pursuant to a February 2002 license
        agreement with Oleoylestrone Development, SL., a Spanish corporation.
        Oleoyl-estrone is an orally administered small molecule that has been shown
        to
        cause significant weight loss in preclinical animal studies regardless of
        dietary modifications.
 
 Oleoyl-estrone
        was initially developed by researchers at the University of Barcelona (“UB”) in
        Spain. Through a decade of research, scientists of the Nitrogen-Obesity Research
        Group at UB noted that hormones that effect metabolism play a significant
        role
        in body weight regulation. At the same time, the obesity research community
        suggested that weight is regulated by the ponderostat, a central mechanism
        in
        the hypothalamus of the brain believed to set the point of ideal weight.
        Researchers at UB believe that a hormone controls the ponderostat, raising
        or
        lowering body weight by changing the central set point for the entire body.
 
 We
        consider Oleoyl-estrone as a potential out-licensing candidate. We plan to
        complete enough development work to ensure that, should the product candidate
        be
        out licensed, it will continue to be successful and maintain urgency in a
        larger
        partner’s hands. The potential for out-licensing oleoyl-estrone may also create
        an opportunity for non-dilutive financing based on both up-front and ongoing
        milestone payments as the drug advances through development.
 
 In
        January 2005, the FDA accepted our filed investigational new drug application,
        or “IND” for the human clinical testing of Oleoyl-estrone. We completed Phase Ia
        and Phase Ib clinical trials in May 2005 and July 2005 and released data
        on both
        trials in October 2005. Both trials were completed in Basel, Switzerland
        after
        obtaining formal approval from the Swiss medical authority, Swissmedic, however,
        only the Phase Ia trial was conducted pursuant to the IND accepted by the
        FDA.
        The objective of both dose-escalation studies was to determine the safety
        and
        tolerability of defined doses of orally administered Oleoyl-estrone in obese
        adult volunteers as well as the pharmacokinetic profile (i.e. the manner
        in
        which the drug is absorbed, distributed, metabolized and excreted by the
        body)
        of Oleoyl-estrone in both men and women.
  The
        Phase
        Ia study involved 36 obese volunteers. Twelve of the 36 patients received
        placebo and 24 received a single dose in one of six strengths ranging from
        1 mg
        to 150 mg. Oleoyl-estrone was shown to be safe with no serious adverse events
        noted in this study.
  The
        Phase
        Ib study was a seven day repeat dose study involving 24 obese volunteers
        in four
        cohorts of 6 patients each who received either placebo or Oleoyl-estrone
        in
        doses ranging from 10 mg to 150 mg once daily for seven consecutive days.
        The
        results indicated that Oleoyl-estrone was generally well-tolerated at all
        doses
        and no serious adverse events were reported. There were also no clinically
        significant changes in the physical exams, vital signs, ECGs, coagulation
        and
        liver function tests. The study demonstrated evidence of greater weight loss
        among the treated groups compared with the placebo group as well as evidence
        of
        reduction in desire to eat, hunger levels, fasting glucose and LDL cholesterol.
        Important clinical laboratories findings included reversible, dose-dependent
        elevations in estrone and estradiol levels, as well as reductions in
        testosterone levels. We plan to initiate a follow on Phase IIa study
        using low doses of Oleoyl-estrone in the first half of 2006.
  -3-
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 **Index
              to Financial
              Statements**
  Results
        from both Phase I studies are being used, in conjunction with
        extensive preclinical work, to establish the protocol and obtain approval
        from
        the relevant regulatory authority to begin Phase II clinical trials. Under
        our
        license agreement with Oleoylestrone Developments, we made a $250,000 milestone
        payment upon the treatment of the first patient in the Phase I trial. Upon
        initiation of the Phase IIa trial, an additional milestone payment of $250,000
        will be made. In
        preparation for beginning the phase IIa clinical trial, the clinical study
        protocol is currently in the regulatory review cycle in Switzerland, having
        received local ethics committee review and approval. The trial will begin
        immediately following receipt of final regulatory approval from Swissmedic,
        the
        Swiss Medical Authority.
 
 **PTH(1-34)**
 
 We
        acquired our rights to PTH (1-34) in connection with our acquisition of Tarpan
        Therapeutics in April 2005. Tarpan acquired an exclusive, worldwide license
        to
        develop and commercialize this drug compound pursuant to an April 2004 agreement
        with IGI, Inc.
  In
        August 2003, researchers, led by Michael Holick, PhD, MD, Professor of Medicine,
        Physiology, and Biophysics at Boston University Medical Center, reported
        positive results from a US Phase I and II clinical trial evaluating the safety
        and efficacy of PTH (1-34) as a topical treatment for psoriasis. This
        double-blind, controlled trial in 15 patients compared PTH (1-34) formulated
        in
        the Novasome® Technology versus the Novasome® vehicle alone. Following 8 weeks
        of treatment, the topical application of PTH (1-34) resulted in complete
        clearing of the treated lesion in 60% of patients and partial clearing in
        85% of
        patients. Additionally, there was a statistically significant improvement
        in the
        global severity score. Ten patients continued receiving PTH(1-34) in an open
        label extension study in which the Psoriasis Area and Severity Index (PASI)
        was
        measured; PASI improvement across all 10 patients achieved statistically
        significant improvement compared to baseline. This study showed PTH (1-34)
        to be
        well tolerated and efficacious for the treatment of plaque psoriasis with
        no
        patients experiencing any clinically significant adverse events.
 
 Due
        to the high response rate seen in patients in the initial trial with PTH
        (1-34),
        we believe that it may have an important clinical advantage over current
        topical
        psoriasis treatments. A
        follow
        on physician IND Phase IIa trial involving PTH (1-34) was initiated in December
        2005 under the auspices of Boston University. Patient recruitment is ongoing;
        dosing has not yet begun.
 
 **Lingual
        Spray Propofol**
 
 On
        April
        4, 2003, we entered into a License and Development Agreement (the “Propofol
        License”) with NovaDel Pharma Inc. (“NovaDel”) for the worldwide, exclusive
        rights to NovaDel’s proprietary lingual spray technology to deliver propofol for
        preprocedural sedation prior to diagnostic, therapeutic or endoscopic
        procedures.
 
 Propofol
        is currently delivered intravenously as an oily emulsion for induction and
        maintenance of general anesthesia or “monitored anesthesia care” in operating
        rooms, or deep sedation in intensive care units. Propofol has not previously
        been available for dosing via a convenient route of administration for
        office-based and other ambulatory uses. Accordingly, we have filed a patent
        application for this new method of use. Other patent applications are being
        prepared related to our novel formulation.
 
 We
        believe that delivering propofol via this proprietary delivery system provides
        many advantages over currently formulated sedatives. In addition to the
        convenience and ease of administration, we believe the lingual spray route
        will
        eliminate delayed onset and poor coordination of timing associated with
        administering oral sedatives, and allow for rapid clinical responses typical
        of
        intravenous delivery (i.e., less than 5 minutes). Lingual spray propofol
        is
        intended to allow patients to tolerate unpleasant procedures, by relieving
        anxiety and producing a pleasant, short-term amnesia. Particularly in children
        and adults unable to cooperate, mild sedation expedites the conduct of numerous
        ambulatory procedures that are not particularly painful, but which require
        the
        patient to remain still for the best technical result.
  -4-
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**
 
 NovaDel’s
        delivery systems (both patented and patent-pending) are lingual sprays, enabling
        drug absorption through the oral mucosa and more rapid absorption into the
        bloodstream than presently available oral delivery systems. NovaDel refers
        to
        its delivery system as Immediate-Immediate Release (I2R **TM** )
        because
        its delivery system is designed to provide therapeutic benefits within minutes
        of administration. We are working with NovaDel to develop, manufacture and
        commercialize the licensed product, having jointly announced commencement
        of a
        development program for lingual spray propofol in June 2003.
  In
          July
          2004, we released the results of the first human trial for our proprietary
          lingual spray formulation of propofol. The
          study, which took place in the United Kingdom, was a single-center, randomized,
          double-blind, placebo-controlled dose-escalating study of propofol lingual
          spray
          in twelve healthy adult volunteers. The primary objectives were to compare
          the
          safety and tolerability of three dose levels of the propofol spray to a
          single
          intravenous bolus low dose of propofol, as well as to determine the respective
          pharmacokinetic profiles and relative bioavailability of the three escalating
          doses.
 
 No
          serious adverse events, nor dose-dependent changes in vital signs, occurred
          in
          any group. The mean time to maximum blood concentration of propofol following
          spray was approximately 30 min across all doses. Propofol was detectable
          in
          blood as early as 4 minutes following spray administration. The mean maximum
          blood concentrations plateaued at the highest of the three doses tested,
          and the
          mean bioavailability of the current spray formulation was up to 18% of
          that of
          the intravenous formulation.
 
 In
          January 2005, the FDA accepted our IND for the initiation of the human
          clinical
          trials in the United States of lingual spray propofol. We continue to pursue
          FDA
          approval of Propofol LS under the 505b2 regulatory pathway. Section 505b2
          of the
          U.S. Food, Drug & Cosmetic Act allows the FDA to approve a drug on the basis
          of existing data in the scientific literature or data used by the FDA in
          the
          approval of other drugs. See "—Government Regulation – Drug Approval Process."
          Accordingly, the FDA has indicated to us that we will be able to utilize
          Section
          505b2 to proceed directly to a pivotal Phase III trial for lingual spray
          propofol following completion of Phase I trials. We are actively planning
          the
          next steps of the development process for Propofol LS, particularly meeting
          with
          scientific advisors, NovaDel and other formulation partners regarding optimum
          formulation development. See also “Management’s Discussion and Analysis of
          Financial Condition and Results of Operations - Liquidity and Capital Resources
          - Research and Development Projects - Lingual Spray Propofol.
 
 Although
          we have the sole right and obligation to develop and commercialize lingual
          spray
          propofol on a worldwide basis, NovaDel has undertaken to perform certain
          development activities on our behalf. NovaDel’s responsibilities include
          formulation development, formulation stability testing, formulation analytic
          method development and testing and manufacture of clinical trial material
          for
          the pre-clinical and early clinical development. We are also working with
          other
          formulation partners to develop an optimal formulation. We will oversee
          pre-clinical testing, as necessary, and have responsibility for overall
          product
          development and product management. In addition, we will design and oversee
          clinical trials and be responsible for regulatory filings and meetings.
          The
          license agreement provides that these development activities are to be
          performed
          under the supervision of a development committee, which is comprised of
          an equal
          number of appointees of us and NovaDel. Within 30 days of the end of each
          calendar quarter in which any agreed-upon development activities are to
          be
          performed, each of us and NovaDel are to provide a written progress report
          to
          the development committee, which should describe the activities that have
          been
          performed and evaluate the work performed in relation to the goals of the
          development plan and budget. The NovaDel license agreement also provides
          that
          NovaDel will manufacture and supply us with lingual spray propofol for
          use in
          clinical development and for commercial purposes pursuant to a manufacturing
          agreement to be entered into between us and NovaDel.
  -5-
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 **Index
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                Statements**
 **Market
          and Competition**
  *Obesity*
 According to estimates, the market for prescription anti-obesity drugs
              is in
              excess of $10 billion, or roughly equal to that of diabetes.  It is
              estimated that 65 percent of Americans are overweight and that 30 percent
              are
              obese.  According to the Center for Disease Control and Prevention (CDC),
              the medical costs attributed to both overweight and obesity accounted
              for 9.1
              percent of the total U.S. medical expenditures in 1998 and may have
              reached as
              high as $78.5 billion.   The U.S. Department of Health and Human
              Services has estimated that in 2000 the total costs for the treatment
              of obesity
              had reached $117 billion.  Meridia ® and
              Xenical ® ,
              two
              currently approved anti-obesity medications, together accounted for
              approximately $700 million in worldwide sales in 2004.  We believe that the
              disease currently lacks a treatment that is safe and effective for
              most patient
              groups, and that oleoyl-estrone has the potential to meet the needs
              of this
              market.
  Competition
            in the pharmaceutical industry, and the anti-obesity drug market in particular,
            is intensely competitive. In addition to Abbott Laboratories, Inc. and
            Roche
            Holdings AG, the makers of Meridia® and Xenical,® respectively, some of the
            largest drug companies in the world have anti-obesity drugs currently
            in
            development, including GlaxoSmithKline PLC, Johnson & Johnson, Inc.,
            Bristol-Myers Squibb Company, Regeneron Pharmaceutical, Inc., Phytopharm,
            PLC,
            Amgen, Inc. These companies are all substantially larger and more established
            than we are and have significantly greater financial and other resources
            than we
            do.
  *Psoriasis*
  The
            efficacy and safety profile of PTH (1-34) potentially make it an attractive
            alternative to existing topical treatments, photo therapies and systemic
            treatments such as methotrexate and biologics for the treatment of psoriasis.
            We
            intend to achieve market share as a monotherapy at the expense of existing
            and
            established products to be used in combination with currently available
            therapies. Some of PTH (1-34)’s competitors would include, but are not limited
            to over-the-counter, or “OTC,” and prescription topical treatments, Dovonex,
            phototherapies, laser treatment, methotrexate, cyclosporine, Johnson
&
Johnson (Remicade), Amgen (Enbrel), BiogenIdec (Amevive) and Genentech
            (Raptiva).
 
 Topical
            treatments include numerous OTC ointments that help to reduce inflammation,
            soothe skin and enhance the efficacy of other therapies. Additionally,
            steroids
            are prescribed as an adjunct therapy for pain and anti-inflammation.
            One of the
            most frequently prescribed topical treatments is Calcipotriene (Dovonex),
            which
            is an active vitamin D3 analogue. Approximately 60% of patients show
            some
            response to Dovonex in the first few months of treatment, however, 60%
            of these
            become resistant to treatment in 6-12 months. Dovonex achieved $700 million
            in
            sales in its first two years after launch but sales have now declined
            to $130
            million due to high incidence of resistance.
 
 There
            are two main types of phototherapy, Ultra-violet A, or “UVA” and Ultra-violet B,
            or “UVB.” UVA penetrates deeper into the skin but requires the use of
            photo-sensitizing agent and carries a higher risk of skin cancer. UVB,
            on the
            other hand, is 1,000 times more powerful than UVA in producing sunburn.
            UV
            treatments are often combined with other treatments such as topicals
            and
            methotrexate. Phototherapy treatments have been shown to clear the disease
            and
            induce remission but they require frequent doctor visits, making treatment
            expensive and inconvenient.
 
 Systemic
            treatments are generally reserved for severe patients due to their harsh
            side
            effect profiles. The most effective systemic treatments are methotrexate
            and
            cyclosponine. Methotrexate is a classical antifolate commonly used for
            the
            treatment of widespread plaque psoriasis the psoriatic arthritis and
            other
            autoimmune diseases. The low cost and effectiveness of methotrexate is
            counter
            balanced by the significant risk of liver and kidney toxicity and inability
            to
            be used by pregnant women. Cyclosporine inhibits Nuclear Factor of Activated
            T-Cells (NFAT), which requires the transcription of cytokines and the
            immune
            response. It is only indicated in patients who have failed prior systemic
            therapies and carries the risk of impaired renal function and severe
            immunosuppression. Unlike methotrexate, cyclosporine is relatively expensive
            and
            costs over $6,000 per year.
  -6-
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 **Index
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                  Statements**
 
 Biologics
            are likely to play a large role in the treatment of patients with moderate
            to
            severe psoriasis but due to their high cost, use will likely be limited
            to
            patients that have failed all other treatments or have experienced intolerable
            side effects or toxicity with other therapies. Therefore the market will
            likely
            be limited to the patient population that can no longer be treated with
            methotrexate or cyclosporine. Amgen’s TNF-a inhibitor, Enbrel, recently received
            marketing approval for psoriasis and is expected to have strong sales
            due to
            physician familiarity and efficacy data. However, Enbrel has been shown
            to cause
            serious infections and sepsis. Genentech and Serono’s Raptiva received FDA
            approval in 2003 for the treatment of chronic moderate to severe plaque
            psoriasis in adults. Raptiva is a humanized monoclonal antibody that
            binds to
            CD11a, leading to inhibition of T-cell activation and migration to sites
            of
            inflammation. Clinical trials show Raptiva to have a fast onset of action
            and to
            be relatively effective, however, the companies are required to conduct
            post
            market safety and efficacy studies. There are other biologics that are
            either
            approved or in clinical studies for psoriasis, including BiogenIdec’s Amevive
            and Johnson & Johnson’s Remicade. Use of many of these will be limited by
            their side effect profiles, cost and method of delivery.
 
 *Pre-procedural
            Sedation*
  To
            date,
            Midazolam (now a generic), which is delivered both intravenously and
            orally, has
            dominated the preprocedural sedation market, posting sales of $536 million
            in
            1999. However, serious adverse events are reported in the Midazolam package
            insert, including respiratory depression, airway obstruction, oxygen
            desaturation, apnea and even respiratory arrest. In contrast, at the
            doses being
            developed by us, we believe that propofol lingual spray may offer a safer,
            noninvasively administered alternative to Midazolam. Propofol’s rapid onset
            profile will allow clinicians to more accurately time its peak effects
            during
            procedures, as well as to determine the precise concentration needed
            for desired
            levels of sedation.
 
 **Intellectual
            Property and License Agreements**
  Our
            goal
            is to obtain, maintain and enforce patent protection for our products,
            formulations, processes, methods and other proprietary technologies,
            preserve
            our trade secrets, and operate without infringing on the proprietary
            rights of
            other parties, both in the United States and in other countries. Our
            policy is
            to actively seek to obtain, where appropriate, the broadest intellectual
            property protection possible for our product candidates, proprietary
            information
            and proprietary technology through a combination of contractual arrangements
            and
            patents, both in the U.S. and elsewhere in the world.
  We
            also
            depend upon the skills, knowledge and experience of our scientific and
            technical
            personnel, as well as that of our advisors, consultants and other contractors,
            none of which is patentable. To help protect our proprietary know-how
            which is
            not patentable, and for inventions for which patents may be difficult
            to
            enforce, we rely on trade secret protection and confidentiality agreements
            to
            protect our interests. To this end, we require all employees, consultants,
            advisors and other contractors to enter into confidentiality agreements
            which
            prohibit the disclosure of confidential information and, where applicable,
            require disclosure and assignment to us of the ideas, developments, discoveries
            and inventions important to our business.
  *Oleoyl-estrone
            License Agreement*
  We
            currently have worldwide, exclusive license rights to the U.S. and foreign
            patents and patent applications regarding oleoyl-estrone and its use
            for the
            treatment of human disease:
  1.
                  US
                      Patent No. 5,798,348 entitled “Fatty-acid monesters of estrogens for the
                      treatment of obesity and/or overweight.” M. Alemany, Inventor. Application
                      filed, October 30, 1996. Patent issued August 25, 1998. This
                      patent
                      expires on October 30, 2016.
  2.
                  European
                      Patent No. 771.817 entitled “Oleate monoesters of estrogens for the
                      treatment of obesity and/or overweight.” M. Alemany, Inventor. Application
                      filed, October 28, 1996. Patent issued March 26, 2003. This
                      patent expires
                      on October 28, 2016.
  3.
                  Spanish
                      Patent Application No. ES 200100785 entitled “Fatty-acid monoesters of
                      estrogens acting as anti-diabetic and hypolipidemia agents.” M. Alemany
                      Lamana, Francisco Javier Remesar Betiloch, and Jose Antonio
                      Fernandez
                      Lopez, Inventors. Application filed March 28, 2001, European
                      Patent
                      Application No. EP1380300A1, filed March 25, 2002, and Canadian
                      Patent
                      Application No. 2441890, filed March 25, 2002.
   -7-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  The
            U.S.
            and European patents have numerous, detailed, and specific claims for
            both the
            composition of oleoyl-estrone, and its method of use for weight loss.
            Our rights
            to these patents are subject to the terms of a February 2002 license
            agreement
            between us and Oleoylestrone Developments. The license agreement provides
            us
            with an exclusive, worldwide right to the intellectual property covered
            by the
            license agreement, including the right to grant sublicenses. Our success
            in
            developing oleoyl-estrone depends on our ability to maintain and enforce
            the
            patents relating to oleoyl-estrone.
  In
            consideration for the license, we paid an initial license fee of $175,000.
            The
            license agreement provides for further cash payments of $9,250,000 in
            the
            aggregate, payable as follows: $250,000 payable upon treatment of the
            first
            patient in a Phase I clinical trial under an IND sponsored by us; $250,000
            upon
            treatment of the first patient in a Phase II clinical trial; $750,000
            upon the
            first successful completion of a Phase II clinical trial; $2,000,000
            upon the
            first successful completion of a Phase III clinical trial; and $6,000,000
            upon
            the first final approval of a New Drug Application (“NDA”) for oleoyl-estrone by
            the FDA. The license agreement does not require us to make any royalty
            payments.
            Through December 31, 2005, we have paid the initial license fee of $175,000
            and
            $250,000 in milestone payments.
  Subject
            to earlier termination as described below, the term of the license expires
            on
            the last to expire patent right licensed under the agreement, which is
            currently
            October 2016. Oleoylestrone Developments has the right to terminate the
            license
            agreement sooner, subject to certain requirements to provide us advance
            notice,
            in the event we become bankrupt or similar proceedings are initiated,
            fail to
            make the required milestone payments required under the agreement or
            otherwise
            materially breach the license agreement. We have the right to terminate
            the
            license agreement for any reason upon written notice.
  *PTH
            (1-34) License Agreement.*
 
 On
            April
            1, 2005 as part of the acquisition of Tarpan Therapeutics, Inc., we acquired
            a
            Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April 14,
            2004.  We
            currently have worldwide, exclusive license rights to the U.S. and foreign
            patents and patent applications for all topical uses of PTH(1-34) for
            the
            treatment of hyperproliferative skin disorders including psoriasis:
 
 1.
                  U.S.
                      Patent No. 5,527,772, entitled “Regulation of cell proliferation and
                      differentiation using peptides.” M.F. Holick, Inventor. Application filed
                      July, 28, 1994. Patent issued June 18,
                      1996.
 
 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.
 
 3.
                  U.S.
                      Patent No. 6,066,618, entitled “Regulation of cell proliferation and
                      differentiation using peptides.” M.F. Holick, Inventor. Application filed
                      November 13, 1998. Patent issued May 23,
                      2000.




4.
              European
                  Patent Specification PCT/US88/03639
   -8-
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              to Table of Contents**
 **Index
              to Financial
              Statements**
  These
        patents have numerous, detailed and specific claims relating to the topical
        use
        of PTH (1-34) In consideration for our rights under the IGI Agreement, a
        payment
        of $300,000 was made upon execution of the agreement, prior to our acquisition
        of Tarpan. In addition the IGI Agreement requires us to make certain milestone
        payments as follows: $300,000 payable upon the commencement of a Phase II
        clinical trial; $500,000 upon the commencement of a Phase III clinical trial;
        $1,500,000 upon the acceptance of an NDA application by the FDA; $2,400,000
        upon
        the approval of an NDA by the FDA; $500,000 upon the commencement of a Phase
        III
        clinical trial for an indication other than psoriasis; $1,500,000 upon the
        acceptance of and NDA application for an indication other than psoriasis
        by the
        FDA; and $2,400,000 upon the approval of an NDA for an indication other than
        psoriasis by the FDA.
  In
        addition, we are obligated to pay IGI, Inc. an annual royalty of 6% annual
        net
        sales on annual net sales up to $200,000,000. In any calendar year in which
        net
        sales exceed $200,000,000, we are obligated to pay IGI, Inc. an annual royalty
        of 9% annual net sales. Through December 31, 2005, we have not paid any such
        milestones or royalties.
  IGI,
        Inc.
        may terminate the agreement (i) upon 60 days’ notice if we fail to make any
        required milestone or royalty payments, or (ii) if we become bankrupt or
        if a
        petition in bankruptcy is filed, or if we are placed in the hands of a receiver
        or trustee for the benefit of creditors. IGI, Inc. may terminate the agreement
        upon 60 days’ written notice and an opportunity to cure in the event we commit a
        material breach or default. Eighteen months from the date of the IGI Agreement,
        we may terminate the agreement in whole or as to any portion of the PTH patent
        rights upon 90 days’ notice to IGI, Inc.
  *Propofol
        LS License Agreement*
  Pursuant
        to the NovaDel license agreement, we have an exclusive, worldwide license
        to
        NovaDel’s proprietary lingual spray technology to deliver propofol for
        preprocedural sedation prior to diagnostic, therapeutic or endoscopic
        procedures. Our rights under the NovaDel License include license rights to
        the
        following patents held by NovaDel:
  1.
              U.S.
                  Patent No. 5,955,098, entitled “Buccal Non Polar Spray or Capsule.” H.A.
                  Dugger, III, Inventor. Application filed April 12, 1996. Patent
                  issued
                  September 21, 1999. This patent expires April 12,
                  2016.
 
 2.
              U.S.
                  Patent No. 6,110,486, entitled “Buccal Polar Spray or Capsule.” H.A.
                  Dugger, III, Inventor. Application filed November 25, 1998. Patent
                  issued
                  August 29, 2000. This patent expires April 12,
                  2016.
 
 3.
              U.S.
                  Patent No. 6,969,508, entitled “Buccal, polar and non-polar spray or
                  capsule containing drugs for treating pain.” H.A. Dugger, III, Inventor.
                  Application filed December 4, 2003. Patent issued November 29,
                  2005.
 
 4.
              European
                  Patent No. 0904055 entitled “Buccal, Non-Polar Spray or Capsule.” H.A.
                  Dugger, III, Inventor. Application filed, February 21, 1997. Patent
                  issued
                  April 16, 2003. This patent expires February 21,
                  2017.
 
 5.
              U.S.
                  Patent Application No. 10/834815 entitled “Buccal, Polar and Non-Polar
                  Sprays Containing Propofol.” H.A. Dugger and M.A. El-Shafy, Inventors.
                  Application filed April 27, 2004.
   -9-
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              to Table of Contents**
 **Index
              to Financial
              Statements**
  These
        issued patents have numerous, detailed, and specific claims relating to the
        formulation for lingual spray applications and their method of use. We have
        the
        right to use the technology in connection with one application - delivering
        propofol. Our success in developing lingual spray propofol depends substantially
        on the maintenance and enforcement of NovaDel’s patents covering its proprietary
        spray technology. In consideration for our rights under the NovaDel license
        agreement, we paid NovaDel an initial license fee of $500,000 upon the
        completion of our $10 million private placement of Series A Convertible
        Preferred Stock in November 2003. In addition, the license agreement requires
        us
        to make certain milestone payments as follows: $1,000,000 payable following
        the
        date that the first NDA for lingual spray propofol is accepted for review
        by the FDA; $1,000,000 following the date that the first European Marketing
        Application is accepted for review by any European Union country; $2,000,000
        following the date when the first filed NDA for lingual spray propofol is
        approved by the FDA; $2,000,000 following the date when the first filed European
        Marketing Application for lingual spray propofol is approved by a European
        Union
        country; $1,000,000 following the date on which an application for commercial
        approval of lingual spray propofol is approved by the appropriate regulatory
        authority in each of Australia, Canada, Japan and South Africa; and $50,000
        following the date on which an application for commercial approval for lingual
        spray propofol is approved in any other country (other than the U.S., a member
        of the European Union, Australia, Canada, Japan or South Africa). In addition,
        we are obligated to pay NovaDel an annual royalty based on a fixed rate of
        net
        sales of licensed products, or if greater, the annual royalty is based on
        our
        net profits from the sale of licensed products at a rate that is twice the
        net
        sales rate.
 
 Subject
        to certain requirements to provide us with notice and an opportunity to cure,
        NovaDel may terminate the license agreement in the event we (1) become subject
        to a bankruptcy or similar proceeding that is not dismissed within 60 days,
        (2)
        default in our obligation to make a required payment under the license
        agreement, or (3) otherwise materially breach the license agreement. We may
        terminate the license agreement for any reason upon 90 days’ notice to
        NovaDel.
 
 **Manufacturing**
  We
        do not
        have any manufacturing capabilities. We are in contact with several contract
        “Good Manufacturing Process” (GMP) manufacturers for the supply of
        Oleoyl-estrone, lingual spray propofol, and PTH(1-34) that will be necessary
        to
        conduct Phase I and Phase II human clinical trials. A method has been identified
        for synthesizing oleoyl-estrone, and can be done through simple reactions
        that
        produce the substance at above 99 percent purity. We believe that the production
        of oleoyl-estrone will involve one contract manufacturer for clinical trials.
        In
        addition, we will be outsourcing the manufacture of lingual spray propofol
        and
        PTH(1-34) as well.
  **Government
        Regulation**
  The
        research, development, testing, manufacture, labeling, promotion, advertising,
        distribution, and marketing, among other things, of our products are extensively
        regulated by governmental authorities in the United States and other countries.
        In the United States, the FDA regulates drugs under the Federal Food, Drug,
        and
        Cosmetic Act, or the “FDCA,” and its implementing regulations. Failure to comply
        with the applicable U.S. requirements may subject us to administrative or
        judicial sanctions, such as FDA refusal to approve pending NDAs, warning
        letters, product recalls, product seizures, total or partial suspension of
        production or distribution, injunctions, and/or criminal
        prosecution.
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 **Index
              to Financial
              Statements**
  ***Drug
        Approval Process.*** None
        of our drugs may be marketed in the U.S. until the drug has received FDA
        approval. The steps required before a drug may be marketed in the U.S. include:
 
 ·
              preclinical
                  laboratory tests, animal studies, and formulation
                  studies,
  ·
              submission
                  to the FDA of an IND for human clinical testing, which must become
                  effective before human clinical trials may
                  begin,
  ·
              adequate
                  and well-controlled human clinical trials to establish the safety
                  and
                  efficacy of the drug for each
                  indication,
  ·
              submission
                  to the FDA of an NDA,
  ·
              satisfactory
                  completion of an FDA inspection of the manufacturing facility or
                  facilities at which the drug is produced to assess compliance with
                  current
                  good manufacturing practices, or “cGMPs,”
and
  ·
              FDA
                  review and approval of the NDA.
  Preclinical
        tests include laboratory evaluation of product chemistry, toxicity, and
        formulation, as well as animal studies. The conduct of the preclinical tests
        and
        formulation of the compounds for testing must comply with federal regulations
        and requirements. The results of the preclinical tests, together with
        manufacturing information and analytical data, are submitted to the FDA as
        part
        of an IND, which must become effective before human clinical trials may begin.
        An IND will automatically become effective 30 days after receipt by the FDA,
        unless before that time the FDA raises concerns or questions about issues
        such
        as the conduct of the trials as outlined in the IND. In such a case, the
        IND
        sponsor and the FDA must resolve any outstanding FDA concerns or questions
        before clinical trials can proceed. We cannot be sure that submission of
        an IND
        will result in the FDA allowing clinical trials to begin.
  Clinical
        trials involve the administration of the investigational drug to human subjects
        under the supervision of qualified investigators. Clinical trials are conducted
        under protocols detailing the objectives of the study, the parameters to
        be used
        in monitoring safety, and the effectiveness criteria to be evaluated. Each
        protocol must be submitted to the FDA as part of the IND.
  Clinical
        trials typically are conducted in three sequential phases, but the phases
        may
        overlap. The study protocol and informed consent information for study subjects
        in clinical trials must also be approved by an Institutional Review Board
        for
        each institution where the trials will be conducted. Study subjects must
        sign an
        informed consent form before participating in a clinical trial. Phase I usually
        involves the initial introduction of the investigational drug into people
        to
        evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics
        and pharmacologic actions, and, if possible, to gain an early indication
        of its
        effectiveness. Phase II usually involves trials in a limited patient population
        to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible
        adverse effects and safety risks; and (iii) preliminarily evaluate the efficacy
        of the drug for specific indications. Phase III trials usually further evaluate
        clinical efficacy and test further for safety by using the drug in its final
        form in an expanded patient population. There can be no assurance that phase
        I,
        phase II, or phase III testing will be completed successfully within any
        specified period of time, if at all. Furthermore, the Company or the FDA
        may
        suspend clinical trials at any time on various grounds, including a finding
        that
        the subjects or patients are being exposed to an unacceptable health risk.
  The
        FDCA
        permits FDA and the IND sponsor to agree in writing on the design and size
        of
        clinical studies intended to form the primary basis of an effectiveness claim
        in
        an NDA application. This process is known as Special Protocol Assessment,
        or
        SPA. These agreements may not be changed after the clinical studies begin,
        except in limited circumstances.
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  Assuming
        successful completion of the required clinical testing, the results of the
        preclinical and clinical studies, together with other detailed information,
        including information on the manufacture and composition of the drug, are
        submitted to the FDA in the form of a NDA requesting approval to market the
        product for one or more indications. The testing and approval process requires
        substantial time, effort, and financial resources. The agencies review the
        application and may deem it to be inadequate to support the registration
        and we
        cannot be sure that any approval will be granted on a timely basis, if at
        all.
        The FDA may also refer the application to the appropriate advisory committee,
        typically a panel of clinicians, for review, evaluation and a recommendation
        as
        to whether the application should be approved. The FDA is not bound by the
        recommendations of the advisory committee.
  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
        505b2 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.
  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 postmarketing testing and
        surveillance to monitor the drug’s safety or efficacy, or impose other
        conditions.
  After
        approval, certain changes to the approved product, such as adding new
        indications, making certain manufacturing changes, or making certain additional
        labeling claims, are subject to further FDA review and approval. Before we
        can
        market our product candidates for additional indications, we must obtain
        additional approvals from FDA. Obtaining approval for a new indication generally
        requires that additional clinical studies be conducted. We cannot be sure
        that
        any additional approval for new indications for any product candidate will
        be
        approved on a timely basis, or at all.
  ***Post-Approval
        Requirements*** **.** Often
        times, even after a drug has been approved by the FDA for sale, the FDA may
        require that certain post-approval requirements be satisfied, including the
        conduct of additional clinical studies. If such post-approval conditions
        are not
        satisfied, the FDA may withdraw its approval of the drug. In addition, holders
        of an approved NDA are required to: (i) report certain adverse reactions
        to the
        FDA, (ii) comply with certain requirements concerning advertising and
        promotional labeling for their products, and (iii) continue to have quality
        control and manufacturing procedures conform to cGMP after approval. The
        FDA
        periodically inspects the sponsor’s records related to safety reporting and/or
        manufacturing facilities; this latter effort includes assessment of compliance
        with cGMP. Accordingly, manufacturers must continue to expend time, money,
        and
        effort in the area of production and quality control to maintain cGMP
        compliance. We intend to use third party manufacturers to produce our products
        in clinical and commercial quantities, and future FDA inspections may identify
        compliance issues at the facilities of our contract manufacturers that may
        disrupt production or distribution, or require substantial resources to correct.
        In addition, discovery of problems with a product after approval may result
        in
        restrictions on a product, manufacturer, or holder of an approved NDA, including
        withdrawal of the product from the market.
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 **Index
              to Financial
              Statements**
 
 ***Orphan
        Drug.*** The
        FDA may grant orphan drug designation to drugs intended to treat a “rare disease
        or condition,” which generally is a disease or condition that affects fewer than
        200,000 individuals in the United States. Orphan drug designation must be
        requested before submitting an NDA. If the FDA grants orphan drug designation,
        which it may not, the identity of the therapeutic agent and its potential
        orphan
        use are publicly disclosed by the FDA. Orphan drug designation does not convey
        an advantage in, or shorten the duration of, the review and approval process.
        If
        a product which has an orphan drug designation subsequently receives the
        first
        FDA approval for the indication for which it has such designation, the product
        is entitled to orphan exclusivity, meaning that the FDA may not approve any
        other applications to market the same drug for the same indication, except
        in
        certain very limited circumstances, for a period of seven years. Orphan drug
        designation does not prevent competitors from developing or marketing different
        drugs for that indication.
  ***Non-United
        States Regulation*** **.** Before
        our products can be marketed outside of the United States, they are subject
        to
        regulatory approval similar to that required in the United States, although
        the
        requirements governing the conduct of clinical trials, including additional
        clinical trials that may be required, product licensing, pricing and
        reimbursement vary widely from country to country. No action can be taken
        to
        market any product in a country until an appropriate application has been
        approved by the regulatory authorities in that country. The current approval
        process varies from country to country, and the time spent in gaining approval
        varies from that required for FDA approval. In certain countries, the sales
        price of a product must also be approved. The pricing review period often
        begins
        after market approval is granted. Even if a product is approved by a regulatory
        authority, satisfactory prices may not be approved for such product.
  In
        Europe, marketing authorizations may be submitted at a centralized, a
        decentralized or national level. The centralized procedure is mandatory for
        the
        approval of biotechnology products and provides for the grant of a single
        marketing authorization that is valid in all EU members states. As of January
        1995, a mutual recognition procedure is available at the request of the
        applicant for all medicinal products that are not subject to the centralized
        procedure. There can be no assurance that the chosen regulatory strategy
        will
        secure regulatory approvals on a timely basis or at all.
  **Employees**
  We
        currently have 8 employees, including 3 persons devoted to research and
        development and 5 persons in administration and finance, including our senior
        management.
 
 **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.*
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 **Index
              to Financial
              Statements**
 
 **Risks
        Related to Our Business**
 
 **We
        currently have no product revenues and will need to raise additional funds
        in
        the future. If we are unable to obtain the funds necessary to continue our
        operations, we will be required to delay, scale back or eliminate one or
        more of
        our drug development programs** .
  We
        have
        generated no product revenues to date and will not until, and if, we receive
        approval from the FDA and other regulatory authorities for our product
        candidates. We have already spent substantial funds developing our potential
        products and business, however, and we expect to continue to have negative
        cash
        flow from our operations for at least the next several years. As of December
        31,
        2005, we had $9,826,336 of cash and cash equivalents and $1,007,818 of
        short-term investments. **** We
        will
        have to raise additional funds to complete the development of our drug
        candidates and to bring them to market. Beyond the capital requirements
        mentioned above, our future capital requirements will depend on numerous
        factors, including:
 
 ·
              the
                  results of any clinical trials;
 ·
              the
                  scope and results of our research and development
                  programs;
 ·
              the
                  time required to obtain regulatory
                  approvals;
 ·
              our
                  ability to establish and maintain marketing alliances and collaborative
                  agreements; and
 ·
              the
                  cost of our internal marketing
                  activities.
 
 Additional
        financing may not be available on acceptable terms, if at all. If adequate
        funds
        are not available, we will be required to delay, scale back or eliminate
        one or
        more of our drug development programs or obtain funds through arrangements
        with
        collaborative partners or others that may require us to relinquish rights
        to
        certain of our technologies or products that we would not otherwise
        relinquish.
 
 **We
        are not currently profitable and may never become
        profitable.**
  We
        have a
        history of losses and expect to incur substantial losses and negative operating
        cash flow for the foreseeable future, and we may never achieve or maintain
        profitability. For each of the fiscal years ended December 31, 2005, 2004,
        2003
        and 2002 and from August 6, 2001 (inception) through December 31, 2001, we
        incurred net losses of $19,140,997, $5,896,031, $5,960,907, $1,037,320, and
        $56,796, respectively. Even if we succeed in developing and commercializing
        one
        or both of our product candidates, we expect to incur substantial losses
        for the
        foreseeable future and may never become profitable. We also expect to continue
        to incur significant operating and capital expenditures and anticipate that
        our
        expenses will increase substantially in the foreseeable future as
        we:
  ·
              continue
                  to undertake pre-clinical development and clinical trials for our
                  product
                  candidates;
 ·
              seek
                  regulatory approvals for our product
                  candidates;
 ·
              implement
                  additional internal systems and infrastructure;
 ·
              lease
                  additional or alternative office facilities;
                  and
 ·
              hire
                  additional personnel.
 
 We
        also
        expect to experience negative cash flow for the foreseeable future as we
        fund
        our operating losses and capital expenditures. As a result, we will need
        to
        generate significant revenues in order to achieve and maintain profitability.
        We
        may not be able to generate these revenues or achieve profitability in the
        future. Our failure to achieve or maintain profitability could negatively
        impact
        the value of our common stock.
  -14-
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              to Table of Contents**
 **Index
              to Financial
              Statements**
  **We
          have a limited operating history upon which to base an investment decision.**
  We
          are a
          development-stage company and have not yet demonstrated any ability to
          perform
          the functions necessary for the successful commercialization of any product
          candidates. The successful commercialization of our product candidates
          will
          require us to perform a variety of functions, including:
  ·
                continuing
                    to undertake pre-clinical development and clinical
                    trials;
 ·
                participating
                    in regulatory approval processes;
 ·
                formulating
                    and manufacturing products; and
 ·
                conducting
                    sales and marketing activities.
  Since
          inception as Manhattan Research Development, Inc., our operations have
          been
          limited to organizing and staffing, and acquiring, developing and securing
          our
          proprietary technology and undertaking pre-clinical trials of principal
          product
          candidates. These operations provide a limited basis for you to assess
          our
          ability to commercialize our product candidates and the advisability of
          investing in our securities.
  **We
          may not obtain the necessary U.S. or worldwide regulatory approvals to
          commercialize our product candidates.**
  We
          will
          need FDA approval to commercialize our product candidates in the U.S. and
          approvals from the FDA equivalent regulatory authorities in foreign
          jurisdictions to commercialize our product candidates in those jurisdictions.
          In
          order to obtain FDA approval of any of our product candidates, we must
          first
          submit to the FDA an Investigational New Drug Application, or an “IND,” which
          will set forth our plans for clinical testing of our product candidates.
          In
          January 2005, the FDA accepted INDs for both our Oleoyl-estrone and Propofol
          LS
          product candidates. We have not yet filed a corporate IND for PTH(1-34).
          In May
          and July 2005, we completed Phase Ia and Phase Ib trials in Basel, Switzerland
          to evaluate the safety and tolerability as well as preliminary signs of
          efficacy
          of defined doses of orally administered oleoyl-estrone in obese adults,
          in
          accordance with relevant regulatory guidelines. Assuming formulation work
          is
          completed satisfactorily, we expect to conduct a Phase I clinical study
          for
          propofol lingual spray following formulation. Because propofol has already
          been
          approved by the FDA for intravenous use, the FDA has informed us that we
          may
          utilize a rapid development strategy that will enable us to go directly
          to a
          Pivotal Phase III trial following completion of our planned Phase I trials.
          Accordingly, we currently anticipate that development of propofol lingual
          spray
          may be completed as early as 2007. We are unable to estimate the size and
          timing
          of all the Phase II and Phase III programs for oleoyl-estrone at this time
          and,
          accordingly, cannot estimate the time when development of that product
          candidate
          will be completed.
  When
          the
          clinical testing for our product candidates is complete, we will submit
          to the
          FDA a New Drug Application, or “NDA,” demonstrating that the product candidate
          is safe for humans and effective for its intended use. This demonstration
          requires significant research and animal tests, which are referred to as
          pre-clinical studies, as well as human tests, which are referred to as
          clinical
          trials. Satisfaction of the FDA’s regulatory requirements typically takes many
          years, depends upon the type, complexity and novelty of the product candidate
          and requires substantial resources for research, development and testing.
          We
          cannot predict whether our research and clinical approaches will result
          in drugs
          that the FDA considers safe for humans and effective for indicated uses.
          The FDA
          has substantial discretion in the drug approval process and may require
          us to
          conduct additional pre-clinical and clinical testing or to perform
          post-marketing studies. The approval process may also be delayed by changes
          in
          government regulation, future legislation or administrative action or changes
          in
          FDA policy that occur prior to or during our regulatory review. Delays
          in
          obtaining regulatory approvals may:
  ·
                delay
                    commercialization of, and our ability to derive product revenues
                    from, our
                    product candidates;
 ·
                impose
                    costly procedures on us; and
 ·
                diminish
                    any competitive advantages that we may otherwise
                    enjoy.
   -15-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  Even
          if
          we comply with all FDA requests, the FDA may ultimately reject one or more
          of
          our NDAs. We cannot be sure that we will ever obtain regulatory clearance
          for
          our product candidate. Failure to obtain FDA approval of any of our product
          candidate will severely undermine our business by reducing our number of
          salable
          products and, therefore, corresponding product revenues.
  In
          foreign jurisdictions, we must receive approval from the appropriate regulatory
          authorities before we can commercialize our drugs. Foreign regulatory approval
          processes generally include all of the risks associated with the FDA approval
          procedures described above. We have not yet made any determination as to
          which
          foreign jurisdictions we may seek approval and have not undertaken any
          steps to
          obtain approvals in any foreign jurisdiction.
  **Clinical
          trials are very expensive, time-consuming and difficult to design and
          implement.**
  Human
          clinical trials are very expensive and difficult to design and implement,
          in
          part because they are subject to rigorous regulatory requirements. The
          clinical
          trial process is also time consuming. We estimate that clinical trials
          of our
          product candidates will take at least several years to complete. Furthermore,
          failure can occur at any stage of the trials, and we could encounter problems
          that cause us to abandon or repeat clinical trials. The commencement and
          completion of clinical trials may be delayed by several factors,
          including:
  ·
                unforeseen
                    safety issues;
 ·
                determination
                    of dosing issues;
 ·
                lack
                    of effectiveness during clinical
                    trials;
 ·
                slower
                    than expected rates of patient
                    recruitment;
 ·
                inability
                    to monitor patients adequately during or after treatment;
                    and
 ·
                inability
                    or unwillingness of medical investigators to follow our clinical
                    protocols.
  In
          addition, we or the FDA may suspend our clinical trials at any time if
          it
          appears that we are exposing participants to unacceptable health risks
          or if the
          FDA finds deficiencies in our IND submissions or the conduct of these
          trials.
  **The
          results of our clinical trials may not support our product candidate
          claims.**
  Even
          if
          our clinical trials are completed as planned, we cannot be certain that
          their
          results will support our product candidate claims. Success in pre-clinical
          testing and early clinical trials does not ensure that later clinical trials
          will be successful, and we cannot be sure that the results of later clinical
          trials will replicate the results of prior clinical trials and pre-clinical
          testing. The clinical trial process may fail to demonstrate that our product
          candidates are safe for humans or effective for indicated uses. This failure
          would cause us to abandon a product candidate and may delay development
          of other
          product candidates. Any delay in, or termination of, our clinical trials
          will
          delay the filing of our NDAs with the FDA and, ultimately, our ability
          to
          commercialize our product candidates and generate product revenues. In
          addition,
          we anticipate that our clinical trials will involve only a small patient
          population. We expect that our clinical trials will only involve a small
          sample
          size. Accordingly, the results of such trials may not be indicative of
          future
          results over a larger patient population.
  -16-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  **Physicians
          and patients may not accept and use our drugs.**
  Even
          if
          the FDA approves our product candidates, physicians and patients may not
          accept
          and use them. Acceptance and use of our product will depend upon a number
          of
          factors including:
  ·
                perceptions
                    by members of the health care community, including physicians,
                    about the
                    safety and effectiveness of our
                    drugs;
 ·
                cost-effectiveness
                    of our product relative to competing
                    products;
 ·
                availability
                    of reimbursement for our products from government or other healthcare
                    payers; and
 ·
                effectiveness
                    of marketing and distribution efforts by us and our licensees
                    and
                    distributors, if any.
  Because
          we expect sales of our current product candidates, if approved, to generate
          substantially all of our product revenues for the foreseeable future, the
          failure of any of these drugs to find market acceptance would harm our
          business
          and could require us to seek additional financing.
  **Our
          drug-development program depends upon third-party researchers who are outside
          our control.**
  We
          currently are collaborating with NovaDel Pharma, from which we license
          our
          rights to lingual spray propofol, in the development of that product candidate
          in the pre-clinical and early clinical trial stages. Under our agreement
          with
          NovaDel, it has agreed to perform certain development on our behalf and
          at our
          expense, including formulation stability testing, formulation analytic
          method
          development and testing and manufacture of clinical trial material for
          the
          pre-clinical and early clinical development of propofol lingual spray.
          Beyond
          those limited activities, we need to engage independent investigators and
          other
          third party collaborators to conduct pre-clinical and clinical trials for
          lingual spray propofol. We are not currently collaborating with any third
          party
          with respect to the development of oleoyl-estrone, but we intend to engage
          third
          party independent investigators and collaborators, which may include
          universities and medical institutions, to conduct our pre-clinical and
          clinical
          trials for that product candidate, as well. Accordingly, the successful
          development of our product candidates will depend on the performance of
          these
          third parties. These collaborators will not be our employees, however,
          and we
          cannot control the amount or timing of resources that they will devote
          to our
          programs. Our collaborators may not assign as great a priority to our programs
          or pursue them as diligently as we would if we were undertaking such programs
          ourselves. If outside collaborators fail to devote sufficient time and
          resources
          to our drug-development programs, or if their performance is substandard,
          the
          approval of our FDA applications, if any, and our introduction of new drugs,
          if
          any, will be delayed. These collaborators may also have relationships with
          other
          commercial entities, some of whom may compete with us. If our collaborators
          assist our competitors at our expense, our competitive position would be
          harmed.
  **We
          rely exclusively on third parties to formulate and manufacture our product
          candidates.**
  We
          have
          no experience in drug formulation or manufacturing and do not intend to
          establish our own manufacturing facilities. We lack the resources and expertise
          to formulate or manufacture our own product candidates. We currently have
          no
          contract for the manufacture of our product candidate. We intend to contract
          with one or more manufacturers to manufacture, supply, store and distribute
          drug
          supplies for our clinical trials. **** If
          any of
          our product candidates receive FDA approval, we will rely on one or more
          third-party contractors to manufacture our drugs. Our anticipated future
          reliance on a limited number of third-party manufacturers, exposes us to
          the
          following risks:
  ·
                We
                    may be unable to identify manufacturers on acceptable terms or
                    at all
                    because the number of potential manufacturers is limited and
                    the FDA must
                    approve any replacement contractor. This approval would require
                    new
                    testing and compliance inspections. In addition, a new manufacturer
                    would
                    have to be educated in, or develop substantially equivalent processes
                    for,
                    production of our products after receipt of FDA approval, if
                    any.
 ·
                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 DEA, and corresponding state agencies to ensure
                    strict
                    compliance with good manufacturing practice and other government
                    regulations and corresponding foreign standards. We do not have
                    control
                    over third-party manufacturers’ compliance with these regulations and
                    standards.
 ·
                If
                    any third-party manufacturer makes improvements in the manufacturing
                    process for our products, we may not own, or may have to share,
                    the
                    intellectual property rights to the
                    innovation.
   -17-
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                to Table of Contents**
 **Index
                to Financial
                Statements**
  We
          may be
          unable to identify manufacturers on acceptable terms or at all because
          the
          number of potential manufacturers is limited and the FDA must approve any
          replacement contractor. This approval would require new testing and compliance
          inspections. In addition, a new manufacturer would have to be educated
          in, or
          develop substantially equivalent processes for, production of our products
          after
          receipt of FDA approval, if any.
  **Our
          third-party manufacturers might be unable to formulate and manufacture
          our drugs
          in the volume and of the quality required to meet our clinical needs and
          commercial needs, if any.**
  Our
          future contract manufacturers may not perform as agreed or may not remain
          in the
          contract manufacturing business for the time required to supply our clinical
          trials or to successfully produce, store and distribute our products. Drug
          manufacturers are subject to ongoing periodic unannounced inspection by
          the FDA,
          the Drug Enforcement Agency, and corresponding state agencies to ensure
          strict
          compliance with good manufacturing practice and other government regulations
          and
          corresponding foreign standards. We do not have control over third-party
          manufacturers’ compliance with these regulations and standards. If any
          third-party manufacturer makes improvements in the manufacturing process
          for our
          products, we may not own, or may have to share, the intellectual property
          rights
          to the innovation.
  Each
          of
          these risks could delay our clinical trials, the approval, if any of our
          product
          candidates by the FDA or the commercialization of our product candidates
          or
          result in higher costs or deprive us of potential product revenues.
  **We
          have no experience selling, marketing or distributing products and no internal
          capability to do so.**
  We
          currently have no sales, marketing or distribution capabilities. We do
          not
          anticipate having the resources in the foreseeable future to allocate to
          the
          sales and marketing of its proposed products. Our future success depends,
          in
          part, on our ability to enter into and maintain such collaborative
          relationships, the collaborator’s strategic interest in the products under
          development and such collaborator’s ability to successfully market and sell any
          such products. We intend to pursue collaborative arrangements regarding
          the
          sales and marketing of oleoyl-estrone and perhaps our other products,
          however, there can be no assurance that we will be able to establish or
          maintain
          such collaborative arrangements, or if able to do so, that they will have
          effective sales forces. To the extent that we decide not to, or are unable
          to,
          enter into collaborative arrangements with respect to the sales and marketing
          of
          its proposed products, significant capital expenditures, management resources
          and time will be required to establish and develop an in-house marketing
          and
          sales force with technical expertise. There can also be no assurance that
          we
          will be able to establish or maintain relationships with third party
          collaborators or develop in-house sales and distribution capabilities.
          To the
          extent that we depend on third parties for marketing and distribution,
          any
          revenues we receive will depend upon the efforts of such third parties,
          and
          there can be no assurance that such efforts will be successful. In addition,
          there can also be no assurance that we will be able to market and sell
          our
          product in the United States or overseas.
  -18-
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                to Table of Contents**
 **Index
                to Financial
                Statements**
  **If
          we cannot compete successfully for market share against other drug companies,
          we
          may not achieve sufficient product revenues and our business will suffer.**
  The
          market for our product candidates is characterized by intense competition
          and
          rapid technological advances. If our product candidates receive FDA approval,
          they will compete with a number of existing and future drugs and therapies
          developed, manufactured and marketed by others. Existing or future competing
          products may provide greater therapeutic convenience or clinical or other
          benefits for a specific indication than our products, or may offer comparable
          performance at a lower cost. If our products fail to capture and maintain
          market
          share, we may not achieve sufficient product revenues and our business
          will
          suffer.
  We
          will
          compete against fully integrated pharmaceutical companies and smaller companies
          that are collaborating with larger pharmaceutical companies, academic
          institutions, government agencies and other public and private research
          organizations. Many of these competitors have product candidates that will
          compete with ours already approved or in development. In addition, many
          of these
          competitors, either alone or together with their collaborative partners,
          operate
          larger research and development programs and have substantially greater
          financial resources than we do, as well as significantly greater experience
          in:
  ·
                developing
                    drugs;
 ·
                undertaking
                    pre-clinical testing and human clinical
                    trials;
 ·
                obtaining
                    FDA and other regulatory approvals of
                    drugs;
 ·
                formulating
                    and manufacturing drugs; and
 ·
                launching,
                    marketing and selling drugs.
  **Developments
          by competitors may render our products or technologies obsolete or
          non-competitive.**
  Companies
          that currently sell both generic and proprietary anti-obesity compounds
          formulations include among others Abbot Laboratories, Inc., Amgen, Inc.,
          and
          Regeneron Pharmaceuticals, Inc. Alternative technologies are being developed
          to
          treat obesity and overweight disease, several of which are in advanced
          clinical
          trials. In addition, companies pursuing different but related fields represent
          substantial competition. Many of these organizations competing with us
          have
          substantially greater capital resources, larger research and development
          staffs
          and facilities, longer drug development history in obtaining regulatory
          approvals and greater manufacturing and marketing capabilities than we
          do. These
          organizations also compete with us to attract qualified personnel, parties
          for
          acquisitions, joint ventures or other collaborations.
  **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.
  -19-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  We
          currently do not directly own the rights to any patents or patent applications.
          We license the exclusive rights to two issued patents relating to
          oleoyl-estrone, which expire in 2016, and three patent applications. We
          also
          license the exclusive rights to three issued patents relating to lingual
          spray
          propofol, which expire from 2016 to 2017. In addition, our license for
          propofol
          lingual spray covers one pending patent application. See “Business -
          Intellectual Property and License Agreements.” There are no other pending patent
          applications relating to either of our product candidates, although we
          anticipate the need to file additional patent applications both in the
          U.S. and
          in other countries, as appropriate.
  However,
          with regard to the patents covered by our license agreements and any future
          patents issued to which we will have rights, we cannot predict:
  ·
                the
                    degree and range of protection any patents will afford us against
                    competitors including whether third parties will find ways to
                    invalidate
                    or otherwise circumvent our
                    patents;
 ·
                if
                    and when patents will issue;
 ·
                whether
                    or not others will obtain patents claiming aspects similar to
                    those
                    covered by our patents and patent applications;
                    or
 ·
                whether
                    we will need to initiate litigation or administrative proceedings
                    which
                    may be costly whether we win or
                    lose.
  Our
          success also depends upon the skills, knowledge and experience of our scientific
          and technical personnel, our consultants and advisors as well as our licensors
          and contractors. To help protect our proprietary know-how and our inventions
          for
          which patents may be unobtainable or difficult to obtain, we rely on trade
          secret protection and confidentiality agreements. To this end, we require
          all of
          our employees, consultants, advisors and contractors to enter into agreements
          which prohibit the disclosure of confidential information and, where applicable,
          require disclosure and assignment to us of the ideas, developments, discoveries
          and inventions important to our business. These agreements may not provide
          adequate protection for our trade secrets, know-how or other proprietary
          information in the event of any unauthorized use or disclosure or the lawful
          development by others of such information. For example, despite covenants
          in our
          license agreements with Oleoylestrone Developments and NovaDel Pharma,
          from
          which we license oleoyl-estrone and lingual spray propofol, respectively,
          that
          generally prohibit those companies from disclosing information relating
          to our
          licensed technology, the respective license agreements allow for each company
          to
          publish data and other information relating to our licensed technology.
          If any
          of our trade secrets, know-how or other proprietary information is disclosed,
          the value of our trade secrets, know-how and other proprietary rights would
          be
          significantly impaired and our business and competitive position would
          suffer.
  **If
          we infringe the rights of third parties we could be prevented from selling
          products, forced to pay damages, and defend against litigation.**
  Our
          business is substantially dependent on the intellectual property on which
          our
          product candidates are based. To date, we have not received any threats
          or
          claims that we may be infringing on another’s patents or other intellectual
          property rights. If our products, methods, processes and other technologies
          infringe the proprietary rights of other parties, we could incur substantial
          costs and we may have to:
  ·
                obtain
                    licenses, which may not be available on commercially reasonable
                    terms, if
                    at all;
 ·
                redesign
                    our products or processes to avoid
                    infringement;
 ·
                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.
   -20-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  **Our
          ability to generate product revenues will be diminished if our drugs sell
          for
          inadequate prices or patients are unable to obtain adequate levels of
          reimbursement.**
  Our
          ability to commercialize our drugs, alone or with collaborators, will depend
          in
          part on the extent to which reimbursement will be available from:
  ·
                government
                    and health administration
                    authorities;
 ·
                private
                    health maintenance organizations and health insurers;
                    and
 ·
                other
                    healthcare payers.
  Significant
          uncertainty exists as to the reimbursement status of newly approved healthcare
          products. Healthcare payers, including Medicare, are challenging the prices
          charged for medical products and services. Government and other healthcare
          payers increasingly attempt to contain healthcare costs by limiting both
          coverage and the level of reimbursement for drugs. Even if our product
          candidates are approved by the FDA, insurance coverage may not be available,
          and
          reimbursement levels may be inadequate, to cover our drugs. If government
          and
          other healthcare payers do not provide adequate coverage and reimbursement
          levels for any of our products, once approved, market acceptance of our
          products
          could be reduced.
  **We
          may not successfully manage our growth.**
  Our
          success will depend upon the expansion of our operations and the effective
          management of our growth, which will place a significant strain on our
          management and on our administrative, operational and financial resources.
          To
          manage this growth, we must expand our facilities, augment our operational,
          financial and management systems and hire and train additional qualified
          personnel. If we are unable to manage our growth effectively, our business
          may
          suffer.
  **If
          we are unable to hire additional qualified personnel, our ability to grow
          our
          business may be harmed.**
  We
          will
          need to hire additional qualified personnel with expertise in pre-clinical
          testing, clinical research and testing, government regulation, formulation
          and
          manufacturing and sales and marketing. We compete for qualified individuals
          with
          numerous biopharmaceutical companies, universities and other research
          institutions. Competition for such individuals is intense, and we cannot
          be
          certain that our search for such personnel will be successful. Attracting
          and
          retaining qualified personnel will be critical to our success.
  -21-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  **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 $2,000,000, 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 32 percent of our outstanding voting stock and, including
          shares
          underlying outstanding options and warrants, this group beneficially owns
          approximately 35 percent of our common stock. Accordingly, these persons
          and
          their respective affiliates will have the ability to exert substantial
          influence
          over the election of our Board of Directors and the outcome of issues submitted
          to our stockholders.
  **Risks
          Related to Our Securities**
  **Our
          stock price is, and we expect it to remain, volatile, which could limit
          investors’ ability to sell stock at a profit.**
  During
          the last two fiscal years, our stock price has traded at a low of $0.65
          (in the
          fourth quarter of 2004) to a high of $2.48 (in the second quarter of 2004).
          The
          volatile price of our stock makes it difficult for investors to predict
          the
          value of their investment, to sell shares at a profit at any given time,
          or to
          plan purchases and sales in advance. A variety of factors may affect the
          market
          price of our common stock. These include, but are not limited to:
  ·
                publicity
                    regarding actual or potential clinical results relating to products
                    under
                    development by our competitors or
                    us;
 ·
                delay
                    or failure in initiating, completing or analyzing pre-clinical
                    or clinical
                    trials or the unsatisfactory design or results of these
                    trials;
 ·
                achievement
                    or rejection of regulatory approvals by our competitors or
                    us;
 ·
                announcements
                    of technological innovations or new commercial products by our
                    competitors
                    or us;
 ·
                developments
                    concerning proprietary rights, including
                    patents;
 ·
                developments
                    concerning our collaborations;
 ·
                regulatory
                    developments in the United States and foreign
                    countries;
 ·
                economic
                    or other crises and other external factors;
 ·
                period-to-period
                    fluctuations in our revenues and other results of
                    operations;
 ·
                changes
                    in financial estimates by securities analysts;
                    and
 ·
                sales
                    of our common stock.
   -22-
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                to Table of Contents**
 **Index
                to Financial
                Statements**
  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
          have never paid dividends.**
  We
          have
          never paid dividends on our capital 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.
  -23-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  **ITEM
                  2.**
                **LEGAL
                    PROCEEDINGS**
  We
          are
          not a party to any legal proceedings.
  **ITEM
                  3.**
                **DESCRIPTION
                    OF PROPERTY**
  Our
          executive offices are located at 810 Seventh Avenue, 4th Floor, New York,
          New
          York 10019. We currently occupy this space pursuant to a written lease
          for a
          term of four years under which we pay rent of approximately $11,800 per
          month.
  We
          believe that our existing facilities are adequate to meet our current
          requirements. We do not own any real property.
  **ITEM
                  4.**
                **SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY
                    HOLDERS.**
  We
          held
          our Annual Meeting of Stockholders at 210 West 55 th Street,
          New York, New York on November 18, 2005. The stockholders took the following
          actions:
  (i)    The
          stockholders elected seven directors to serve until the next Annual Meeting
          of
          Stockholders. The stockholders present in person or by proxy cast the following
          numbers of votes in connection with the election of directors, resulting
          in the
          election of all nominees:
  **Nominee**
                
                **Votes
                    For**
                
                **Votes
                    Withheld**Douglas
                    Abel
                
                
                40,968,529
                
                
                54,074Neil
                    Herskowitz
                
                
                40,935,131
                
                
                88,372Malcolm
                    Hoenlein
                
                
                40,935,131
                
                
                88,372Timothy
                    McInerney
                
                
                40,966,301
                
                
                57,202Joan
                    Pons Gimbert
                
                
                40,966,301
                
                
                57,202Richard
                    I. Steinhart
                
                
                40,967,848
                
                
                55,655Michael
                    Weiser
                
                
                40,941,697
                
                
                81,806
  (ii) 
            The stockholders ratified and approved and amendment to our 2003
          Stock Option Plan, increasing the number of shares of our common stock
          available
          for issuance thereunder to 7,400,000. 33,214,320 votes were cast for the
          proposal; 327,255 votes were cast against the proposal; 116,498 votes abstained;
          and there were 7,365,430 broker non-votes.
  (iii) 
            The stockholders ratified the appointment of J.H. Cohn LLP as our
          independent registered public accounting firm for fiscal 2005. 41,010,443
          votes
          were cast for the proposal; 11,500 votes were cast against the proposal,
          shares
          representing 1,560 votes abstained; and there were no broker
          non-votes.
 
 **PART
          II**
  **ITEM
                  5.**
                **MARKET
                    FOR COMMON EQUITY AND RELATED STOCKHOLDER
                    MATTERS**
  **Market
          for Common Stock**
  Our
          common stock currently trades on
          the American Stock Exchange under the symbol “MHA.” Prior to October 7, 2005,
          our common stock was quoted
          on
          the OTC Bulletin Board under the symbol “MHTT.” The following table lists the
          high and low price for our common stock as quoted, in U.S. dollars, on
          the
          American Stock Exchange and OTC Bulletin Board during each quarter within
          the
          last two fiscal years:
  **Price
                    Range****2005**
                
                **2004****Quarter
                    Ended**
                
                **High**
                
                **Low**
                
                **High**
                
                **Low**March
                    31
                
                $
                2.100
                
                $
                0.850
                
                $
                2.000
                
                $
                1.350June
                    30
                
                
                1.640
                
                
                1.200
                
                
                2.480
                
                
                1.270September
                    30
                
                
                1.600
                
                
                1.110
                
                
                1.600
                
                
                0.700December
                    31
                
                
                1.520
                
                
                1.040
                
                
                1.050
                
                
                0.650
   -24-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  The
          quotations from the OTC Bulletin Board reflect inter-dealer prices, without
          retail mark-up, mark-down or commission, and may not represent actual
          transactions.
  **Record
          Holders**
  The
          number of holders of record of our common stock as of March 14, 2006 was
          581.
  **Dividends**
  We
          have
          not paid or declared any dividends on our common stock and we do not anticipate
          paying dividends on our common stock in the foreseeable future.
  **Stock
          Repurchases**
  We
          did
          not make any repurchases of our common stock during 2005.
  **ITEM
                      6.**
                    **MANAGEMENT’S
                        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                        OF OPERATIONS
                        OR PLAN OF
                        OPERATIONS.**
  **Overview**
  We
          were
          incorporated in Delaware in May 1993 under the name “Atlantic Pharmaceuticals,
          Inc.” and, in March 2000, we changed our name to “Atlantic Technology Ventures,
          Inc.” On February 21, 2003, we completed a “reverse” acquisition of
          privately-held Manhattan Research Development, Inc. (formerly Manhattan
          Pharmaceuticals, Inc.), a Delaware corporation. To effect this transaction,
          we
          caused Manhattan Pharmaceuticals Acquisition Corp., our wholly-owned subsidiary,
          to merge with and into Manhattan Research Development, with Manhattan Research
          Development surviving as our wholly owned subsidiary. In accordance with
          the
          terms of the merger, the outstanding common stock of Manhattan Research
          Development automatically converted into the right to receive an aggregate
          of
          approximately 80 percent of our outstanding common stock (after giving
          effect to
          the transaction). In connection with the merger, we also changed our name
          to
“Manhattan Pharmaceuticals, Inc.” The financial statements reflect the
          activities of Manhattan Research Development, Inc. since its inception,
          as the
“accounting acquirer”.
 
 Pursuant
          to an Agreement and Plan of Merger dated April 1, 2005 (the “Agreement”) among
          us, Tarpan Therapeutics, Inc., a Delaware corporation (“Tarpan”), and Tarpan
          Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary
          (“TAC”), TAC merged with and into Tarpan, with Tarpan remaining as the surviving
          corporation and our wholly-owned subsidiary. Tarpan was a privately-held,
          New
          York based biopharmaceutical company developing dermatological therapeutics.
          Through the merger, we acquired exclusive rights to develop and commercialize
          Tarpan’s primary product candidate, PTH (1-34), a peptide believed to be a
          regulator of epidermal cell growth and differentiation. In consideration
          for
          their shares of Tarpan capital stock and in accordance with the Agreement,
          the
          stockholders of Tarpan received an aggregate of approximately 10,731,000
          shares
          or approximately 20% of our then outstanding common stock. This transaction
          was accounted for as a purchase of Tarpan by the Company. As a result of
          the
          merger, we assumed Tarpan’s outstanding indebtedness of approximately $651,000,
          which resulted from a series of promissory notes issued to Paramount BioCapital
          Investments, LLC and Horizon BioMedical Ventures, LLC, both of which are
          owned
          or controlled by Dr. Lindsay Rosenwald. The notes were amended at the time
          of
          the merger to provide that one-half of the outstanding indebtedness was
          payable
          upon completion of the merger and the remaining one-half will be payable
          at such
          time as we raise at least $5 million in new financing. Further, the remaining
          one-half of indebtedness would no longer be interest bearing. As a result
          of our
          August 2005 private placement, discussed above, we have now satisfied the
          remaining balance of this indebtedness.
  -25-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
 
 We
          are
          engaged in the business of developing and commercializing early-stage
          technologies, particularly biomedical and pharmaceutical technologies.
          We aim to
          acquire proprietary rights to these technologies, by license or acquisition
          of
          an ownership interest, fund their research and development and eventually
          bring
          the technologies to market. We currently are researching and developing
          three
          biomedical technologies: oleoyl-estrone, an orally administered hormone
          which we
          believe can be used to treat obesity; PTH (1-34), a topical treatment for
          psoriasis; and lingual spray propofol, a proprietary lingual spray technology
          to
          deliver propofol for pre-procedural sedation prior to diagnostic, therapeutic
          or
          endoscopic procedures.
 
 You
          should read the following discussion of our results of operations and financial
          condition in conjunction with the consolidated financial statements and
          notes
          thereto appearing elsewhere in this Form 10-KSB. This discussion includes
          “forward-looking” statements that reflect our current views with respect to
          future events and financial performance. We use words such as we “expect,”
“anticipate,” “believe,” and “intend” and similar expressions to identify
          forward-looking statements. Investors should be aware that actual results
          may
          differ materially from our expressed expectations because of risks and
          uncertainties inherent in future events, particularly those risks identified
          under the heading “Risk Factors” following Item 1 in this Annual Report, and
          should not unduly rely on these forward looking statements. All share and
          per
          share information in this discussion has been adjusted for the 1-for-5
          combination of our common stock effected on September 25, 2003.
  **Results
          Of Operations**
  ***2005
          Versus 2004***
  During
          each of the years ended December 31, 2005 and 2004, we had no revenues,
          and are
          considered a development stage company. We do not expect to have revenues
          relating to our technologies prior to December 31, 2006.
  For
          the
          year ended December 31, 2005 research and development expense was $5,178,077
          as
          compared to $4,152,994 for the year ended December 31, 2004. The increase
          of
          $1,025,083 is due primarily to an acceleration of pre-clinical and clinical
          development of our Oleoyl-estrone drug and, commencing after the April
          2005
          acquisition of Tarpan, the pre-clinical and clinical development of our
          PTH
          (1-34) which amounted to approximately $969,508. As we enter Phase IIa
          clinical
          trials in Oleoyl-estrone and PTH (1-34), we expect research and development
          to
          continue to increase in 2006.
  -26-
 **Back
                to Table of Contents**
 **Index
                to Financial
                Statements**
  For
          the
          year ended December 31, 2005, general and administrative expense was
          $2,291,121as compared to $1,989,829 for the year ended December 31, 2004.
          The
          increase of $301,292 is due primarily to increases in payroll, outside
          services
          and investor relations expenses of approximately $139,000, $146,000 and
          $106,000, respectively. In addition, we had increases in expenses related
          to
          taxes, depreciation and accounting fees of approximately $50,000, $34,000,
          and
          $31,000, respectively. These increases are partially offset by reductions
          in
          consulting, legal fees and all other expenses of approximately $168,000,
          $19,000
          and $18,000, respectively. As a result of the acquisition of Tarpan and
          continued expansion of our infrastructure required to support the planned
          growth, we expect general and administrative expenses to continue to increase
          in
          2006.
  The
          in-process research and development charge in 2005 relates to the allocation
          of
          the purchase price of the Tarpan acquisition. See Note 1 to the consolidated
          financial statements for further details.
  For
          the
          year ended December 31, 2005, interest and other income including realized
          gain
          on the sale of marketable equity securities was $216,008 as compared to
          $246,792
          for the year ended December 31, 2004. The decrease of $30,784 is a result
          of a
          non-recurring realized gain on sale of marketable equity securities in
          2004,
          partially offset by higher balances of cash and short-term investments
          earning
          investment income.
  Net
          loss
          for the year ended December 31, 2005, was $19,140,997 as compared to $5,896,031
          for the year ended December 31, 2004. This increase in net loss is attributable
          primarily to the in-process research and development charge of $11,887,807
          related to the acquisition of Tarpan. Additionally, there were increases
          in
          research and development expenses of $1,025,083 and general and administrative
          expenses of $301,292. Additionally, there was a decrease in interest and
          other
          income of $30,784.
  Preferred
          stock dividends of $175,663 and $585,799 reduced earnings per share for
          the
          years ended December 31, 2005 and 2004 by $0.00 and $0.02,
          respectively.
  ***2004
          Versus 2003***
  During
          each of the years ended December 31, 2004 and 2003, we had no
          revenue.
  For
          the
          year ended December 31, 2004, research and development expense was $4,152,994
          as
          compared to $1,724,043 for the year ended December 31, 2003. The increase
          of
          $2,428,951 is due primarily to an acceleration of pre-clinical development
          of
          our Oleoyl-estrone drug to the pre-clinical and clinical development of
          our
          Propofol Lingual Spray.
  For
          the
          year ended December 31, 2004, general and administrative expense was $1,989,829
          as compared to $1,786,080 for the year ended December 31, 2003. The increase
          of
          $203,749 is due primarily to investor relations expenses of approximately
          $160,000 and consulting expenses of approximately $67,000. In addition,
          we had
          increases in expenses associated with travel of approximately $85,000 and
          meetings and conferences of approximately $54,000 as well as rent and other
          expenses of approximately $19,000 and $55,000, respectively. These increases
          are
          partially offset by a net reduction in legal and accounting fees of
          approximately $91,000. Finally, in 2003 we had amortization of intangible
          assets
          of approximately $145,000 which we did not have in the current
          year.
  For
          the
          year ended December 31, 2004, interest and other income was $246,792 as
          compared
          to $11,324 for the year ended December 31, 2003. The increase of $235,468
          is a
          result of an increase in cash balances and a gain on sale of short-term
          investments.
  -27-
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                to Table of Contents**
 **Index
                to Financial
                Statements**
  Net
            loss
            for the year ended December 31, 2004, was $5,896,031 as compared to $5,960,907
            for the year ended December 31, 2003. This decrease in net loss is attributable
            primarily to losses in 2003 on the disposition of intangible assets as
            a result
            of our sale of our remaining rights to CT-3 to Indevus Pharmaceuticals,
            Inc. of
            $1,213,878 as well as an impairment of intangible assets of $1,248,230
            as a
            result of a decision by Bausch & Lomb not to pursue the Avantix cataract
            removal technology. This decrease in net loss is partially offset by
            an increase
            in research and development expenses of $2,428,951 and an increase in
            general
            and administrative expenses of $203,749. These expense increases are
            partially
            offset by an increase in interest and other income of $235,468.
  Preferred
            stock dividends of $585,799 increased loss per common share for the year
            ended
            December 31, 2004 by $0.02. There were no preferred stock dividend requirements
            in 2003.
  **Liquidity
            and Capital Resources**
  From
            inception to December 31, 2005, we incurred a deficit during the development
            stage of $33,271,695 primarily as a result of our net losses, and we
            expect to
            continue to incur additional losses through at least December 31, 2006
            and for
            the foreseeable future. The acquisition of Tarpan will increase these
            losses.
            These losses have been incurred through a combination of research and
            development activities related to the various technologies under our
            control and
            expenses supporting those activities.
  We
            have
            financed our operations since inception primarily through equity financing
            and
            our licensing and sale of residual royalty rights of CT-3 to Indevus.
            During the
            year ended December 31, 2005, we had a net increase in cash and cash
            equivalents
            of $8,920,680. This increase resulted from net cash provided by financing
            activities, substantially all of which was from the net proceeds of $12,250,209
            from the August 2005 private placement of 11,917,680 shares of common stock
            at $1.11 and $1.15 per share and investing activities, and also included
            proceeds from the sale of short-term investments of $3,499,999. These
            increases
            are partially offset by net cash used in operating activities of $6,244,942.
            Total liquid resources including short term investments as of December
            31, 2005
            were $10,834,154 compared to $5,419,872 at December 31, 2004.
  Our
            current liabilities as of December 31, 2005 were $1,665,817 compared
            to
            $1,195,705 at December 31, 2004, an increase of $470,112. The increase
            was
            primarily due to an increase in expenditures associated with our Phase
            I
            clinical trial for our Oleoyl-estrone product candidate and commencement
            of
            Phase II clinical trial for our PTH (1-34) product candidate. As of December
            31,
            2005, we had working capital of $9,363,113 compared to $4,264,293 at
            December
            31, 2004.
  In
            August
            2005, we completed a private placement offering of units consisting of
            shares of our 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, we sold
            a total
            of 10,808,971 shares of common stock and five-year warrants to purchase
            2,161,767 shares for total gross proceeds of $11,997,954. The warrants
            issued at
            the August 26 closing are exercisable at a price of $1.44 per share.
            On August
            30, 2005, we closed on the sale of an additional 1,108,709 shares of
            common
            stock and warrants to purchase 221,741 common shares, which resulted
            in gross
            proceeds of $1,275,016. The warrants issued in connection with the August
            30
            closing are exercisable at a price of $1.49 per share. After payment
            of all
            related commissions and expenses totaling $1,022,761, we realized total
            net
            proceeds of $12,250,209.
 
 We
            engaged Paramount BioCapital, Inc. an affiliate of a significant stockholder
            of
            the Company, as placement agent and paid total cash commissions and expenses
            of
            $879,418, of which $121,625 was paid to certain selected dealers engaged
            by
            Paramount in connection with the August 26 closing 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, we paid
            cash
            commissions to Paramount of $88,550 and issued an additional five-year
            warrant
            to purchase 55,000 common shares at a price of $1.49 per share. Timothy
            McInerney and Dr. Michael Weiser, each a director of the Company, are
            employees
            of Paramount BioCapital, Inc.
  -28-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 
 The
            terms
            of the Company’s Series A Preferred Stock, which was originally issued in
            November 2003, provided for its automatic conversion upon the Company’s
            completion of a financing that results in gross proceeds to of at least
            $10
            million at a pre-money valuation of the Company of at least $30 million.
            Accordingly, as a result of the August 26, 2005 closing of the Company’s private
            placement discussed above, all of the remaining outstanding shares of
            the
            Company’s Series A Preferred Stock automatically converted into shares of the
            Company’s common stock. As of such date, there were 729,626 shares of Series
            A
            Preferred Stock outstanding, which, upon the closing of the private placement,
            converted into an aggregate of 6,632,957 shares of common stock (at a
            rate of
            9.0909 common shares per share of preferred stock).
  On
            October 21, 2005, the Company issued 675,675 shares of common stock to
            Cato
            BioVentures, an affiliate of Cato Research, Inc., in exchange for the
            satisfaction of $750,000 of accounts payable owed by the Company to Cato
            Research, Inc. The transaction was completed on the same terms as the
            private
            placement described earlier which closed on August 26, 2005.
 
 Our
            available working capital and capital requirements will depend upon numerous
            factors, including progress of our research and development programs,
            our
            progress in and the cost of ongoing and planned pre-clinical and clinical
            testing, the timing and cost of obtaining regulatory approvals, the cost
            of
            filing, prosecuting, defending, and enforcing patent claims and other
            intellectual property rights, 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, 2005, 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. Management
            believes that we will continue to incur net losses and negative cash
            flows from
            operating activities for the foreseeable future. Based on the resources
            available to us at December 31, 2005, management believes that we will
            need
            additional equity or debt financing or will need to generate revenues
            through
            licensing our products or entering into strategic alliances during 2006
            to be
            able to sustain our operations beyond 2006 and we will need additional
            financing
            thereafter until we can achieve profitability, if ever.
  -29-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  We
            have
            reported net losses of $19,140,997 and $5,896,031 for the years ended
            December
            31, 2005 and 2004, respectively. The net loss from date of inception,
            excluding
            preferred stock dividends, August 6, 2001 to December 31, 2005, amounts
            to
            $32,092,051. Management believes that we will continue to incur net losses
            through at least December 31, 2006. Based on the current resources available
            to
            us, we will need additional equity or debt or financing or we will need
            to
            generate revenues through licensing our products or entering into strategic
            alliances to be able to sustain our operations until we can achieve
            profitability, if ever. These matters raise substantial doubt about our
            ability
            to continue as a going concern.
  The
            report of our independent registered public accounting firm on our consolidated
            financial statements includes an explanatory paragraph which states that
            our
            recurring losses and cash used in operating activities raise substantial
            doubt
            about our ability to continue as a going concern. Our consolidated financial
            statements do not include any adjustments that might result from the
            outcome of
            this uncertainty.
  ***Development
            Commitments***
 
 On
            February 15, 2002, we entered into a License Agreement (the "License
            Agreement")
            with Oleoylestrone Developments, S.L. (“OED”). Under the terms of the License
            Agreement, OED granted to us a world-wide license to make, use, lease
            and sell
            the products incorporating the licensed technology. OED also granted
            to us the
            right to sublicense to third parties the licensed technology or aspects
            of the
            licensed technology with the prior written consent of OED. OED retains
            an
            irrevocable, nonexclusive, royalty-free right to use the licensed technology
            solely for its internal, noncommercial use. The License Agreement shall
            terminate automatically upon the date of the last to expire patent contained
            in
            the licensed technology or upon our bankruptcy. OED may terminate the
            License
            Agreement in the event of a material breach by us that is not cured within
            the
            notice period. We may terminate the License Agreement for any reason
            upon 60
            days notice.
 
 Under
            the
            License Agreement, we agreed to pay to OED certain licensing fees which
            are
            being expensed as they are incurred. We paid $175,000 in up front licensing
            fees
            which is included in 2002 research and development expense. In addition,
            pursuant to the License Agreement, we issued 1,000,000 shares of our common
            stock to OED. We valued these shares at their then estimated fair value
            of
            $1,000.
 
 In
            connection with the License Agreement, we have agreed to milestone payments
            to
            OED as follows:
 
 (i)
            $250,000 upon the treatment of the first patient in a Phase I clinical
            trial
            under a Company-sponsored investigational new drug application ("IND");
            (ii)
            $250,000 upon the treatment of the first patient in a Phase II clinical
            trial
            under a Company-sponsored IND; (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, 2005, we have paid $425,000 in licensing fees
            and milestone payments.
 
 In
            addition to the License Agreement, we entered into a consulting agreement
            with
            OED. The agreement became effective in February 2002, at a fee of $6,250
            per
            month, and will terminate when the License Agreement terminates. The
            fees
            associated with the consulting agreement are expensed as incurred. OED
            agreed
            to designate a member of our Scientific Advisory Board and to render
            consultative and advisory services to us. Such services include research,
            development and clinical testing of our technology as well as the reporting
            of
            the findings of such tests, assistance in the filing of patent applications
            and
            oversight and direction of efforts in regards to personnel for clinical
            development.
  -30-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 
 In
            April
            2003, we entered into a license and development agreement with NovaDel
            Pharma,
            Inc. (“NovaDel”), under which we received certain worldwide, exclusive rights to
            develop and commercialize products related to NovaDel’s proprietary lingual
            spray technology for delivering propofol for pre-procedural sedation.
            Under the
            terms of this agreement, we agreed to use our commercially reasonable
            efforts to
            develop and commercialize the licensed products, to obtain necessary
            regulatory
            approvals and to thereafter exploit the licensed products. The agreement
            also
            provides that NovaDel will undertake to perform, at our expense, a substantial
            portion of the development activities, including without limitation,
            preparation
            and filing of various applications with applicable regulatory
            authorities.
 
 In
            consideration of the license, we are required to make certain license
            and
            milestone payments. Specifically, we were required to pay a $500,000
            license fee
            at such time as we had completed a financing transaction resulting in
            aggregate
            gross proceeds of at least $10,000,000. Accordingly, upon completion
            of our sale
            of $10,000,000 of our Series A Convertible Preferred Stock in November
            2003, we
            paid and expensed the $375,000 balance of the license fee. We paid and
            expensed
            the first $125,000 in June 2003.
 
 We
            are
            also required to make various milestone payments to NovaDel under the
            license
            agreement as follows: $1,000,000 payable following the date that the
            first NDA for lingual spray propofol is accepted for review by the FDA;
            $1,000,000 following the date that the first European Marketing Application
            is
            accepted for review by any European Union country; $2,000,000 following
            the date
            when the first filed NDA for lingual spray propofol is approved by the
            FDA;
            $2,000,000 following the date when the first filed European Marketing
            Application for lingual spray propofol is approved by a European Union
            country;
            $1,000,000 following the date on which an application for commercial
            approval of
            lingual spray propofol is approved by the appropriate regulatory authority
            in
            each of Australia, Canada, Japan and South Africa; and $50,000 following
            the
            date on which an application for commercial approval for lingual spray
            propofol
            is approved in any other country (other than the U.S., a member of the
            European
            Union, Australia, Canada, Japan or South Africa).
 
 In
            addition, we are obligated to pay to NovaDel an annual royalty based
            on a fixed
            rate of net sales of licensed products, or if greater, the annual royalty
            is
            based on our net profits from the sale of licensed products at a rate
            that is
            twice the net sales rate. In the event we sublicense the licensed product
            to a
            third party, we are obligated to pay royalties based on a fixed rate
            of fees or
            royalties received from the sublicensee until such time as we recover
            our
            out-of-pocket costs, and thereafter the royalty rate doubles. Because
            of the
            continuing development efforts required of NovaDel under the agreement,
            the
            royalty rates are substantially higher than customary for the
            industry.
 
 NovaDel
            may terminate the agreement (i) upon 10 days’ notice if we fail to make any
            required milestone or royalty payments, or (ii) if we become bankrupt
            or if a
            petition in bankruptcy or insolvency is filed and not dismissed within
            60 days
            or if we become subject to a receiver or trustee for the benefit of creditors.
            Each party may terminate the agreement upon 30 days’ written notice and an
            opportunity to cure in the event the other party committed a material
            breach or
            default. We may also terminate the agreement for any reason upon 90 days’ notice
            to NovaDel.
 
 Through
            our April 2005 acquisition of Tarpan Therapeutics, Inc., we acquired
            a
            Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April 14, 2004.
            Under the IGI Agreement we received the exclusive, world-wide, royalty
            bearing
            sublicense to develop and commercialize the licensed technology. Under
            the terms
            of the IGI Agreement, we are responsible for the cost of the preclinical
            and
            clinical development of the project, including research and development,
            manufacturing, laboratory and clinical testing and trials and marketing
            of
            licensed products for which we will be responsible.
  -31-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  The
            IGI
            Agreement requires us to make certain milestone payments as
            follows: $300,000 payable upon the commencement of a Phase II clinical
            trial; $500,000 upon the commencement of a Phase III clinical trial;
            $1,500,000
            upon the acceptance of an NDA application by the FDA; $2,400,000 upon
            the
            approval of an NDA by the FDA; $500,000 upon the commencement of a Phase
            III
            clinical trial for an indication other than psoriasis; $1,500,000 upon
            the
            acceptance of and NDA application for an indication other than psoriasis
            by the
            FDA; and $2,400,000 upon the approval of an NDA for an indication other
            than
            psoriasis by the FDA.
  In
            addition, we are obligated to pay IGI, Inc. an annual royalty of 6% annual
            net
            sales on annual net sales up to $200,000,000. In any calendar year in
            which net
            sales exceed $200,000,000, we are obligated to pay IGI, Inc. an annual
            royalty
            of 9% on such excess. Through December 31, 2005, we have not paid any such
            milestones or royalties.
  IGI,
            Inc.
            may terminate the agreement (i) upon 60 days’ notice if we fail to make any
            required milestone or royalty payments, or (ii) if we become bankrupt
            or if a
            petition in bankruptcy is filed, or if we are placed in the hands of
            a receiver
            or trustee for the benefit of creditors. IGI, Inc. may terminate the
            agreement
            upon 60 days’ written notice and an opportunity to cure in the event we commit a
            material breach or default. Eighteen months from the date of the IGI
            Agreement,
            we may terminate the agreement in whole or as to any portion of the PTH
            patent
            rights upon 90 days’ notice to IGI, Inc.
  **Research
            and Development Projects**
  ***Oleoyl-estrone***
  In
            January 2005, the FDA accepted our filed investigational new drug application,
            or “IND” for the human clinical testing of Oleoyl-estrone. We completed Phase
            Ia
            and Phase Ib clinical trials in May 2005 and July 2005 and released data
            on both
            trials in October 2005. Both trials were completed in Basel, Switzerland
            after
            obtaining formal approval from the Swiss medical authority, Swissmedic
            however
            only the Phase Ia trial was conducted pursuant to the IND accepted by
            the FDA.
            The objective of both dose-escalation studies was to determine the safety
            and
            tolerability of defined doses of orally administered Oleoyl-estrone in
            obese
            adult volunteers as well as the pharmacokinetic profile (i.e. the manner
            in
            which the drug is absorbed, distributed, metabolized and excreted by
            the body)
            of Oleoyl-estrone in both men and women.
  The
            Phase
            Ia study involved 36 obese volunteers. Twelve of the 36 patients received
            placebo and 24 received a single dose in one of six strengths ranging
            from 1 mg
            to 150 mg. Oleoyl-estrone was shown to be safe with no serious adverse
            events
            noted in this study.
  The
            Phase
            Ib study was a seven day repeat dose study involving 24 obese volunteers
            in four
            cohorts of 6 patients each who received either placebo or Oleoyl-estrone
            in
            doses ranging from 10 mg to 150 mg once daily for seven consecutive days.
            The
            results indicated that Oleoyl-estrone was generally well-tolerated at
            all doses
            and no serious adverse events were reported. There were also no clinically
            significant changes in the physical exams, vital signs, ECGs, coagulation
            and
            liver function tests. The study demonstrated evidence of greater weight
            loss
            among the treated groups compared with the placebo group as well as evidence
            of
            reduction in desire to eat, hunger levels, fasting glucose and LDL cholesterol.
            Important clinical laboratories findings included reversible, dose-dependent
            elevations in estrone and estradiol levels, as well as reductions in
            testosterone levels. We will initiate a follow on Phase IIa study using
            lower
            doses of Oleoyl-estrone in the first half of 2006. In
            preparation for beginning the phase IIa clinical trial, the clinical
            study
            protocol is currently in the regulatory review cycle in Switzerland,
            having
            received local ethics committee review and approval. The trial will begin
            immediately following receipt of final regulatory approval from Swissmedic,
            the
            Swiss Medical Authority.
  -32-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  To
            date,
            we have incurred $7,989,816 of project costs related to our development
            of
            oleoyl-estrone, including milestone payments triggered under our license
            agreement for oleoyl-estrone, of which $4,004,322 was incurred in fiscal
            2005.
            Currently, we anticipate that we will need to expend approximately an
            additional
            $5,000,000 in development costs in fiscal 2006. Since oleoyl-estrone
            is regarded
            by the FDA as a new entity, it is not realistic to predict the size and
            the
            design of futues studies at this time.
  Although
            we currently have sufficient capital to fund our anticipated 2006 R&D
            expenditures relating to oleoyl-estrone, we will need to raise additional
            capital in order to complete the anticipated five or six year development
            program for the product. If we are unable to raise such additional capital,
            we
            may have to sublicense our rights to oleoyl-estrone to a third party
            as a means
            of continuing development, or, although less likely, we may be required
            to
            abandon further development efforts altogether, either of which would
            have a
            material adverse effect on the prospects of our business.
  In
            addition to raising further capital, whether we are successful in developing
            oleoyl-estrone is dependent on numerous other factors, including unforeseen
            safety issues, lack of effectiveness, significant unforeseen delays in
            the
            clinical trial and regulatory approval process, both of which could be
            extremely
            costly, and inability to monitor patients adequately before and after
            treatments. See also “Item 1. Description of Business - Risk Factors” in this
            Form 10-KSB. The existence of any of these factors could increase our
            development costs or make successful completion of development impractical,
            which would have a material adverse affect on the prospects of our
            business.
  ***PTH
            (1-34).*** ****
  PTH
            (1-34), which we acquired as a result of our April 2005 acquisition of
            Tarpan
            Therapeutics, Inc., is being developed as a topical treatment for psoriasis. In
            August 2003, researchers, led by Michael Holick, MD, Professor of Medicine,
            Physiology, and Biophysics at Boston University Medical Center, reported
            positive results from a US Phase I and II clinical trial evaluating the
            safety
            and efficacy of PTH (1-34) as a topical treatment for psoriasis. This
            double-blind, controlled trial in 15 patients compared PTH (1-34) formulated
            in
            the Novasome® Technology versus the Novasome® vehicle alone. Following 8 weeks
            of treatment, the topical application of PTH (1-34) resulted in complete
            clearing of the treated lesion in 60% of patients and partial clearing
            in 85% of
            patients. Additionally, there was a statistically significant improvement
            in the
            global severity score. Ten patients continued into an open label extension
            study
            in which the Psoriasis Area and Severity Index (PASI) was measured; PASI
            improvement across all 10 patients achieved statistically significant
            improvement compared to baseline. This study showed PTH (1-34) to be
            a safe and
            effective treatment for plaque psoriasis with no patients experiencing
            any
            clinically significant adverse events.
 
 Due
            to the high response rate seen in patients in the initial trial with
            PTH (1-34)
            we believe that it may have an important clinical advantage over current
            topical
            psoriasis treatments. A
            follow
            on physician IND Phase IIa trial involving PTH (1-34) was initiated in
            December
            2005 under the auspices of Boston University. Patient recruitment is
            ongoing;
            dosing has not yet begun.
  To
            date,
            we have incurred $969,508 **** of
            project costs related to our development of PTH (1-34), which has been
            incurred
            since April 1, 2005, the date of the Tarpan Therapeutics, Inc. acquisition.
            Currently, we anticipate that we will need to expend approximately an
            additional
            $3,300,000 in development costs in fiscal 2006. A phase IIa clinical
            trial
            involving PTH (1-34) was initiated in late 2005 under the auspices of
            Boston
            University. As with the development of our other product candidates,
            we believe
            we currently have sufficient capital to fund our development activities
            of PTH
            (1-34) in their entirety during 2006. Since PTH (1-34) is already available
            in
            the injectable form, we should be able to utilize much of the data that
            is
            publicly available in planning our future studies. However, since PTH
            (1-34)
            will be used topically, bridging studies will need to be performed and
            we are
            not able to realistically predict the size and the design of those studies
            at
            this time.
  -33-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  ***Lingual
            spray propofol***
  We
            are
            developing propofol lingual spray, the right to which we license from
            NovaDel
            Pharma, Inc., for light to medium sedation on a Section 505b2 bioequivalence
            regulatory pathway toward FDA approval. In January 2005, the FDA accepted
            our
            IND for propofol lingual spray, allowing us to commence clinical trials.
            The FDA
            has indicated to us in discussions that we may proceed to a pivotal Phase
            III
            trial of propofol lingual spray following completion of Phase I trials.
            We are
            actively planning the next steps for the clinical development of this
            product
            candidate, meeting with our scientific advisors, NovaDel and other formulation
            partners regarding formulation, reviewing existing data, developing trial
            design
            and evaluating plans to re-enter the clinic. See also “Management’s Discussion
            and Analysis of Financial Condition and Results of Operations - Liquidity
            and
            Capital Resources - Research and Development Projects - Lingual Spray
            Propofol.
  To
            date,
            we have incurred $2,821,187 of project costs related to our development
            of
            propofol lingual spray, of which $204,247 was incurred in fiscal 2005.
            Currently, we anticipate that we will need to expend approximately an
            additional
            $100,000 in development costs in fiscal 2006 and at least an aggregate
            of
            approximately $3,000,000 to $5,000,000 until we receive FDA approval
            for
            propofol, should we opt to continue development until then, including
            anticipated 2006 costs. As with our development of oleoyl-estrone, we
            believe we
            currently have sufficient capital to fund our development activities
            of propofol
            lingual spray during 2005 and 2006. Since our business does not generate
            any
            cash flow, however, we will need to raise additional capital to continue
            development of the product beyond 2006. We expect to raise such additional
            capital through debt financings or by selling shares of our capital stock.
            To
            the extent additional capital is not available when we need it, we may
            be forced
            to sublicense our rights to propofol lingual spray or abandon our development
            efforts altogether, either of which would have a material adverse effect
            on the
            prospects of our business.
 
 **Summary
            of Contractual Committments**
 
 ***Employment
            Agreements***
  We
            have
            employment agreements with three employees for the payment of aggregate
            base
            salary of $775,000 as well as performance based bonuses. Two of these
            agreements
            have terms ranging from two to three years and have a remaining obligation
            of
            $825,000 as of December 31, 2005. The third agreement effective February
            1, 2006
            has a term of three years and a remaining obligation of $875,000.
  ***Leases***
  Rent
            expense for the years ended December 31, 2005 and 2004 was $120,209 and
            $112,176, respectively.
  Future
            minimum rental payments subsequent to December 31, 2005 under an operating
            lease
            for the Company’s office facility are as follows:
  Years
                      Ending December 31,
                  
                  Commitment2006
                  
                  $
                  141,6002007
                  
                  $
                  141,6002008
                  
                  $
                  100,000
   -34-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **Off-Balance
            Sheet Arrangements**
  We
            have
            not entered into any off-balance sheet arrangements.
  **Critical
            Accounting Policies**
  In
            December 2001, the SEC requested that all registrants discuss their most
            “critical accounting policies” in management’s discussion and analysis of
            financial condition and results of operations. The SEC indicated that
            a
“critical accounting policy” is one which is both important to the portrayal of
            the company’s financial condition and results and requires management’s most
            difficult, subjective or complex judgments, often as a result of the
            need to
            make estimates about the effect of matters that are inherently
            uncertain.
  ***Use
            of Estimates***
  The
            preparation of financial statements in conformity with accounting principles
            generally accepted in the United States of America requires management
            to make
            estimates and assumptions that affect certain reported amounts of assets
            and
            liabilities and disclosure of contingent assets and liabilities at the
            date of
            the financial statements and the reported amounts of expenses during
            the
            reporting period. Actual results could differ from those estimates.
  ***Research
            and development expenses***
  Research
            and development expenses are expensed as incurred. In process research
            and
            development, deemed to have no future use, is expensed as incurred as
            well.
  ***Stock-based
            Compensation***
  Options,
            warrants and stock awards issued to non-employees and consultants are
            recorded
            at their fair value as determined in accordance with Statement of Financial
            Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and
            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” and
            recognized as expense over the service period. The fair value of the
            options
            issued to consultants or others which require “variable accounting” are
            remeasured at each reporting period and the resultant change in fair
            value of
            the vested options is recorded as a charge or credit in the consolidated
            statement of operations.
  **Recently
            Issued Accounting Standards**
  In
            December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based
            Payment”, which amends SFAS Statement No. 123 and will be effective for our
            quarter ending March 31, 2006. The new standard will require us to expense
            employee stock options and other share-based payments over the vesting
            period.
            The new standard may be adopted in one of three ways - the modified prospective
            transition method, a variation of the modified prospective transition
            method or
            the modified retrospective transition method. We are will adopt SFAS
            123(R) in
            the first quarter of 2006.
  -35-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **ITEM
                    7.**
                  **CONSOLIDATED
                      FINANCIAL STATEMENTS**
  For
            a
            list of the consolidated financial statements filed as part of this report,
            see
            the Index to Consolidated Financial Statements beginning at Page F-1
            of this
            annual report.
  **ITEM
                        8.**
                      **CHANGES
                          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                          FINANCIAL
                          DISCLOSURE******
  None.
  **ITEM
                    8A.**
                  **CONTROLS
                      AND PROCEDURES**
 
 **Evaluation
            of Disclosure Controls and Procedures**
 
 As
            of
            December 31, 2005, 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 as of that date are effective to ensure that
            information
            required to be disclosed in the reports we file under the Securities
            and
            Exchange Act is recorded, processed, summarized and reported on an accurate
            and
            timely basis. During
            the fourth quarter of 2005, we hired the accounting firm of Amper, Politziner
            & Mattia to review and consult on non-routine transactions and our periodic
            SEC filings. We expect that this will improve our internal controls over
            financial reporting subsequent to such evaluation.
  As
            a
            non-accelerated filer with a fiscal year end of December 31, we must
            first begin
            to comply with the requirements of Section 404 of the Sarbanes-Oxley
            Act of 2002
            for the fiscal year ending December 31, 2007. We believe that our present
            internal control program has been effective at a reasonable assurance
            level to
            ensure that our financial reporting has not been materially misstated.
            Nonetheless, during the remaining periods through December 31, 2007,
            we will
            review, and where necessary, enhance our internal control design and
            documentation, management review, and ongoing risk assessment as part
            of our
            internal control program, including implementing the requirements of
            Section 404
            of the Sarbanes-Oxley Act of 2002.
  **Changes
            in Internal Controls**
  In
              connection with the preparation of our quarterly report on Form 10-QSB
              for the
              quarter ended September 30, 2005, as part of its review of this report,
              our
              independent registered public accounting firm identified material weaknesses,
              as
              of September 30, 2005, in our internal controls over financial reporting
              relating to the recording and disclosures of stock options that we
              have granted
              to non-employee consultants in accordance with Emerging Issues Task
              Force
              (“EITF”) 96-18 and SFAS 123. Specifically, in accordance with EITF 96-18,
              we
              should have been accounting for an option issued to a non-employee
              consultant
              using variable accounting, instead of fixed accounting. In addition,
              we
              improperly applied SFAS 123 in accounting for a stock option granted
              to a
              different non-employee consultant. In connection with its review of
              such Form
              10-QSB, our independent registered accounting firm also identified
              certain
              errors made in the calculation of our weighted average number of shares
              outstanding. Our independent registered public accounting firm advised
              management and our Audit Committee that it considered each of these
              situations
              to be a material weakness in our internal controls. Since such material
              weaknesses were identified by our independent registered accounting
              firm in
              connection with its review of this Form 10-QSB and because they relate
              only to
              the quarter ended September 30, 2005, the items subject to these issues
              are
              correctly presented on our historical financial statements, including
              the
              September 30, 2005 Form 10-QSB, and no restatement of any previously
              filed
              financial statements was required.
  As
              a
              result of the material weakness discussed above, however, we implemented
              a
              change in our internal controls over financial reporting during the
              fourth
              quarter of the year ended December 31, 2005. Specifically, we have
              instituted
              additional procedures in the review process for the financial statement
              recording and disclosures of options in order to remediate this issue.
              Additionally, we engaged a public accounting firm separate and unrelated
              to our
              independent registered public accounting firm, to consult with from
              time to time
              concerning the appropriate accounting treatment of such stock options,
              as well
              as other accounting matters. We have also increased our emphasis on
              continuing
              education for our accounting personnel and increase our emphasis on
              reviewing
              applicable accounting literature, all relating to the selection and
              application
              of accounting principles pertaining to stock options. We believe these
              enhancements to our system of internal control and our disclosure controls
              and
              procedures are adequate to provide reasonable assurance that our internal
              controls are effective in alerting management on a timely basis to
              material
              information required to be disclosed in our periodic reports to the
              Securities
              and Exchange Commission.
 **ITEM
                    8B.**
                  **OTHER
                      INFORMATION**
 
 As
            discussed above, at our annual stockholder meeting held on November 18,
            2005,
            our stockholders approved an amendment to our 2003 Stock Option Plan,
            increasing
            the number of shares of our common stock available for issuance under
            such plan
            from 5,400,000 to 7,400,000.
  -36-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **PART
            III**
  **ITEM
                        9.**
                      **DIRECTORS,
                          EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                          WITH SECTION
                          16(a) OF THE EXCHANGE
                          ACT**
  **Information
            Concerning Directors and Executive Officers**
  **Name**
                  
                  **Age**
                  
                  **Position**Douglas
                      Abel
                  
                  44
                  
                  President
                      and Chief Executive Officer and DirectorAlan
                      G. Harris, M.D.
                  
                  55
                  
                  Chief
                      Medical OfficerNicholas
                      J. Rossettos, C.P.A.
                  
                  40
                  
                  Chief
                      Financial Officer, Chief Operating Officer and
                      SecretaryNeil
                      Herskowitz
                  
                  48
                  
                  DirectorMalcolm
                      Hoenlein
                  
                  61
                  
                  DirectorTimothy
                      McInerney
                  
                  44
                  
                  DirectorJoan
                      Pons
                  
                  55
                  
                  DirectorRichard
                      I. Steinhart
                  
                  48
                  
                  DirectorMichael
                      Weiser, M.D., Ph.D.
                  
                  42
                  
                  Director
  **Douglas
            Abel** has
            been
            our President and Chief Executive Officer since April 2005, when we completed
            our acquisition of Tarpan Therapeutics, where Mr. Abel had been President
            and
            CEO since November 2004. Prior to joining 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 the creation of
            the U.S.
            dermatology commercial operation, building the team from two to 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. ****
  **Alan
            G. Harris** has been
            our Chief Medical Officer since February 2006. Prior to joining Manhattan,
            from
            January 2004, Dr.
            Harris was head of the Worldwide Medical Endocrine Care group at Pfizer,
            Inc.
            (New York, NY), where he was responsible for the clinical development
            of the
            growth hormone Genotropin®, the growth hormone antagonist Somavert®, and the
            leading international medical outcomes database containing information
            about
            growth hormone treatment in children (KIGS) and adults (KIMS). Prior
            to that he
            served in a number of capacities at Schering-Plough Corporation (Kenilworth,
            NJ)
            from 1995 to 2004, most recently as vice president, Global Healthcare
            Research
& Outcomes. Dr. Harris received an MD degree cum laude from the Louis
            Pasteur Faculty of Medicine, University of Strasbourg, France and a Ph.D.
            in
            Endocrinology from Erasmus University, Rotterdam, The Netherlands. He
            is
            currently an adjunct professor of medicine at New York University Medical
            School
            and visiting professor of medicine in the Department of Endocrinology
            at Liege
            University Medical School, Belgium and in the department of Pharmacology
            and
            Clinical Toxicology at the University Hospital of Lausanne, Switzerland.
            Dr.
            Harris is a Fellow of the American College of Physicians, the Royal College
            of
            Physicians (UK), and the American College of Clinical Pharmacology.
  **Nicholas
            J. Rossettos** has been
            our Chief Financial Officer and Treasurer since April 2000 and our Chief
            Operating Officer since February 2003. From February 1999 until joining
            our
            company, Mr. Rossettos was Manager of Finance for Centerwatch, a
            pharmaceutical trade publisher headquartered in Boston, Massachusetts,
            that is a
            wholly owned subsidiary of Thomson Corporation of Toronto, Canada. Prior
            to
            that, from 1994, he was Director of Finance and Administration for
            EnviroBusiness, Inc., an environmental and technical management-consulting
            firm
            headquartered in Cambridge, Massachusetts. Mr. Rossettos is a certified
            public
            accountant and holds an M.S. in Accounting and M.B.A. from Northeastern
            University.
  -37-
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                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 **Neil
          Herskowitz**was
          appointed to our board of directors in July 2004.Since
          1998, Mr. Herskowitz has co-owned the ReGen Group of companies. Currently
          he is
          a managing member of ReGen Partners I L.P., an investment fund based in
          New York
          City, and President of Riverside Claims LLC an investment vehicle for ReGen.
          Mr.
          Herskowitz also serves as a member of the Board of Directors of Chelsea
          Therapeutics, Inc. (OTCBB: CHTP) a publicly traded specialty pharmaceutical
          development company, and as a director of Starting Point Services for Children,
          a not-for-profit corporation. Mr. Herskowitz received a B.B.A. in Finance
          from
          Bernard M. Baruch College.
  **Malcolm
            Hoenlein** was appointed to our board of directors in July 2004. Since January 2001,
            he has
            also served as 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. Since 1992, Mr. McInerney
            has been a Managing Director of Paramount BioCapital, Inc. where he oversees
            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 has 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.
  **Joan
            Pons** has been
            a director of our company since February 21, 2003, the date of our merger
            with
            Manhattan Research Development. Prior to the merger, he served as a director
            of
            Manhattan Research Development from 2002. Since 2002, Mr. Pons has served
            chief
            executive officer of Oleoylestrone Development S.L., a spin-off of the
            University of Barcelona. Pursuant to a January 2002 license agreement,
            we hold
            an exclusive worldwide license to several patents and patent applications
            relating to oleoyl-estrone, which are owned by Oleoylestrone Developments.
            From
            1999 until joining Oleoylestrone Developments, Mr. Pons has served as
            Director
            of Franchising of Pans & Company, a fast-food company. From 1972 until 1999,
            Mr. Pons was employed in various finance and sales capacities by Gallina
            Blanca
            Purina S.A., a joint venture between St. Louis, Missouri based Ralston
            Purina
            Co. and Spanish based Agrolimen S.A., most recently serving as its National
            Sales & Marketing Director.
  **Richard
            I. Steinhart** has been a director of our company since July 2004. Since May 1992, Mr.
            Steinhart has been 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.
  -38-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **Michael
            Weiser, M.D., Ph.D.** ,
            has
            been a director of our company since the completion of our merger transaction
            with Manhattan Research Development, Inc. in February 2003. He served
            as a
            director of Manhattan Research Development since
            December 2001 and as its Chief Medical Officer from its inception until
            August
            2001. Dr. Weiser is currently also the Director of Research of Paramount
            BioCapital Asset Management and he is a director of Hana Biosciences,
            Inc.
            (AMEX:HBX), a South San Francisco, California-based technology company
            focused
            on oncology therapeutics, Chelsea Therapeutics International, Ltd. (OTCBB:CHTP)
            and VioQuest Pharmaceuticals, Inc. (OTCBB:VQPH). Dr. Weiser is also a
            member of Orion Biomedical GP, LLC, and serves on the board of directors
            of
            several privately held companies. Dr. Weiser received an M.D. from New
            York
            University School of Medicine and a Ph.D. in Molecular Neurobiology from
            Cornell
            University Medical College. Dr. Weiser completed a Postdoctoral Fellowship
            in
            the Department of Physiology and Neuroscience at New York University
            School of
            Medicine and performed his post-graduate medical training in the Department
            of
            Obstetrics and Gynecology and Primary Care at New York University Medical
            Center.
  There
            are
            no family relationships among our executive officers or directors.
  **Section
            16(a) Beneficial Ownership Reporting Compliance**
  Section
            16(a) of the Securities Exchange Act of 1934, as amended, requires our
            officers,
            directors and persons who are the beneficial owners of more than 10%
            of our
            common stock to file with the SEC initial reports of ownership and reports
            of
            changes in ownership of our common stock. Officers, directors and beneficial
            owners of more than 10% of our common stock are required by SEC regulations
            to
            furnish us with copies of all Section 16(a) forms they file. Based solely
            on a
            review of the copies of the Forms 3, 4 and 5 and amendments that we received
            with respect to transactions during 2005, we believe that all such forms
            were
            filed on a timely basis, except for those items listed in the table
            below:
  Name
                      of Filer
                  
                  Description
                      of Transaction
                  
                  Transaction
                      Date
                  
                  Filing
                      DateDouglas
                      Abel
                  
                  Initial
                      Form 3
                  
                  4/1/05
                  
                  4/25/05Neil
                      Herskowitz
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  2/22/05Malcolm
                      Hoenlein
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  4/20/05Joshua
                      A. Kazam
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  3/29/05Timothy
                      McInerney
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  4/5/05Joan
                      Pons Gimbert
                  
                  Option
                      Grant
                    Director
                      Stock Option Grant
                  
                  1/24/04
                    1/11/05
                  
                  4/26/05
                    4/26/05Nicholas
                      J. Rossettos
                  
                  Grant
                      of options
                  
                  1/11/05
                  
                  8/19/05Richard
                      I. Steinhart
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  2/22/05David
                      M. Tanen
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  3/29/05Michael
                      Weiser
                  
                  Director
                      Stock Option Grant
                  
                  1/11/05
                  
                  4/5/05
   -39-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 **Code
            of Business Conduct and Ethics**
 
 Our
            Board
            of Directors adopted a Code of Business Conduct and Ethics to be applicable
            to
            all officers, directors and employees. The Code of Business Conduct and
            Ethics
            is intended to be designed to deter wrong-doing and promote honest and
            ethical
            behavior, full, fair, timely, accurate and understandable disclosure,
            and
            compliance with applicable laws. The Board adopted the Code of Business
            Conduct
            and Ethics in July 2004. A copy of the Code of Business Conduct and Ethics
            can
            be obtained and will be provided to any person without charge upon written
            request to our Secretary at our executive offices, 810 Seventh Avenue,
            4th
            Floor, New York, New York 10019.
 
 **Audit
            Committee Financial Expert**
  We
            have
            an audit committee comprised of Richard Steinhart, Neil Herskowitz and
            Malcolm
            Hoenlein. Richard Steinhart satisfies the “audit committee financial expert” as
            that term is defined by SEC regulations . Further,
            all of our audit committee members are independent, as defined by the
            listing
            standards of the American Stock Exchange.
  -40-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 
 **ITEM
                    10.**
                  **EXECUTIVE
                      COMPENSATION**
  The
            following table sets forth, for the last three fiscal years, the compensation
            earned for services rendered in all capacities by our chief executive
            officer
            and the other highest-paid executive officers serving as such at the
            end of 2005
            whose compensation for that fiscal year was in excess of $100,000. The
            individuals named in the table will be hereinafter referred to as the
“Named
            Officers.” No other executive officer of Manhattan received compensation in
            excess of $100,000 during fiscal year 2005.
  Summary
            Compensation Table
  **Annual
                      Compensation**
                  
                  **Long-Term
                      Compensation Awards**
                  
                  **All
                      Other Compensation ($)****Name
                      and Principal Position**
                  
                  **Year**
                  
                  **Salary($)**
                  
                  **Bonus($)**
                  
                  **Other
                      Annual Compensation ($)**
                  
                  **Securities
                      Underlying Options/SARs(#)**Douglas
                      Abel(1)
                    Chief
                      Executive Officer and
                    President
                  
                  
                  2005
                    2004
                    2003
                  
                  
                  243,750
                    —
                    —
                  
                  
                  200,000
                    —
                    —
                  
                  
                  57,648(3)
                    —
                    —
                  
                  
                  2,923,900
                    —
                    —
                  
                  
                  —
                    —
                    —Nicholas
                      J. Rossettos
                  
                  
                  2005
                  
                  
                  175,000
                  
                  
                  22,500
                  
                  
                  7,170(4
                  )
                  
                  50,000
                  
                  
                  —Chief
                      Operating Officer, Chief Financial Officer,
                  
                  
                  2004
                  
                  
                  150,000
                  
                  
                  22,500
                  
                  
                  7,500(4
                  )
                  
                  150,000
                  
                  
                  —Treasurer
                      & Secretary
                  
                  
                  2003
                  
                  
                  142,788
                  
                  
                  25,000
                  
                  
                  22,397(2
                  )
                  
                  292,030
                  
                  
                  —
 
 (1)
                  Mr.
                      Abel was appointed our chief executive officer on April 1, 2005
                      following the merger with Tarpan Therapeutics,
                      Inc.
 (2)
                  Represents
                      salary deferred from the prior fiscal year and prior to February
                      24,
                      2003.
 (3)
                  Represents
                      matching contributions by us pursuant to our company’s 401(k) retirement
                      plan of $8,400 and reimbursement of certain business related
                      travel
                      expenses of $49,248.
 (4)
                  Represents
                      matching contributions by us pursuant to our company’s 401(k) retirement
                      plan.
   -41-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **Options
            and Stock Appreciation Rights**
  The
            following table contains information concerning the grant of stock options
            under
            our stock option plans and otherwise to the executive officers identified
            below
            during the 2005 fiscal year. No stock appreciation rights were granted
            during
            the 2005 fiscal year.
  Option
            Grants in Last Fiscal Year (Individual Grants)
  **Name**
                  
                  **Number
                      of Securities Underlying Options/SARs Granted (#)**
                  
                  **Percent
                      of Total Options/SARs Granted to Employees in Fiscal
                      Year**
                  
                  **Exercise
                      or Base Price ($/Share)****(1)**
                  
                  **Expiration
                      Date**Mr.
                      Abel
                  
                  
                  2,923,900(2
                  )
                  
                  80
                  
                  
                  1.50
                  
                  
                  4/1/2015Mr.
                      Rossettos
                  
                  
                  50,000(3
                  )
                  
                  1
                  
                  
                  1.00
                  
                  
                  1/11/2015
 
 (1)
                  Exercise
                      price is based on the closing sale price of our common stock
                      on the last
                      trading day preceding the grant
                      date.
 (2)
                  One-third
                      of the option vested as of November 2005; the remaining two-thirds
                      vests
                      in equal annual amounts in November 2006 and November
                      2007.
 (3)
                  One-half
                      of the option vested as of January 2006; the remaining one-half
                      vests in
                      January 2007.
  **Option
            Exercise and Holdings**
  The
            following table provides information with respect to the executive officers
            named below concerning the exercisability of options during the 2005
            fiscal year
            and unexercisable options held as of the end of the 2005 fiscal year.
            No stock
            appreciation rights were exercised during the 2005 fiscal year, and no
            stock
            appreciation rights were outstanding at the end of that fiscal
            year.
  Aggregated
            Option Exercises in Last Fiscal Year and Fiscal Year-End Option
            Values
 **Shares****Acquired**
                  
                  
                  **Value**
                  
                  
                  **No.
                      of Securities Underlying Unexercised Options/SARs at FY-End
                      (#)**
                  
                  
                  **Value
                      of Unexercised In-the-Money
                      Options/SARs at FY-End (Market price of shares at FY-End less
                      exercise
                      price) ($)(2)****Name**
                  
                  
                  **on
                      Exercise**
                  
                  
                  **Realized****(1)**
                  
                  
                  **Exercisable**
                  
                  
                  **Unexercisable**
                  
                  
                  **Exercisable**
                  
                  
                  **Unexercisable**Mr.
                      Abel
                  
                  
                  —
                  
                  
                  —
                  
                  
                  974,634
                  
                  
                  1,949,266
                  
                  
                  —
                  
                  
                  —Mr.
                      Rossettos
                  
                  
                  —
                  
                  
                  —
                  
                  
                  457,030
                  
                  
                  110,000
                  
                  
                  254,476
                  
                  
                  12,500
 
 (1)
                  Equal
                      to the fair market value of the purchased shares at the time
                      of the option
                      exercise over the exercise price paid for those
                      shares.
 (2)
                  Based
                      on the fair market value of our common stock on December 30,
                      2005, the
                      last trading day of fiscal 2005, of $1.25 per share, the closing
                      sale
                      price per share on that date on the American Stock
                      Exchange.
   -42-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **Long
            Term Incentive Plan Awards**
  No
            long
            term incentive plan awards were made to any of our executive officers
            during the
            last fiscal year.
  **Compensation
            of Directors**
  Non-employee
            directors are eligible to participate in an automatic stock option grant
            program
            pursuant to the 2003 stock option plan. Non-employee directors are granted
            an
            option for 50,000 shares of common stock upon their initial election
            or
            appointment to the board and an option for 25,000 shares of common stock
            annually thereafter. For members of a sub-committee, the annual grant
            is an
            option for 30,000 shares and for a Chairman of the Board, the annual
            grant is an
            option for 35,000 shares. During 2005 our board members received an aggregate
            of
            $11,500 in cash compensation for their services as directors. Directors
            are
            reimbursed for reasonable expenses incurred in connection with attending
            meetings of the board and of committees of the board.
  **Employment
            Contracts and Termination of Employment and Change of Control Arrangements**
  ***Douglas
            Abel***
 
 We
            entered into an Employment Agreement with Douglas Abel dated April 1,
            2005
            whereby Mr. Abel will serve as our President and Chief Executive Officer
            for a
            period of three years in exchange for (i) an annual base salary of $300,000,
            subject to a retroactive increase in the amount of $25,000 in the event
            we
            complete a financing transaction of at least $5,000,000, (ii) a signing
            bonus in
            the amount of $200,000 payable in two installments of $100,000 in May
            and
            November 2005, respectively, (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. As a result of the private
            placement that we completed in August 2005, Mr. Abel’s salary was increased
            to $325,000 retroactive to April 1, 2005. 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.
  ***Alan
              G. Harris***
 
 We
              and
              Dr. Harris entered into an Employment Agreement dated January 26, 2006
              (the
              "Agreement") whereby Dr. Harris will serve as our Chief Medical Officer
              for a
              period of three years commencing on February 1, 2006 and will receive
              in
              exchange for his services: (i) an annual base salary of $275,000; (ii)
              a
              guaranteed cash bonus of $50,000; (iii) an annual milestone bonus on
              each
              anniversary of the Agreement during the term of the Agreement in an
              amount up to
              30% of Dr. Harris' base salary, at the discretion of the Chief Executive
              Officer
              and the Board; and (iv) an option to purchase 300,000 shares of our
              common stock
              at an exercise price equal to the last closing sale price of our common
              stock on
              February 1, 2006, such options to vest in equal amounts over three
              years and be
              exercisable for a 10-year term. In the event Dr. Harris' employment
              is
              terminated upon a change of control and the fair market value of our
              common
              stock, as determined in the good faith discretion of the Board of Directors
              of
              the Company, is less than $40,000,000 on the date of the change of
              control, Dr.
              Harris shall continue to receive his base salary and benefits for a
              period of
              three months from the date of termination. In the event such termination
              is for
              a reason other than for cause or pursuant to a change of control, Dr.
              Harris
              shall be entitled to receive his base salary for a period of six months
              from the
              date of termination.
 ***Nicholas
            J. Rossettos***
  Mr. Rossettos’
            employment with us is pursuant to a January 2005 employment agreement.
            This
            agreement has a two-year term ending on January 3, 2007, which may be
            extended
            for additional one (1) year periods thereafter. Under the agreement,
            Mr.
            Rossettos is entitled to an annual salary of $175,000 in addition to
            health,
            disability insurance and other benefits. Pursuant to his employment agreement,
            on January 3, 2005, Mr. Rossettos was granted an option to purchase an
            aggregate
            of 50,000 shares of common stock at a price of $1.00 per share. The option
            vests
            in two equal installments on each of January 3, 2006 and January 3, 2007.
            Mr. Rossettos and his dependents are eligible to receive paid medical and
            long term disability insurance and such other health benefits as we make
            available to other senior officers and directors. In the event Mr. Rossettos’
employment with the Company is terminated other than for “cause” or upon a
“change of control” (as such terms are defined in the employment agreement), he
            is entitled to continue receiving his base salary until the end of the
            term of
            the agreement or 1 year from such termination, whichever occurs first,
            and the
            portions of his stock options scheduled to vest in the calendar year
            of such
            termination shall accelerate and be deemed vested as of the date of termination.
            If Mr. Rossettos’ employment is terminated upon a change of control, he is
            entitled to continue receiving his base salary for a period of 6 months
            from
            termination and the vesting of all his stock options shall accelerate
            and be
            deemed vested as of such termination.
  -43-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  
 **ITEM
                    11.**
                  **SECURITY
                      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                      STOCKHOLDER MATTER**
  The
            following table sets forth certain information regarding beneficial ownership
            of
            the our common stock as of March 1, 2006, by (i) each person known by
            us to be
            the beneficial owner of more than 5 percent of the outstanding Common
            Stock,
            (ii) each director, (iii) each executive officer, and (iv) all executive
            officers and directors as a group. The number of shares beneficially
            owned is
            determined under rules promulgated by the SEC, and the information is
            not
            necessarily indicative of beneficial ownership for any other purpose.
            Under
            those rules, beneficial ownership includes any shares as to which the
            individual
            has sole or shared voting power or investment power and also any shares
            which
            the individual has the right to acquire within 60 days of the date hereof,
            through the exercise or conversion of any stock option, convertible security,
            warrant or other right. Inclusion of shares in the table does not, however,
            constitute an admission that the named stockholder is a direct or indirect
            beneficial owner of those shares. Unless otherwise indicated, each person
            or
            entity named in the table has sole voting power and investment power
            (or shares
            that power with that person’s spouse) with respect to all shares of capital
            stock listed as owned by that person or entity. Unless otherwise indicated,
            the
            address of each of the following persons is 810 Seventh Avenue, 4th Floor,
            New
            York, New York 10019.
  **Name**
                  
                  **Shares****Beneficially
                      Owned**
                  
                  **Percent
                      of Class**Douglas
                      Abel (1)
                  
                  
                  999,634
                  
                  
                  1.6Alan
                    G. Harris
                  
                  
                  0
                  
                  
                  *Nicholas
                      J. Rossettos(2)
                  
                  
                  532,030
                  
                  
                  *Michael
                      Weiser(3)
                  
                  
                  2,431,092
                  
                  
                  4.0Joan
                      Pons Gimbert(4)
                  
                  
                  4,048,704
                  
                  
                  6.7Neil
                      Herskowitz (5)
                  
                  
                  126,541
                  
                  
                  *Malcolm
                      Hoenlien (6)
                  
                  
                  60,673
                  
                  
                  *Timothy
                      McInerney (7)
                  
                  
                  811,338
                  
                  
                  1.3Richard
                      I. Steinhart (6)
                  
                  
                  60,673
                  
                  
                  *All
                      directors and officers as a group (8)
                  
                  
                  9,070,685
                  
                  
                  14.6Oleoylestrone
                      Developments, SL(9)
                  
                  
                  3,957,037
                  
                  
                  6.6Josep
                      Samitier 1-5, Barcelona Science Park08028
                      Barcelona SpainLester
                      E. Lipschutz(10)
                  
                  
                  8,918,354
                  
                  
                  14.81650
                      Arch Street - 22nd FloorPhiladelphia,
                      PA 19103Lindsay
                      A. Rosenwald(11)
                  
                  
                  3,444,506
                  
                  
                  6.6787
                      Seventh Avenue, 48th FloorNew
                      York, NY 10019
 
 *
                  Less
                      than 1.0%
 (1)
                  Includes
                      974,634 shares issuable upon exercise of a portion of an option
                      which
                      vested November 1, 2005, but does not include the remaining
                      1,949,266
                      shares issuable upon the exercise of such option, which remaining
                      shares
                      vest in two equal installments of 974,633 shares on each of
                      November 1,
                      2006 and November 1, 2007.
 (2)
                  Includes
                      532,030 shares issuable upon the exercise of options that are
                      currently
                      exercisable or will be exercisable within 60 days.
 (3)
                  Includes
                      95,000 shares issuable upon the exercise of an option, and
                      127,754 shares
                      issuance upon exercise of warrants.
 (4)
                  Includes
                      3,957,037 shares held by Oleoylestrone Developments, SL, of
                      which Mr. Pons
                      is chief executive officer, and 91,667 shares issuable upon
                      the exercise
                      of options.
 (5)
                  Includes
                      60,673 shares issuable upon exercise of options, 21,700 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)
                  Represents
                      shares issuable upon exercise of options.
 (7)
                  Includes
                      83,333 shares issuable upon exercise of options; and 115,863
                      shares
                      issuable upon exercise of warrants.
 (8)
                  Includes
                      2,202,300 shares issuable upon exercise of currently exercisable
                      options,
                      or options that will be exercisable within 60 days, and upon
                      exercise of
                      warrants.
 (9)
                  Mr.
                      Pons Gimbert is the chief executive officer of Oleoylestrone
                      Developments,
                      SL.
 (10)
                  Includes
                      8,918,354 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. Dr. Rosenwald disclaims beneficial ownership
                      of these
                      shares, except to the extent of his pecuniary interest therein,
                      if
                      any.
 (11)
                  Includes
                      80 shares owned by Dr. Rosenwald’s spouse, 33 shares owned by his
                      children, 76 shares held by corporations affiliated by Dr.
                      Rosenwald, and
                      839,649 shares issuable upon the exercise of warrants. Does
                      not include
                      8,918,354 shares held by Lester Lipschutz, as trustee of certain
                      trusts
                      established for the benefit of Dr. Rosenwald, as to which Dr.
                      Rosenwald
                      disclaims beneficial ownership, except to the extent of his
                      pecuniary
                      interest therein, if any.
  -44-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
 
 **Equity
            Compensation Plan Information**
  The
            following table summarizes outstanding options under our 1995 Stock Option
            Plan,
            as amended and our 2003 Stock Option Plan, as well as outstanding options
            that
            we have issued to certain officers, directors and employees of our company
            outside of any plan.
  **Plan
                      category**
                  
                  **Number
                      of securities to be issued upon exercise of outstanding options,
                      warrants
                      and rights**
                    **(a)**
                  
                  **Weighted
                      average exercise price of outstanding options, warrants and
                      rights**
                    **(b)**
                  
                  **Number
                      of securities remaining available for future issuance (excluding
                      securities reflected in column (a))**
                    **(c)**Equity
                      compensation plans approved by stockholders (1)
                  
                  
                  5,191,514
                  
                  $
                  1.45
                  
                  
                  1,808,486Equity
                      compensation plans approved by stockholders (2)
                  
                  
                  32,400
                  
                  $
                  8.28
                  
                  
                  --Equity
                      compensation plans not approved by stockholders (3)
                  
                  
                  1,104,840
                  
                  $
                  0.57
                  
                  
                  --
 
 (1)
                  Represent
                      shares of common stock issuable upon outstanding options issued
                      to
                      employees and directors under our 2003 Stock option
                      Plan.
 (2)
                  Represent
                      shares of common stock issuable upon outstanding options issued
                      to
                      employees and directors under our 1995 Stock Option Plan, as
                      amended. Our
                      1995 Stock Option Plan expired on June 30,
                      2005.
 (3)
                  Represent
                      shares of common stock issuable upon outstanding options issued
                      to
                      employees and directors outside of any stock option
                      plan.
   -45-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **ITEM
                    12.**
                  **CERTAIN
                      RELATIONSHIPS AND RELATED
                      TRANSACTIONS**
  **Oleoylestrone
            Developments, SL**
  Pursuant
            to the terms of a license agreement dated February 15, 2002 by and between
            Manhattan Research Development, Inc., our wholly owned subsidiary, and
            Oleoylestrone Developments, SL (“OED”), we have an exclusive, worldwide license
            to U.S. and foreign patents and patent applications relating to certain
            technologies. Although we are not obligated to pay royalties to OED,
            the license
            agreement requires us to make certain performance-based milestone payments.
            See
“Item 1 - Intellectual Property.” OED currently owns approximately 16 percent of
            our outstanding common stock. Additionally, Mr. Pons, a member of our
            board of
            directors, is chief executive officer of OED.
 
 In
            addition to the license agreement, we entered into a consulting agreement
            with
            OED. The agreement became effective in February 2002, at a fee of $6,250
            per
            month, and will terminate when the license agreement terminates. The
            fees
            associated with the consulting agreement are expensed as incurred. OED
            agreed to
            serve as a member of our Scientific Advisory Board and to render consultative
            and advisory services to us. Such services include research, development
            and
            clinical testing of our technology as well as the reporting of the findings
            of
            such tests, assistance in the filing of patent applications and oversight
            and
            direction of efforts in regards to personnel for clinical development.
            For the
            periods ended December 31, 2005, 2004 and from inception, fees paid to
            OED were
            $75,000, $75,000 and $287,500, respectively.
 
 **NovaDel
            Pharma Inc.**
  As
            discussed above, pursuant to the terms of a license agreement dated April
            4,
            2003 by and between us and NovaDel Pharma Inc., we have the rights to
            develop
            NovaDel’s proprietary lingual spray technology to deliver propofol for
            preprocedural sedation. The license agreement with NovaDel requires us
            to make
            certain license and milestone payments, as well as pay royalties. See
“Item 1.
            Business - Lingual Spray Propofol.” During 2003, we paid aggregate license fees
            of $500,000 to NovaDel under the license agreement, but during 2004 and
            2005 did
            not make any payments to NovaDel under the agreement. Lindsay A. Rosenwald,
            who
            beneficially owns more than 5 percent of our common stock, also
            beneficially owns in excess of 20 percent of the common stock of
            NovaDel.
  **Paramount
            BioCapital, Inc.**
  Two
            members of our board of directors, Timothy McInerney and Michael Weiser,
            are
            also employees of Paramount BioCapital, Inc. or one of its affiliates.
            In
            addition, two former members of our board of directors, Joshua Kazam
            and David
            Tanen were employed by Paramount BioCapital through August 2004 and were
            directors of our company until September 2005. The sole shareholder of
            Paramount
            BioCapital, Inc. is Lindsay A. Rosenwald, M.D. Dr. Rosenwald beneficially
            owns
            more than 5 percent of our common stock. In January 2004, we paid approximately
            $260,000 as commissions earned in consideration for placement agent services
            rendered by Paramount BioCapital in connection with a private placement
            of our
            common stock, which amount represented 7 percent of the shares sold by
            Paramount
            BioCapital in the private placement. The engagement of Paramount BioCapital
            in
            connection with the January 2004 private placement was approved by all
            of our
            disinterested directors. In connection with both private placements and
            as a
            result of their employment with Paramount BioCapital, 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 our common stock, respectively,
            at a price
            of $1.10 per share.
  -46-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  Paramount
            BioCapital also served as our placement agent in connection with our
            August 2005
            private placement. As placement agent we paid to Paramount BioCapital
            total cash
            commissions of $806,741 and issued five-year warrants to purchase an
            aggregate
            of 462,184 shares of common stock exercisable at a price of $1.44 per
            share, and
            an additional five-year warrant to purchase 55,000 common shares exercisable
            at
            a price of $1.49 per share.
  **Acquisition
            of Tarpan Therapeutics, Inc.**
 
 On
            April
            1, 2005, we completed the acquisition of Tarpan Therapeutics, Inc., a
            privately-held biotechnology company that owns the rights to develop
            PTH (1-34),
            in a merger transaction. Several of Tarpan’s former stockholders are directors
            or significant stockholders of the Company. Dr. Rosenwald and various
            trusts
            established for the benefit of Dr. Rosenwald and members of his immediate
            family
            collectively beneficially owned approximately 46 percent of Tarpan’s common
            stock and beneficially owned approximately 26 percent our common stock.
            In
            addition, Joshua Kazam, David Tanen, Dr. Michael Weiser and Timothy McInerney,
            all of whom were members of the Company’s board of directors at the time of such
            acquisition (Messrs. Kazam and Tanen have since resigned), collectively
            owned
            approximately 13.4 percent of Tarpan’s outstanding common stock. Dr. Weiser and
            Mr. McInerney are also employed by Paramount BioCapital, Inc., an entity
            owned
            and controlled by Dr. Rosenwald. As a result of such relationships between
            the
            Company and Tarpan, the Company’s board of directors established a special
            committee to consider and approve the Agreement. The special committee
            consisted
            of three disinterested directors, none of whom had any prior relationship
            with
            Tarpan.
 
 We
            believe that all the transactions described above were made on terms
            no less
            favorable to us than could have been obtained from unaffiliated third
            parties.
  -47-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **ITEM
                    13.**
                  **EXHIBITS
                      LIST**
  The
            following documents are included or referenced in this report.
  Exhibit
                      No.
                  
                  Description2.1
                  
                  Agreement
                      and Plan of Merger among the Company, Manhattan Pharmaceuticals
                      Acquisition Corp. and Manhattan Research Development, Inc.
                      (formerly
                      Manhattan Pharmaceuticals, Inc.) dated December 17, 2002 (incorporated
                      by
                      reference to Exhibit 2.1 from Form 8-K filed March 5,
                      2003).2.2
                  
                  Agreement
                      and Plan of Merger among the Registrant, Tarpan Therapeutics,
                      Inc. and
                      Tarpan Acquisition Corp., dated April 1, 2005 (incorporated
                      by reference
                      to Exhibit 2.1 of the Registrant’s Form 8-K/A filed June 15,
                      2005).3.1
                  
                  Certificate
                      of incorporation, as amended through September 25, 2003 (incorporated
                      by
                      reference to Exhibit 3.1 to the Registrant’s Form 10-QSB for the quarter
                      ended September 30, 2003).3.2
                  
                  Bylaws,
                      as amended to date (incorporated by reference from Registrant’s
                      registration statement on Form SB-2, as amended (File
                      No. 33-98478)).4.1
                  
                  Specimen
                      common stock certificate (incorporated by reference from Registrant’s
                      registration statement on Form SB-2, as amended (File
                      No. 33-98478)).4.2
                  
                  Warrant
                      issued to John Prendergast to purchase 37,500 shares of Registrant’s
                      common stock (incorporated by reference from Exhibit 10.24
                      to the
                      Registrant’s Form 10-QSB for the quarter ended March 31,
                      1997.4.3
                  
                  Form
                      of warrant issued by Manhattan Research Development, Inc.,
                      which
                      automatically converted into warrants to purchase shares of
                      the
                      Registrant’s common stock upon the merger transaction with such company
                      (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB
                      for the quarter ended March 31, 2003).4.4
                  
                  Form
                      of warrant issued to placement agents in connection with the
                      Registrant’s
                      November 2003 private placement of Series A Convertible Preferred
                      Stock
                      and the Registrant’s January 2004 private placement (incorporated by
                      reference to Exhibit 4.18 to the Registrant’s Registration Statement on
                      Form SB-2 filed January 13, 2004 (File No.
                      333-111897)).4.5
                  
                  Form
                      of warrant issued to investors in the Registrant’s August 2005 private
                      placement (incorporated by reference to Exhibit 4.1 of the
                      Registrant’s
                      Form 8-K filed September 1, 2005).4.6
                  
                  Form
                      of warrant issued to placement agents in the Registrant’s August 2005
                      private placement (incorporated by reference to Exhibit 4.2
                      of the
                      Registrant’s Form 8-K filed September 1, 2005).10.1
                  
                  1995
                      Stock Option Plan, as amended (incorporated by reference to
                      Exhibit 10.18
                      to the Registrant’s Form 10-QSB for the quarter ended September 30,
                      1996).10.2
                  
                  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).10.3
                  
                  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).++10.4
                  
                  2003
                      Stock Option Plan (incorporated by reference to Exhibit 4.1
                      to
                      Registrant’s Registration Statement on Form S-8 filed February 17,
                      2004).10.5
                  
                  Employment
                      Agreement dated January 2, 2005, between the Registrant and
                      Nicholas J.
                      Rossettos (incorporated by reference to Exhibit 10.1 to the
                      Registrant’s
                      Form 10-QSB for the quarter ended June 30, 2005).10.6
                  
                  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).10.7
                  
                  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).10.8
                  
                  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).23.1
                  
                  Consent
                      of J.H. Cohn LLP.31.1
                  
                  Certification
                      of Principal Executive Officer.31.2
                  
                  Certification
                      of Principal Financial Officer.32.1
                  
                  Certifications
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.
 
 ++
                  Confidential
                      treatment has been granted as to certain portions of this exhibit
                      pursuant
                      to Rule 24b-2 of the Securities Exchange Act of 1934, as
                      amended.
   -48-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **ITEM
                    14.**
                  **PRINCIPAL
                      ACCOUNTANT FEES AND
                      SERVICES.**
 
 **Fees
            Billed to the Company by Its Independent Auditors**
  The
            following is a summary of the fees billed to us by J.H. Cohn LLP, our
            independent registered public accounting firm for professional services
            rendered
            for fiscal years ended December 31, 2005 and 2004:
  **J.H.
                      Cohn LLP****Fee
                      Category**
                  
                  **Fiscal
                      2005 Fees**
                  
                  **Fiscal
                      2004 Fees**Audit
                      Fees
                  
                  $
                  101,911
                  
                  $
                  73,146Audit-Related
                      Fees (1)
                  
                  
                  9,430
                  
                  
                  40,627Tax
                      Fees (2)
                  
                  
                  18,622
                  
                  
                  17,832All
                      Other Fees (3)
                  
                  
                  0
                  
                  
                  683Total
                      Fees
                  
                  $
                  129,963
                  
                  $
                  132,288
 
 (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 and
                      participation at board of director and audit committee
                      meetings.
 (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 2005 was obtained in reliance on the waiver of the pre-approval
            requirement afforded in SEC regulations.
  -49-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **SIGNATURES**
  In
            accordance with Section 13 or 15(d) of the Securities Exchange Act, Manhattan
            Pharmaceuticals, Inc. has duly caused this report to be signed on its
            behalf by
            the undersigned, thereunto duly authorized, on March 31, 2006.
  **MANHATTAN
                      PHARMACEUTICALS, INC.**By:
                    /s/ DOUGLAS
                      ABELName:  
                        Douglas Abel
                      Title:    
                        Chief Executive Officer and President
 In
            accordance with the Securities Exchange Act, this report has been signed
            below
            by the following persons on behalf of Manhattan Pharmaceuticals, Inc.
            and in the
            capacities and on the dates indicated.
 
 **Signature**
                  
                  **Title**
                  
                  **Date**/s/
                      Douglas Abel
                  
                  Chief
                      Executive Officer, President and Director
                  
                  March
                      31, 2006Douglas
                    Abel
                  
                  (principal
                    executive
                    officer)/s/
                      Nicholas J. Rossettos
                  
                  Treasurer,
                      Secretary, Chief Financial Officer and Chief Operating
                      Officer
                  
                  March
                      31, 2006Nicholas
                    J. Rossettos
                  
                  (principal
                    accounting and financial officer)/s/
                      Neil Herskowitz
                  
                  Director
                  
                  March
                      31, 2006Neil
                    Herskowitz/s/
                      Malcolm Hoenlein
                  
                  Director
                  
                  March
                      31, 2006Malcolm
                    Hoenlein/s/
                      Timothy McInerney
                  
                  Director
                  
                  March
                      31, 2006Timothy
                    McInerney/s/
                      Joan Pons
                  
                  Director
                  
                  March
                      31, 2006Joan
                    Pons/s/
                      Richard Steinhart
                  
                  Director
                  
                  March
                      31, 2006Richard
                    Steinhart/s/
                      Michael Weiser
                  
                  Director
                  
                  March
                      31, 2006Michael
                    Weiser
   -50-
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **Index
            to Consolidated Financial
            Statements**
  **Page**Report
                      of Independent Registered Public Accounting
                      Firm
                  F-2Consolidated
                      Balance Sheets as of December 31, 2005 and
                      2004
                  F-3Consolidated
                      Statements of Operations for the Years Ended
                      December 31, 2005 and 2004 and the cumulative period from August
                      6, 2001
                      (inception) to December 31, 2005
                  F-4Consolidated
                      Statements of Stockholders’ Equity (Deficiency) for the Years EndedDecember
                      31, 2005 and 2004 and the cumulative period from August 6,
                      2001
                      (inception) to December 31, 2005
                  F-5Consolidated
                      Statements of Cash Flows for the Years Ended
                      December 31, 2005 and 2004 and the cumulative period from August
                      6, 2001
                      (inception) to December 31, 2005
                  F-6Notes
                      to Consolidated Financial
                      Statements
                  F-7
  
 F-1
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
            FIRM
  
 The
            Board
            of Directors and Stockholders
 Manhattan
            Pharmaceuticals, Inc.
 
 
 We
            have audited the accompanying consolidated balance sheets of Manhattan
            Pharmaceuticals, Inc. and Subsidiaries (a development stage company)
            as of
            December 31, 2005 and 2004, and the related consolidated statements of
            operations, stockholders' equity (deficiency) and cash flows for the
            years then
            ended, and for the period from August 6, 2001 (date of inception) to
            December
            31, 2005. These consolidated financial statements are the responsibility
            of the
            Company's management. Our responsibility is to express an opinion on
            these
            consolidated financial statements based on our audits.
 
 We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            financial
            statements are free of material misstatement. An audit includes examining,
            on a
            test basis, evidence supporting the amounts and disclosures in the financial
            statements. An audit also includes assessing the accounting principles
            used and
            significant estimates made by management, as well as evaluating the overall
            financial statement presentation. We believe that our audits provide
            a
            reasonable basis for our opinion.
 
 In
            our opinion, the consolidated financial statements referred to above
            present
            fairly, in all material respects, the consolidated financial position
            of
            Manhattan Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2005
            and
            2004, and their consolidated results of operations and cash flows for
            the years
            then ended and for the period from August 6, 2001 (date of inception)
            to
            December 31, 2005, in conformity with accounting principles generally
            accepted
            in the United States of America.
 
 The
            accompanying consolidated financial statements have been prepared assuming
            that
            the Company will continue as a going concern. As discussed in Note 2,
            the
            Company incurred a net loss of $19,140,997and used $6,244,942 of cash
            in
            operating activities during the year ended December 31, 2005 and, as
            of that
            date, it had a loss from inception of $32,092,051. These matters raise
            substantial doubt about the Company’s ability to continue as a going concern.
            Management’s plans concerning these matters are also described in Note 2. The
            consolidated 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
            3, 2006
  F-2
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                        PHARMACEUTICALS, INC. AND SUBSIDIARIES**(A
                        Development Stage Company)Consolidated
                        Balance
                        Sheets
  **December
                        31,**
                    
                    **December
                        31,****Assets**
                    
                    **2005**
                    
                    **2004**Current
                        assets:Cash
                        and cash equivalents
                    
                    $
                    9,826,336
                    
                    $
                    905,656Short-term
                        investments, available for sale, at market
                    
                    
                    1,007,818
                    
                    
                    4,514,216Prepaid
                        expenses
                    
                    
                    194,776
                    
                    
                    40,126Total
                        current assets
                    
                    
                    11,028,930
                    
                    
                    5,459,998Property
                        and equipment, net
                    
                    
                    106,877
                    
                    
                    119,017Other
                        assets
                    
                    
                    70,506
                    
                    
                    70,506Total
                        assets
                    
                    $
                    11,206,313
                    
                    $
                    5,649,521**Liabilities
                        and Stockholders’ Equity**Current
                        liabilities:Accounts
                        payable
                    
                    $
                    1,617,489
                    
                    $
                    1,143,603Accrued
                        expenses
                    
                    
                    48,328
                    
                    
                    52,102Total
                        liabilities
                    
                    
                    1,665,817
                    
                    
                    1,195,705Commitments
                        and ContingenciesStockholders’
                        equity:Series
                        A convertible preferred stock, $.001 par value.Authorized
                        1,500,000 shares; 0 and 854,373 shares issued andoutstanding
                        at December 31, 2005 and December 31, 2004, respectively(liquidation
                        preference aggregating $0 and $8,973,730 atDecember
                        31, 2005 and December 31, 2004, respectively)
                    
                    
                    —
                    
                    
                    854Common
                        stock, $.001 par value. Authorized 150,000,000 shares;60,092,697
                        and 28,309,187 shares issued and outstandingat
                        December 31, 2005 and December 31, 2004, respectively
                    
                    
                    60,093
                    
                    
                    28,309Additional
                        paid-in capital
                    
                    
                    42,751,111
                    
                    
                    18,083,208Deficit
                        accumulated during the development stage
                    
                    
                    (33,271,695
                    )
                    
                    (13,955,035
                    )Dividends
                        payable in shares
                    
                    
                    —
                    
                    
                    303,411Accumulated
                        other comprehensive income
                    
                    
                    987
                    
                    
                    13,237Unearned
                        consulting services
                    
                    
                    —
                    
                    
                    (20,168
                    )Total
                        stockholders’ equity
                    
                    
                    9,540,496
                    
                    
                    4,453,816Total
                        liabilities and stockholders' equity
                    
                    $
                    11,206,313
                    
                    $
                    5,649,521
 See
              accompanying notes to consolidated financial statements.
 F-3
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                        PHARMACEUTICALS, INC. AND SUBSIDIARIES**(A
                        Development Stage Company)Consolidated
                        Statements of
                        Operations
  **Cumulative****period
                        from****August
                        6, 2001****(inception)
                        to****Years
                        ended December 31,**
                    
                    **December
                        31,****2005**
                    
                    **2004**
                    
                    **2005**Revenue
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —Costs
                        and expenses:Research
                        and development
                    
                    
                    5,178,077
                    
                    
                    4,152,994
                    
                    
                    11,780,511General
                        and administrative
                    
                    
                    2,291,121
                    
                    
                    1,989,829
                    
                    
                    6,416,611In-process
                        research and development charge
                    
                    
                    11,887,807
                    
                    
                    —
                    
                    
                    11,887,807Impairment
                        of intangible assets
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,248,230Loss
                        on disposition of intangible assets
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,213,878Total
                        operating expenses
                    
                    
                    19,357,005
                    
                    
                    6,142,823
                    
                    
                    32,547,037Operating
                        loss
                    
                    
                    (19,357,005
                    )
                    
                    (6,142,823
                    )
                    
                    (32,547,037
                    )Other
                        (income) expense:Interest
                        and other income
                    
                    
                    (210,156
                    )
                    
                    (175,610
                    )
                    
                    (401,845
                    )Interest
                        expense
                    
                    
                    —
                    
                    
                    —
                    
                    
                    23,893Realized
                        gain on sale of marketable equity securities
                    
                    
                    (5,852
                    )
                    
                    (71,182
                    )
                    
                    (77,034
                    )Total
                        other income
                    
                    
                    (216,008
                    )
                    
                    (246,792
                    )
                    
                    (454,986
                    )Net
                        loss
                    
                    
                    (19,140,997
                    )
                    
                    (5,896,031
                    )
                    
                    (32,092,051
                    )Preferred
                        stock dividends (including imputed amounts)
                    
                    
                    (175,663
                    )
                    
                    (585,799
                    )
                    
                    (1,179,644
                    )Net
                        loss applicable to common shares
                    
                    $
                    (19,316,660
                    )
                    $
                    (6,481,830
                    )
                    $
                    (33,271,695
                    )Net
                        loss per common share:Basic
                        and diluted
                    
                    $
                    (0.44
                    )
                    $
                    (0.24
                    )Weighted
                        average shares of common stock outstanding:Basic
                        and diluted
                    
                    
                    43,544,206
                    
                    
                    26,936,658See
                        accompanying notes to consolidated financial statements.
   F-4
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                      PHARMACEUTICALS, INC. AND SUBSIDIARIES**(A
                      Development Stage Company)Consolidated
                      Statements of Stockholders' Equity
                      (Deficiency)
  **Deficit**
                  
                  **Dividends**
                  
                  
                  
                  
                  
                  **Total****Series
                      A**
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  **accumulated**
                  
                  **payable
                      in**
                  
                  **Accumulated**
                  
                  
                  
                  **stock–****convertible**
                  
                  
                  
                  
                  
                  **Additional**
                  
                  
                  
                  **during**
                  
                  **Series
                      A**
                  
                  **other**
                  
                  **Unearned**
                  
                  **holders'****preferred
                      stock**
                  
                  **Common
                      stock**
                  
                  **paid-in**
                  
                  **Subscription**
                  
                  **development**
                  
                  **preferred**
                  
                  **comprehensive**
                  
                  **consulting**
                  
                  **equity****Shares**
                  
                  **Amount**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **capital**
                  
                  **receivable**
                  
                  **stage**
                  
                  **shares**
                  
                  **income/(loss)**
                  
                  **services**
                  
                  **(deficiency)**Stock
                      issued at $0.0004 pershare
                      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 sharefor
                      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
                  
                  
                  22,721Sales
                      of common stock at $0.63 pershare
                      through privateplacement,
                      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 through private placement at $1.10 per
                      share,net
                      of expenses
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,368,952
                  
                  
                  3,369
                  
                  
                  3,358,349
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,361,718Conversion
                      of preferred stock to common stock
                  
                  
                  (170,528
                  )
                  
                  (171
                  )
                  
                  1,550,239
                  
                  
                  1,551
                  
                  
                  (1,380
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Preferred
                      stock dividends paid by issuance of
                      shares
                  
                  
                  24,901
                  
                  
                  25
                  
                  
                  —
                  
                  
                  —
                  
                  
                  281,073
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (282,388
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (1,290
                  )Preferred
                      stock dividend accrued
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (585,799
                  )
                  
                  585,799
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Warrants
                      issued for consulting services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  125,558
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (120,968
                  )
                  
                  4,590Amortization
                      of unearned consulting costs
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  100,800
                  
                  
                  100,800Reversal
                      of unrealized loss on short-terminvestments
                      and unrealized gain on short-term
                      investments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  20,997
                  
                  
                  —
                  
                  
                  20,997Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,896,031
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,896,031
                  )Balance
                      at December 31, 2004
                  
                  
                  854,373
                  
                  
                  854
                  
                  
                  28,309,187
                  
                  
                  28,309
                  
                  
                  18,083,208
                  
                  
                  —
                  
                  
                  (13,955,035
                  )
                  
                  303,411
                  
                  
                  13,237
                  
                  
                  (20,168
                  )
                  
                  4,453,816Common
                      stock issued through private placement at $1.11 and
                      $1.15per
                      share, net of expenses
                  
                  
                  —
                  
                  
                  —
                  
                  
                  11,917,680
                  
                  
                  11,918
                  
                  
                  12,238,291
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  12,250,209Common
                      stock issued to vendor at $1.11 pershare
                      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
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  68,491Conversion
                      of preferred stock to common stock
                  
                  
                  (896,154
                  )
                  
                  (896
                  )
                  
                  8,146,858
                  
                  
                  8,147
                  
                  
                  (7,251
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Preferred
                      stock dividends paid by issuance of
                      shares
                  
                  
                  41,781
                  
                  
                  42
                  
                  
                  —
                  
                  
                  —
                  
                  
                  477,736
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (479,074
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (1,296
                  )Preferred
                      stock dividend accrued
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (175,663
                  )
                  
                  175,663
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Stock
                      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
                  
                  $
                  —
                  
                  $
                  9,540,496
 See
              accompanying notes to consolidated financial statements.
 F-5
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                        PHARMACEUTICALS, INC. AND SUBSIDIARIES**(A
                        Development Stage Company)Consolidated
                        Statements of Cash
                        Flows
  **Cumulative****period
                        from****August
                        6, 2001****(inception)
                        to****Years
                        ended December 31,**
                    
                    **December
                        31,****2005**
                    
                    **2004**
                    
                    **2005**Cash
                        flows from operating activities:Net
                        loss
                    
                    $
                    (19,140,997
                    )
                    $
                    (5,896,031
                    )
                    $
                    (32,092,051
                    )Adjustments
                        to reconcile net loss tonet
                        cash used in operating activities:Common
                        stock issued for license rights
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,000Stock
                        based compensation
                    
                    
                    87,139
                    
                    
                    100,800
                    
                    
                    248,528Warrants
                        issued for consulting services
                    
                    
                    —
                    
                    
                    4,590
                    
                    
                    4,590Amortization
                        of intangible assets
                    
                    
                    —
                    
                    
                    —
                    
                    
                    145,162Gain
                        on sale of marketable equity securities
                    
                    
                    (5,852
                    )
                    
                    (71,182
                    )
                    
                    (77,034
                    )Depreciation
                    
                    
                    53,734
                    
                    
                    27,344
                    
                    
                    87,294Non
                        cash portion of in-process research and development charge
                    
                    
                    11,721,623
                    
                    
                    —
                    
                    
                    11,721,623Loss
                        on impairment of intangible assets
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,248,230Loss
                        on disposition of intangible assets
                    
                    
                    —
                    
                    
                    —
                    
                    
                    1,213,878Changes
                        in operating assets and liabilities, net of acquisitions:Decrease
                        (increase) in prepaid expenses and other current assets
                    
                    
                    (154,650
                    )
                    
                    (15,145
                    )
                    
                    (136,531
                    )Increase
                        in other assets
                    
                    
                    —
                    
                    
                    (70,506
                    )
                    
                    (70,506
                    )Increase
                        in accounts payable
                    
                    
                    1,197,835
                    
                    
                    595,008
                    
                    
                    2,017,703Decrease
                        in accrued expenses
                    
                    
                    (3,774
                    )
                    
                    (365,323
                    )
                    
                    (491,993
                    )Net
                        cash used in operating activities
                    
                    
                    (6,244,942
                    )
                    
                    (5,690,445
                    )
                    
                    (16,180,107
                    )Cash
                        flows from investing activities:Purchase
                        of property and equipment
                    
                    
                    (39,555
                    )
                    
                    (138,340
                    )
                    
                    (184,449
                    )Cash
                        paid in connection with acquisitions
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (32,808
                    )Purchase
                        of short-term investments
                    
                    
                    —
                    
                    
                    (5,000,979
                    )
                    
                    (5,000,979
                    )Proceeds
                        from sale of short-term investments
                    
                    
                    3,499,999
                    
                    
                    931,089
                    
                    
                    4,431,088Proceeds
                        from sale of license
                    
                    
                    —
                    
                    
                    —
                    
                    
                    200,001Cash
                        acquired in acquisition
                    
                    
                    6,777
                    
                    
                    —
                    
                    
                    6,777Net
                        cash provided by (used in) investing activities
                    
                    
                    3,467,221
                    
                    
                    (4,208,230
                    )
                    
                    (580,370
                    )Cash
                        flows from financing activities:Proceeds
                        from issuances of notes payable to stockholders
                    
                    
                    —
                    
                    
                    —
                    
                    
                    233,500Repayments
                        of notes payable to stockholders
                    
                    
                    (651,402
                    )
                    
                    —
                    
                    
                    (884,902
                    )Proceeds
                        from issuance of note payable to bank
                    
                    
                    —
                    
                    
                    —
                    
                    
                    600,000Repayment
                        of note payable to bank
                    
                    
                    —
                    
                    
                    —
                    
                    
                    (600,000
                    )Proceeds
                        from subscriptions receivable
                    
                    
                    —
                    
                    
                    —
                    
                    
                    4,000Payment
                        for fractional shares for Preferred stock dividends
                    
                    
                    (1,296
                    )
                    
                    (1,290
                    )
                    
                    (2,286
                    )Proceeds
                        from sale of common stock, net
                    
                    
                    12,250,209
                    
                    
                    3,361,718
                    
                    
                    18,059,335Proceeds
                        from sale of preferred stock, net
                    
                    
                    —
                    
                    
                    —
                    
                    
                    9,046,176Proceeds
                        from exercise of stock options
                    
                    
                    32,400
                    
                    
                    30,100
                    
                    
                    62,500Proceeds
                        from exercise of warrants
                    
                    
                    68,490
                    
                    
                    —
                    
                    
                    68,490Net
                        cash provided by financing activities
                    
                    
                    11,698,401
                    
                    
                    3,390,528
                    
                    
                    26,586,813Net
                        increase (decrease) in cash and cash equivalents
                    
                    
                    8,920,680
                    
                    
                    (6,508,147
                    )
                    
                    9,826,336Cash
                        and cash equivalents at beginning of period
                    
                    
                    905,656
                    
                    
                    7,413,803
                    
                    
                    —Cash
                        and cash equivalents at end of period
                    
                    $
                    9,826,336
                    
                    $
                    905,656
                    
                    $
                    9,826,336Supplemental
                        disclosure of cash flow information:Interest
                        paid
                    
                    $
                    —
                    
                    $
                    —
                    
                    $
                    26,934Supplemental
                        disclosure of noncash investing and financing activities:Common
                        stock issued in satisfaction of accounts payable
                    
                    $
                    750,000
                    
                    $
                    —
                    
                    $
                    750,000Preferred
                        stock dividends accrued
                    
                    
                    175,663
                    
                    
                    585,799
                    
                    
                    761,462Conversion
                        of preferred stock to common stock
                    
                    
                    896
                    
                    
                    171
                    
                    
                    1,067Preferred
                        stock dividends paid by issuance of shares
                    
                    
                    477,736
                    
                    
                    282,388
                    
                    
                    759,134Issuance
                        of common stock for acquisitions
                    
                    
                    11,052,984
                    
                    
                    —
                    
                    
                    13,389,226Marketable
                        equity securities received in connection withsale
                        of license
                    
                    
                    —
                    
                    
                    —
                    
                    
                    359,907Net
                        liabilities assumed over assets acquired in business
                        combination
                    
                    
                    (675,416
                    )
                    
                    —
                    
                    
                    (675,416
                    )See
                        accompanying notes to consolidated financial statements.
 F-6
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 **(1)**
                  **Merger
                      and Nature of Operations**
  ***2003
            Reverse Merger***
 
 On
            February 21, 2003, the Company (formerly known as “Atlantic Technology Ventures,
            Inc.”) completed a reverse acquisition of privately held Manhattan Research
            Development, Inc. (formerly Manhattan Pharmaceuticals, Inc.), a Delaware
            corporation. The merger was effected pursuant to an Agreement and Plan
            of Merger
            dated December 17, 2002 (the “Merger Agreement”) by and among the Company,
            Manhattan Research and Manhattan Pharmaceuticals Acquisition Corp, the
            Company’s
            wholly owned subsidiary (“MPAC”). In accordance with the terms of the Merger
            Agreement, MPAC merged with and into Manhattan Research, with Manhattan
            Research
            remaining as the surviving corporation and a wholly owned subsidiary
            of the
            Company. Pursuant to the Merger Agreement, upon the effective time of
            the
            merger, the outstanding shares of common stock of Manhattan Research
            automatically converted into an aggregate of 18,689,917 shares of the
            Company’s
            common stock, which represented 80 percent of the Company’s outstanding voting
            stock after giving effect to the merger. All share and per share amounts
            have
            been adjusted for a 1-for-5 combination on September 25, 2003 (see Note
            5). In
            addition, immediately prior to the merger Manhattan Research had outstanding
            options and warrants to purchase an aggregate of 172,856 shares of its
            common
            stock, which, in accordance with the terms of the merger, automatically
            converted into options and warrants to purchase an aggregate of 2,196,944
            shares
            of the Company’s common stock. 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. Based on the
            five-day
            average price of the Company’s common stock of $0.50 per share, the purchase
            price approximated $2,336,000 ($3,167,178 including net liabilities assumed)
            which represents 20 percent of the market value of the combined Company’s
            post-merger total outstanding shares of 23,362,396. In connection with
            the
            merger, the Company changed its name from “Atlantic Technology Ventures, Inc.”
to “Manhattan Pharmaceuticals, Inc.” Under the purchase method of accounting, at
            the time of the merger, Manhattan Research recognized patents and licenses
            for
            substantially all of the purchase price. A purchase price allocation
            was
            completed in the third quarter of 2003 and did not result in changes
            to the
            initial estimate. As a result of acquiring Manhattan Research, the Company
            received new technologies. The results of the combined operations have
            been
            included in the Company’s financial statements since February 2003.
 
 ***Business
            and Operations***
  As
            described above, the Company resulted from the February 21, 2003 reverse
            merger
            between Atlantic Technology Ventures, Inc., which was incorporated on
            May 18,
            1993, and privately-held Manhattan Research Development, Inc., incorporated
            on
            August 6, 2001. The Company was incorporated in the State of Delaware.
            In
            connection with the merger, the former stockholders of Manhattan Research
            received a number of shares of Atlantic's common stock so that following
            the
            merger they collectively owned 80 percent of the outstanding shares.
            Upon
            completion of the merger, Atlantic changed its name to Manhattan
            Pharmaceuticals, Inc. and thereafter adopted the business of Manhattan
            Research
            Development.
  F-7
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 
 The
            Company is a development stage biopharmaceutical company that holds an
            exclusive
            world-wide, royalty-free license to certain intellectual property related
            to
            oleoyl-estrone, which is owned by Oleoyl-Estrone Developments, SL (“OED”) of
            Barcelona, Spain. Oleoyl-estrone is an orally administered small molecule
            that
            has been shown to cause significant weight loss in pre-clinical animal
            studies
            regardless of dietary modifications. In addition, the Company has exclusive,
            world-wide proprietary rights to a technology for the clinical uses of
            PTH
            (1-34) relating to the regulation of cell differentiation and proliferation
            for
            treatment of skin disorders including psoriasis. The Company also holds
            the
            worldwide, exclusive rights to proprietary lingual spray technology to
            deliver
            the drug propofol for preprocedural sedation prior to diagnostic, therapeutic
            or
            endoscopic procedures.
 
 ***Acquisition
            of Tarpan Therapeutics, Inc.***
 
 On
            April
            1, 2005, the Company entered into an Agreement and Plan of Merger (the
            “Agreement”) with Tarpan Therapeutics, Inc., a Delaware corporation (“Tarpan”),
            and Tarpan Acquisition Corp., a Delaware corporation and wholly-owned
            subsidiary
            of the Company (“TAC”). Under the Agreement TAC merged with and into Tarpan,
            with Tarpan remaining as the surviving corporation and a wholly-owned
            subsidiary
            of the Company (the “Merger”). The Merger was completed April 1, 2005. In
            consideration for their shares of Tarpan capital stock and in accordance
            with
            the Agreement, the stockholders of Tarpan received 10,731,052 shares
            of the
            Company’s common stock such that, upon the effective time of the Merger, the
            Tarpan stockholders collectively received approximately 20 percent of the
            Company’s then outstanding common stock on a fully-diluted basis. Based on the
            five day average price of the Company’s common stock of $1.03 per share, the
            value of the shares issued totaled $11,052,984. In addition, there were
            $166,184
            of acquisition costs. At the time of the Merger, Tarpan had outstanding
            indebtedness of $651,000 (inclusive of 5% accrued interest) resulting
            from a
            series of promissory notes issued to Paramount BioCapital Investments,
            LLC and
            Horizon BioMedical Ventures, LLC, both of which are owned or controlled
            by Dr.
            Lindsay Rosenwald. The notes were amended at the time of the Merger to
            provide
            that one-half of the outstanding indebtedness was payable upon completion
            of the
            Merger and the remaining one-half was payable at such time as the Company
            raised
            at least $5 million in new financing and no interest would accrue on
            unpaid
            principal subsequent to the Merger. The notes were repaid in full by
            the Company
            in two installments on April 15, 2005 and September 6, 2005.
 
 The
            acquisition of Tarpan has been accounted for by the Company under the
            purchase
            method of accounting in accordance with Statement of Financial Accounting
            Standards (“SFAS”) No. 141 “Business Combinations”. Under the purchase method,
            assets acquired and liabilities assumed by the Company are recorded at
            their
            estimated fair values and the results of operations of the acquired company
            are
            consolidated with those of the Company from the date of acquisition.
 
 Several
            of Tarpan’s former stockholders are directors or significant stockholders of the
            Company. Dr. Rosenwald and various trusts established for the benefit
            of Dr.
            Rosenwald and members of his immediate family collectively beneficially
            owned
            approximately 46 percent of Tarpan’s common stock and beneficially owned
            approximately 26 percent of the Company’s common stock. In addition, Joshua
            Kazam, David Tanen, Dr. Michael Weiser and Timothy McInerney, all of
            whom were
            members of the Company’s board of directors at the time of the transaction,
            collectively owned approximately 13.4 percent of Tarpan’s outstanding common
            stock. Dr. Weiser and Mr. McInerney are also employed by Paramount BioCapital,
            Inc., an entity owned and controlled by Dr. Rosenwald. As a result of
            such
            relationships between the Company and Tarpan, the Company’s board of directors
            established a special committee to consider and approve the Agreement.
            The
            members of the special committee did not have any prior relationship
            with
            Tarpan.
  F-8
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 The
            excess purchase price paid by the Company to acquire the net assets of
            Tarpan
            was allocated to acquired in-process research and development totaling
            $11,887,807. As required by Financial Accounting Standards Board (“FASB”)
            Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business
            combinations Accounted for by the Purchase Method” (“FIN 4”), the Company
            recorded a charge in its consolidated statement of operations for the
            year ended
            December 31, 2005 for the in-process research and development. Tarpan
            is a
            biopharmaceutical company engaged in the development of the Phase II
            pharmaceutical product candidate, PTH (1-34). The acquisition of Tarpan
            gives
            Manhattan its third product candidate. Results of operations of Tarpan
            are
            included in the consolidated financials since April 1, 2005.
 
 A
            summary
            of the allocation of the purchase price is as follows:
 Assets
                      purchased:Cash
                  
                  $
                  6,777Property
                      and equipment
                  
                  
                  2,037Acquired
                      in-process research and development
                  
                  
                  11,887,807Total
                  
                  
                  11,896,621Liabilities
                      assumed:Accounts
                      payable
                  
                  
                  26,051Notes
                      payable - related parties
                  
                  
                  651,402Total
                  
                  
                  677,453Net
                      purchase price
                  
                  $
                  11,219,168
  The
            following unaudited pro forma financial information presents the condensed
            consolidated results of operations of the Company and Tarpan, as if the
            acquisition had occurred on January 1, 2004 instead of April 1, 2005,
            after
            giving effect to certain adjustments, including the issuance of the Company’s
            common stock as part of the purchase price. The unaudited pro forma information
            does not necessarily reflect the results of operations that would have
            occurred
            had the entities been a single company during these periods.
  F-9
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 **Twelve
                        months ended****December
                        31,****2005**
                    
                    **2004**Net
                        loss
                    
                    $
                    (19,268,258
                    )
                    $
                    (18,346,169
                    )Weighted
                        average number of common shares outstanding
                    
                    
                    46,219,619
                    
                    
                    37,667,710Loss
                        per common share - basic and fully diluted
                    
                    $
                    (0.42
                    )
                    $
                    (0.49
                    )
 **(2)**
                  **Liquidity
                      and Basis of Presentation**
 
 ***Liquidity***
 
 The
            Company has reported a net loss of $5,896,031 and negative cash flows
            from
            operating activities of $5,690,445 for the year ended December 31, 2004
            and a
            net loss of $19,140,997 and negative cash flows from operating activities
            of
            $6,244,942 for the year ended December 31, 2005. The net loss from date
            of
            inception, August 6, 2001 to December 31, 2005 amounts to
            $32,092,051.
 
 Management
            believes that the Company will continue to incur net losses and negative
            cash
            flows from operating activities through at least December 31, 2006. Based
            on the
            resources of the Company available at December 31, 2005, management believes
            that the Company will need additional equity or debt financing or will
            need to
            generate revenues during 2006 through licensing of its products or entering
            into
            strategic alliances to be able to sustain its operations beyond 2006
            and that it
            will need additional financing thereafter until it can achieve profitability,
            if
            ever. These matters raise substantial doubt about the Company’s ability to
            continue as a going concern.
 
 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. Through December 31, 2005, a significant portion
            of the
            Company’s financing has been through private placements of common and preferred
            stock. Until and unless the Company’s operations generate significant revenues
            and cash flows from operating activities, the Company will attempt to
            continue
            to fund operations from cash on hand and through the sources of capital
            previously described.
  There
            can be no assurance, however that management's plans will enable the
            Company to
            attain profitable operations or generate sufficient cash flows from operations
            and financing activities necessary to continue as a going concern. The
            accompanying financial statements do not include any adjustments relating
            to the
            classification of recorded asset amounts or amounts and classification
            of
            liabilities that might be necessary should the Company be unable to continue
            in
            existence.
  F-10
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 As
            described in Note 5, the Company completed a private placement offering
            of units
            consisting of shares of its 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, respectively. In
            the
            August 26 closing, the Company sold a total of 10,808,971 shares of common
            stock
            and five-year warrants to purchase 2,161,767 shares for total gross proceeds
            of
            $11,997,954. The warrants issued at the August 26 closing are exercisable
            at a
            price of $1.44 per share. On August 30, 2005, the Company closed on the
            sale of
            an additional 1,108,709 shares of common stock and warrants to purchase
            221,741
            common shares, which resulted in gross proceeds of $1,275,016. The warrants
            issued in connection with the August 30 closing are exercisable at a
            price of
            $1.49 per share. After payment of all related commissions and expenses
            totaling
            $1,022,761, the Company realized net proceeds of $12,250,209.
 
 **(3)**
                      **Summary
                          of Significant Accounting
                          Policies**
  ***Basis
            of Presentation***
 
 The
            consolidated financial statements have been prepared in accordance with
            the
            provisions of  SFAS No. 7, “Accounting and Reporting by Development
            Stage Enterprises.”
 
 ***Principles
            of Consolidation***
  The
            consolidated financial statements include the accounts of the Company
            and its
            wholly-owned subsidiaries. All intercompany balances and transactions
            have been
            eliminated in consolidation.
  **Use
            of Estimates**
  The
            preparation of financial statements in conformity with accounting principles
            generally accepted in the United States of America requires management
            to make
            estimates and assumptions that affect certain reported amounts of assets
            and
            liabilities and disclosure of contingent assets and liabilities at the
            date of
            the financial statements and the reported amounts of expenses during
            the
            reporting period. Actual results could differ from those estimates.
  ***Research
            and Development***
  All
            research and development costs are expensed as incurred and include costs
            of
            consultants who conduct research and development on behalf of the Company
            and
            its subsidiaries. Costs related to the acquisition of technology rights
            and
            patents for which development work is still in process are expensed as
            incurred
            and considered a component of research and development costs.
  F-11
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 ***Acquired
            in-process research and development***
  Costs
            to
            acquire in-process research and development projects and technologies
            which have
            no alternative future use at the date of acquisition are expensed.
  **Income
            Taxes**
  Income
            taxes are accounted for under the asset and liability method. Deferred
            tax
            assets and liabilities are recognized for the future tax consequences
            attributable to temporary differences between financial statement carrying
            amounts of existing assets and liabilities, and their respective tax
            bases and
            operating loss and tax credit carryforwards. Deferred tax assets and
            liabilities
            are measured using enacted tax rates expected to apply to taxable income
            in the
            years in which those temporary differences are expected to be recovered
            or
            settled. The effect on deferred tax assets and liabilities of a change
            in tax
            rates is recognized in income in the period that includes the enactment
            date. A
            valuation allowance is provided when it is more likely than not that
            some
            portion or all of the deferred tax assets will not be realized.
  ***Computation
            of Net Loss per Common Share***
  Basic
            net
            loss per common share is calculated by dividing net loss applicable to
            common
            shares by the weighted-average number of common shares outstanding for
            the
            period. Diluted net loss per common share is the same as basic net loss
            per
            common share, since potentially dilutive securities from stock options,
            stock
            warrants and convertible preferred stock would have an antidilutive effect
            because the Company incurred a net loss during each period presented.
            The
            amounts of potentially dilutive securities excluded from the calculation
            were
            12,841,159 and 14,871,502 shares at December 31, 2005 and 2004,
            respectively.
  ***Stock-Based
            Compensation***
  SFAS
            123,
“Accounting for Stock-Based Compensation”, provides for the use of a fair value
            based method of accounting for employee stock compensation. However,
            SFAS 123
            also allows an entity to continue to measure compensation cost for stock
            options
            granted to employees using the intrinsic value method of accounting prescribed
            by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
            Employees” (“APB 25”), which only requires charges to compensation expense for
            the excess, if any, of the fair value of the underlying stock at the
            date a
            stock option is granted (or at an appropriate subsequent measurement
            date) over
            the amount the employee must pay to acquire the stock *,* if such
            amounts differ materially from historical amounts. The Company has elected
            to
            continue to account for employee stock options using the intrinsic value
            method
            under APB 25. By making that election, it is required by SFAS 123 and
            SFAS 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” to provide
            pro forma disclosures of net income (loss) and earnings (loss) per share
            as if a
            fair value based method of accounting had been applied for all employee
            stock
            options.
  When
            the
            exercise price of employee stock options is less than the fair value
            of the
            underlying stock on the grant date, the Company records deferred compensation
            for the difference and amortizes this amount to expense over the vesting
            period
            of the options. Options or stock awards issued to non-employees and consultants
            are recorded at their fair value as determined in accordance with SFAS
            123 and
            Emerging Issues Task Force (“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, and recognized over the related vesting period.
            The
            fair value of the options issued to consultants or others which require
            “variable accounting” are remeasured at each reporting period and the resultant
            change in fair value of the vested options is recorded as a charge or
            credit in
            the consolidated statement of operations.
  F-12
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
  Had
            compensation costs been determined in accordance with the fair value
            method
            prescribed by SFAS 123 for all options issued to employees and amortized
            over
            the vesting period, the Company’s net loss applicable to common shares and net
            loss per common share (basic and diluted) for plan options would have
            been
            increased to the pro forma amounts indicated below.
 **2005**
                    
                    **2004**Net
                        loss applicable to common shares, as reported
                    
                    $
                    (19,316,660
                    )
                    $
                    (6,481,830
                    )Deduct: 
                        Total
                        stock-based employeecompensation
                        expense determinedunder
                        fair value method
                    
                    
                    (1,089,814
                    )
                    
                    (1,133,131
                    )Net
                        loss applicable to common shares, pro forma
                    
                    $
                    (20,406,474
                    )
                    $
                    (7,614,961
                    )Net
                        loss applicable to common shares – basicAs
                        reported
                    
                    $
                    (0.44
                    )
                    $
                    (0.24
                    )Pro
                        forma
                    
                    
                    (0.47
                    )
                    
                    (0.28
                    )
  The
            fair
            value of each option granted is estimated on the date of the grant using
            the
            Black-Scholes option pricing model with the following assumptions used
            for the
            grants in 2005 and 2004: dividend yield of 0%; expected volatility of
            70% and
            72% for 2005 and 73% and 78% for 2004; risk-free interest rates of 3.4%,
            3.7%,
            4.0% and 4.1% for 2005 and 2.0% for 2004; and expected lives of eight
            years for
            each year presented.
  As
            a
            result of amendments to SFAS 123, the Company will be required to expense
            in its
            historical financial statements the fair value of employee stock options
            over
            the vesting period, beginning January 1, 2006.
  ***Financial
            Instruments***
  At
            December 31, 2005 and 2004, the fair values of cash and cash equivalents,
            short-term investments and accounts payable approximate their carrying
            values
            due to the short-term nature of these instruments.
  ***Cash
            and Cash Equivalents***
  Cash
            equivalents consist of cash or short term investments with original maturities
            at the time of purchase of three months or less.
  F-13
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 ***Property
            and Equipment***
  Property
            and equipment are stated at cost. Depreciation of fixed assets is provided
            by
            straight-line methods 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.
  ***Accounting
            for Impairment of Long-Lived Assets***
  In
            accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
            Long-Lived Assets”, long lived assets such as property, plant, and equipment and
            intangible assets subject to amortization are reviewed for impairment
            whenever
            events or changes in circumstances indicate that the carrying amount
            of an asset
            may not be recoverable. Recoverability of assets to be held and used
            is measured
            by a comparison of the carrying amount of an asset to estimated undiscounted
            future cash flows expected to be generated by the asset. If the carrying
            amount
            of an asset exceeds its estimated future cash flows, an impairment charge
            is
            recognized for the amount by which the carrying amount of the asset exceeds
            the
            fair value of the asset. Assets to be disposed of would be separately
            presented
            in the consolidated balance sheet and reported at the lower of the carrying
            amount or fair value less costs to sell, and would no longer be depreciated.
  ***Short-term
            Investments***
  Short-term
            investments are carried at market value since they are marketable and
            considered
            available-for-sale. The following is a summary of the Company’s short-term
            investments:
  **Unrealized****Cost**
                    
                    **gain**
                    
                    **Fair
                        value****2004**Eaton
                        Vance Floating Rate Fund
                    
                    $
                    4,500,979
                    
                    $
                    13,237
                    
                    $
                    4,514,216
  **Unrealized****Cost**
                    
                    **gain**
                    
                    **Fair
                        value****2005**Eaton
                        Vance Floating Rate Fund
                    
                    $
                    1,006,831
                    
                    $
                    987
                    
                    $
                    1,007,818
   F-14
 **Back
                  to Table of Contents**
 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 Unrealized
            gain (and loss, if any) is excluded from operations and included in accumulated
            other comprehensive income (loss). The Company’s comprehensive losses (net
            losses adjusted for changes in unrealized gains/losses on short-term
            investments) for 2005 and 2004 were $19,153,247 and $5,875,034,
            respectively.
  **(4)**
                      **Property
                          and Equipment**
  Property
            and equipment consists of the following at December 31:
 **2005**
                    
                    **2004**Property
                        and equipment
                    
                    $
                    206,988
                    
                    $
                    165,394Less
                        accumulated depreciation
                    
                    
                    (100,111
                    )
                    
                    (46,377
                    )Net
                        property and equipment
                    
                    $
                    106,877
                    
                    $
                    119,017
 **(5)**
                      **Stockholders’
                          Equity**
  ***Common
            Stock***
  The
            Company issued 10,167,740 shares of common stock to investors during
            December
            2001 for subscriptions receivable of $4,000 or $0.0004 per share. During
            2002,
            the Company received the $4,000 subscription receivable.
 
 In
            August
            2002, the Company entered into one-year agreements with four consultants
            and
            issued options to these consultants to purchase 101,678 shares of the
            Company's
            common stock at an exercise price of $.0039 per share expiring in August
            2007.
            The Company valued these options at $60,589, fair value, and amortized
            the
            expense through August 2003. Therefore, the Company expensed $22,721
            in 2002 and
            $37,868 in 2003. Through December 31, 2005, none of these options were
            exercised.
 
 During
            2002, the Company commenced a private placement and sold 239,450 shares
            of
            common stock at $8 ($0.63 post merger) per share and received proceeds
            of
            $1,704,318, net of expenses of $211,281. These shares converted into
            3,043,332
            shares of the Company’s common stock when the Company completed the reverse
            acquisition of Manhattan Research as discussed in Note 1. In addition,
            each
            investor received warrants equal to 10% of the number of shares of common
            stock
            purchased and, accordingly, Manhattan Research issued warrants to purchase
            23,945 shares of common stock in 2002 in connection with the private
            placement.
            Upon the merger, these converted into warrants to purchase approximately
            304,000
            shares of the Company’s common stock. Each warrant had an exercise price of $8
            per share, which post merger converted to approximately $0.63. These
            warrants
            expire in 2007.
  F-15
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 **Index
                  to Financial
                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 During
            January and February 2003, the Company sold an additional 104,000 shares
            of
            common stock at $8 ($0.63, post merger) per share and warrants to purchase
            10,400 shares of common stock exercisable at $8 ($0.63 post merger) through
            the
            private placement and received net proceeds of $743,691. These shares
            converted
            into 1,321,806 shares of the Company’s common stock when the Company completed
            its reverse acquisition of Manhattan Research. The warrants to purchase
            10,400
            shares of common stock converted into warrants to purchase 132,181 common
            shares
            of the Company.
 
 In
            addition, in connection with the private placement, the Company issued
            to Joseph
            Stevens & Co., Inc., a NASD-member broker-dealer, warrants to purchase
            130,511 shares of its common stock that are exercisable at $8 ($0.63
            post
            merger) per share and expire in 2008. Upon the merger, these warrants
            converted
            into warrants to purchase 1,658,753 shares of common stock of the
            Company.
 
 On
            July
            25, 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. A 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. The 1-for-5 combination became effective on
            September
            25, 2003. Accordingly, all share and per share information in these consolidated
            financial statements has been restated to retroactively reflect the 1-for-5
            combination.
  On
            January 13, 2004, the Company completed a private placement of 3,368,637
            shares
            of its common stock at a per share price of $1.10. After deducting commissions
            and other expenses relating to the private placement, the Company received
            aggregate net proceeds of approximately $3,362,000. In connection with
            the
            common stock private placement and the Series A Convertible Preferred
            private
            placement, the Company issued to the placement agents a 5-year warrant
            to
            purchase 1,235,589 shares of common stock at a price of $1.10 per
            share.
 
 The
            Company completed a private placement offering of units consisting of
            shares of
            its common stock and warrants to purchase additional shares of common
            stock in
            two separate closings held on August 26, 2005 and August 30, 2005, respectively.
            In the August 26 closing, the Company sold a total of 10,808,971 shares
            at $1.11
            per share of common stock and five-year warrants to purchase 2,161,767
            shares
            for total gross proceeds of $11,997,954. The warrants issued at the August
            26
            closing are exercisable at a price of $1.44 per share. On August 30,
            2005, the
            Company closed on the sale of an additional 1,108,709 shares at $1.15
            per share
            of common stock and warrants to purchase 221,741 common shares, which
            resulted
            in gross proceeds of $1,275,016. The warrants issued in connection with
            the
            August 30 closing are exercisable at a price of $1.49 per share. After
            the
            payment of all related commissions and expenses totaling $1,022,761,
            the Company
            realized net proceeds of $12,250,209.
 
 The
            Company engaged Paramount BioCapital, Inc. (“Paramount”) an affiliate of a
            significant stockholder of the Company, as placement agent and paid total
            cash
            commissions and expenses of $879,418, of which $121,625 was paid to certain
            selected dealers engaged by Paramount in connection with the August 26
            closing
            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. Timothy McInerney and Dr.
            Michael
            Weiser, each a director of the Company, are employees of Paramount BioCapital,
            Inc.
  F-16
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                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 The
            terms
            of the Company’s Series A Preferred Stock, which was originally issued in
            November 2003, provided for its automatic conversion upon the Company’s
            completion of a financing that resulted in gross proceeds of at least
            $10
            million and a “pre-money valuation” of the Company of at least $30 million.
            Accordingly, as a result of the August 26, 2005 closing of the Company’s private
            placement discussed above, all of the remaining outstanding shares of
            the
            Company’s Series A Preferred Stock automatically converted into shares of the
            Company’s common stock. As of such date, there were 729,626 shares of Series
            A
            Preferred Stock outstanding, which, upon the closing of the private placement,
            converted into an aggregate of 6,632,957 shares of common stock (at a
            rate of
            9.0909 common shares per share of preferred stock). Prior to the forced
            conversion of Series A Preferred Stock on August 26, 2005, there had
            been
            individual conversions throughout the year aggregating to 166,529 shares
            of
            Series A Preferred Stock which converted into 1,513,901 shares of common
            stock.
 
 On
            October 21, 2005, the Company issued 675,675 shares of 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. The
            transaction was completed on the same terms as the private placement
            described
            earlier which closed on August 26, 2005. These terms include the issuance
            of
            warrants equal to 20 percent of the underlying shares, or 135,135 warrants.
            Since the value of the shares and warrants issued on October 21, 2005
            was
            approximately $750,000, there is no impact on the statement of operations
            for
            this transaction.
 
 ***Series
            A Preferred Stock***
 
 On
            November 7, 2003, the Company completed a private placement of 1,000,000
            shares
            of its newly-designated Series A Convertible Preferred Stock at a price
            of $10
            per share, resulting in gross proceeds to the Company of $10,000,000
            (net
            proceeds $9,046,176). Each share of Series A Convertible Preferred Stock
            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
            Series A
            Convertible Preferred Stock was less than the market value of the Company’s
            common stock on November 7, 2003. Accordingly in 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
            convertible preferred stock of $418,182. The Series A Convertible Preferred
            Stock has a payment-in-kind dividend of 5 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.
 
 **(6)**
                  **Stock
                      Options**
  ***2003
            Stock Option Plan***
  In
            December 2003, the Company established the 2003 Stock Option Plan (the
“2003
            Plan”), which provided for the granting of up to 5,400,000 options to officers,
            directors, employees and consultants for the purchase of stock. In August
            2005,
            the Company increased the number of shares of common stock reserved for
            issuance
            under the 2003 Plan by 2,000,000 shares. At December 31, 2005 and 2004,
            respectively, 7,400,000 and 5,400,000 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 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.
  F-17
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                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
 ***1995
            Stock Option Plan***
  In
            July
            1995, the Company established the 1995 Stock Option Plan (the “1995 Plan”),
            which provided for the granting of up to 130,000 options to officers,
            directors,
            employees and consultants for the purchase of stock. In July 1996, the
            1995 Plan
            was amended to increase the total number of shares authorized for issuance
            by
            60,000 shares to a total of 190,000 shares and beginning with the 1997
            calendar
            year, by an amount equal to one percent (1%) of the shares of common
            stock
            outstanding on December 31 of the immediately preceding calendar year.
            At
            December 31, 2005 and 2004, 0 and 522,381 shares were authorized for
            issuance, respectively. The options have a maximum term of 10 years and
            vest
            over a period determined by the Company’s Board of Directors (generally 4 years)
            and are issued at an exercise price equal to the fair market value of
            the shares
            at the date of grant. The 1995 Plan expired on June 30, 2005 and no further
            options are available for issuance under this plan.
  A
            summary
            of the status of the Company’s stock options as of December 31, 2005 and 2004
            and changes during the years then ended is presented below:
 **2005**
                    
                    **2004****Shares**
                    
                    **Weighted
                        average exercise price**
                    
                    **Shares**
                    
                    **Weighted
                        average exercise price**Oustanding
                        at beginning of year
                    
                    
                    2,822,140
                    
                    $
                    1.17
                    
                    
                    1,392,690
                    
                    $
                    1.68Granted
                    
                    
                    3,641,180
                    
                    
                    1.45
                    
                    
                    1,672,000
                    
                    
                    1.44Exercised
                    
                    
                    (32,400
                    )
                    
                    1.00
                    
                    
                    (27,600
                    )
                    
                    1.09Cancelled
                    
                    
                    (102,166
                    )
                    
                    1.31
                    
                    
                    (214,950
                    )
                    
                    6.57Outstanding
                        at end of year
                    
                    
                    6,328,754
                    
                    $
                    1.33
                    
                    
                    2,822,140
                    
                    $
                    1.17Options
                        exercisable at year-end
                    
                    
                    3,472,745
                    
                    
                    
                    
                    
                    1,282,292Weighted-averagefair
                        value ofoptions
                        grantedduring
                        the year
                    
                    $
                    0.89
                    
                    
                    
                    
                    $
                    0.91
   F-18
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                  Statements**
  **MANHATTAN
              PHARMACEUTICALS, INC.**
 (A
              Development Stage Company)
 
 Notes
              to
              Consolidated Financial Statements
 December
              31, 2005 and 2004
  Included
            in the options granted during 2005 are 350,000 shares issued to consultants
            which are subject to variable accounting pursuant to EITF 96-18. As a
            result,
            the Company recorded expense for the increase in the fair value of those
            options
            of $66,971 for the year ended December 31, 2005.
 
 The
            following table summarizes the information about stock options outstanding
            at
            December 31, 2005:
 **Remaining**
                    
                    **Number
                        of****Exercise**
                    
                    **Number**
                    
                    **contractual**
                    
                    **options****price**
                    
                    **outstanding**
                    
                    **life
                        (years)**
                    
                    **exercisable**$0.400
                    
                    
                    876,090
                    
                    
                    7.16
                    
                    
                    876,0900.430
                    
                    
                    400
                    
                    
                    7.15
                    
                    
                    4000.970
                    
                    
                    490,000
                    
                    
                    8.75
                    
                    
                    276,6661.000
                    
                    
                    328,614
                    
                    
                    9.04
                    
                    
                    105,7601.000
                    
                    
                    65,000
                    
                    
                    6.24
                    
                    
                    65,0001.250
                    
                    
                    12,000
                    
                    
                    6.08
                    
                    
                    12,0001.250
                    
                    
                    163,750
                    
                    
                    6.14
                    
                    
                    153,7501.500
                    
                    
                    2,923,900
                    
                    
                    9.26
                    
                    
                    974,6341.500
                    
                    
                    250,000
                    
                    
                    4.58
                    
                    
                    27,7781.600
                    
                    
                    100,000
                    
                    
                    9.46
                    
                    
                    16,6671.650
                    
                    
                    1,099,000
                    
                    
                    8.08
                    
                    
                    944,0004.375
                    
                    
                    10,000
                    
                    
                    5.14
                    
                    
                    10,00020.938
                    
                    
                    10,000
                    
                    
                    4.28
                    
                    
                    10,0006,328,754
                    
                    
                    
                    
                    
                    3,472,745
  **(7)**
                  **Stock
                      Warrants**
  As
            of
            December 31, 2005, the Company had a total of 6,512,405 warrants outstanding.
            The exercise prices of these warrants ranges from $0.70 to $26.65. These
            warrants expire between 2006 and 2010.
  **(8)**
                  **Related-Party
                      Transactions**
  **Oleoylestrone
            Developments, SL**
  Pursuant
            to the terms of a license agreement dated February 15, 2002 by and between
            Manhattan Research Development, Inc., the Company’s wholly owned subsidiary and
            OED, the Company has an exclusive, worldwide license to U.S. and foreign
            patents
            and patent applications relating to certain technologies. Although the
            Company
            is not obligated to pay royalties to OED, the license agreement requires
            the
            Company to make certain performance-based milestone payments. See Note
            10. OED
            currently owns approximately 7 percent of the Company’s outstanding common
            stock. Additionally, Mr. Pons, a member of the Company’s board of directors, is
            chief executive officer of OED.
  F-19
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                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 In
            addition to the license agreement, the Company entered into a consulting
            agreement with OED. The agreement became effective in February 2002,
            at a fee of
            $6,250 per month, and will terminate when the license agreement terminates.
            The
            fees associated with the consulting agreement are expensed as incurred.
            OED
            agreed to serve as a member of the Company’s Scientific Advisory Board and to
            render consultative and advisory services to the Company. Such services
            include
            research, development and clinical testing of the Company’s technology as well
            as the reporting of the findings of such tests, assistance in the filing
            of
            patent applications and oversight and direction of efforts in regards
            to
            personnel for clinical development.
  Total
            milestone payments under the license agreement of $250,000, $0 and $425,000
            and
            consulting fees of $75,000, $75,000 and $287,500 are included in the
            accompanying consolidated statements of operations for the years ended
            December
            31, 2005 and 2004 and for the cumulative period from August 6, 2001 to
            December
            31, 2005.
  **NovaDel
            Pharma Inc.**
  As
            discussed in Note 10, pursuant to the terms of a license agreement dated
            April
            4, 2003 by and between the Company and NovaDel Pharma Inc. (“NovaDel”), the
            Company has the rights to develop NovaDel’s proprietary lingual spray technology
            to deliver propofol for preprocedural sedation. The license agreement
            with
            NovaDel requires the Company to make certain license and milestone payments,
            as
            well as pay royalties. During 2003, the Company paid aggregate license
            fees of
            $500,000 to NovaDel under the license agreement. In 2004 and 2005, there
            were no
            similar payments made to NovaDel. Lindsay A. Rosenwald, who beneficially
            owns
            more than 10 percent of the Company’s common stock, also beneficially owns in
            excess of 20 percent of the common stock of NovaDel and may therefore
            be deemed
            to be an affiliate of that company.
  **Paramount
            BioCapital, Inc.**
  Two
            members of the Company’s board of directors, Timothy McInerney and Michael
            Weiser, are also employees of Paramount BioCapital, Inc. or one of its
            affiliates. In addition, two former members of the Company’s board of directors,
            Joshua Kazam and David Tanen, were employed by Paramount BioCapital through
            August 2004 and were directors of the Company until September 2005. The
            sole
            shareholder of Paramount BioCapital, Inc. (“Paramount BioCapital”) is Lindsay A.
            Rosenwald, M.D. Dr. Rosenwald beneficially owns more than 5 percent of
            the
            Company’s common stock as of December 31, 2005. In November 2003, the Company
            paid to Paramount BioCapital approximately $460,000 as commissions earned
            in
            consideration for placement agent services rendered in connection with
            the
            private placement of the Company’s Series A Convertible Preferred Stock, which
            amount represented 7 percent of the value of the shares sold by Paramount
            BioCapital in the offering. In addition, in January 2004, the Company
            paid
            approximately $260,000 as commissions earned in consideration for placement
            agent services rendered by Paramount BioCapital in connection with a
            private
            placement of the Company’s common stock, which amount represented 7 percent of
            the value of the shares sold by Paramount BioCapital in the private placement.
            In connection with both private placements and as a result of their employment
            with Paramount BioCapital, 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.
  F-20
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                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 Paramount
            BioCapital also served as the Company’s placement agent in connection with the
            August 2005 private placement. As placement agent, the Company paid to
            Paramount
            BioCapital 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.
  **(9)**
                  **Income
                      Taxes**
  There
            was
            no current or deferred tax expense for the years ended December 31, 2005
            and 2004 because of the Company’s operating losses.
  The
            components of deferred tax assets as of December 31, 2005 and 2004 are as
            follows:
 **2005**
                    
                    **2004**Deferred
                        tax assets:Tax
                        loss carryforwards
                    
                    $
                    14,860,000
                    
                    $
                    11,884,000Research
                        and development credit
                    
                    
                    1,174,000
                    
                    
                    941,000In-process
                        research and development charge
                    
                    
                    4,850,000Other
                    
                    
                    (5,000
                    )
                    
                    11,000Gross
                        deferred tax assets
                    
                    
                    20,879,000
                    
                    
                    12,836,000Less
                        valuation allowance
                    
                    
                    (20,879,000
                    )
                    
                    (12,836,000
                    )Net
                        deferred tax assets
                    
                    $
                    —
                    
                    $
                    —
   F-21
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                  Statements**
 
 **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 
 The
            reasons for the difference between actual income tax benefit for the
            years ended
            December 31, 2005 and 2004 and the amount computed by applying the
            statutory federal income tax rate to losses before income tax benefit
            are as
            follows:
  **2005**
                    
                    **2004****%
                        of**
                    
                    
                    
                    **%
                        of****pretax**
                    
                    
                    
                    **pretax****Amount**
                    
                    **loss**
                    
                    **Amount**
                    
                    **loss**Federal
                        income taxbenefit
                        at statutoryrate
                    
                    $
                    (6,508,000
                    )
                    
                    (34.0
                    %)
                    $
                    (2,005,000
                    )
                    
                    (34.0
                    %)State
                        income taxes,net
                        of federaltax
                    
                    
                    (1,302,000
                    )
                    
                    (6.8
                    %)
                    
                    (401,000
                    )
                    
                    (6.8
                    %)Research
                        anddevelopment
                        credits
                    
                    
                    (233,000
                    )
                    
                    (1.2
                    %)
                    
                    (175,000
                    )
                    
                    (3.0
                    %)Change
                        in valuationallowance
                    
                    
                    8,043,000
                    
                    
                    42.0
                    %
                    
                    2,433,000
                    
                    
                    41.3
                    %Other,
                        net
                    
                    
                    —
                    
                    
                    
                    
                    
                    148,000
                    
                    
                    2.5
                    %—
                    
                    
                    —
                    %
                    
                    —
                    
                    
                    —
                    %
 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, 2005
            and 2004
            was an increase of $8,043,000 and $2,433,000, respectively. The tax benefit
            assumed using the federal statutory tax rate of 34% has been reduced
            to an
            actual benefit of zero due principally to the aforementioned valuation
            allowance.
  At
            December 31, 2005, the Company had unused federal and state net operating
            loss carryforwards of approximately $38,151,000 and $27,780,000, respectively.
            The net operating loss carryforwards expire in various amounts through
            2025 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, 2005, the Company also had research and development credit
            carryforwards of approximately $1,174,000 for federal income tax purposes
            which
            expire in various amounts through 2025.
  F-22
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                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
  **(10)**
                  **License
                      and Consulting Agreements**
  On
            February 15, 2002, the Company entered into a License Agreement (the
            "License
            Agreement") with OED. Under the terms of the License Agreement, OED granted
            to
            the Company a world-wide license to make, use, lease and sell the products
            incorporating the licensed technology (see Note 1). OED also granted
            to the
            Company the right to sublicense to third parties the licensed technology
            or
            aspects of the licensed technology with the prior written consent of
            OED. OED
            retains an irrevocable, nonexclusive, royalty-free right to use the licensed
            technology solely for its internal, noncommercial use. The License Agreement
            shall terminate automatically upon the date of the last to expire patent
            contained in the licensed technology or upon the Company's bankruptcy.
            OED may
            terminate the License Agreement in the event of a material breach by
            the Company
            that is not cured within the notice period. The Company may terminate
            the
            License Agreement for any reason upon 60 days notice.
 
 In
            addition to the License Agreement, the Company entered into a consulting
            agreement with OED. The agreement became effective in February 2002,
            at a fee of
            $6,250 per month, and will terminate when the License Agreement terminates.
            The
            fees associated with the consulting agreement are expensed as incurred.
            OED
            agreed to serve as a member of the Company’s Scientific Advisory Board and to
            render consultative and advisory services to the Company. Such services
            include
            research, development and clinical testing of the Company’s technology as well
            as the reporting of the findings of such tests, assistance in the filing
            of
            patent applications and oversight and direction of efforts in regards
            to
            personnel for clinical development.
 
 Under
            the
            License Agreement, the Company agreed to pay to OED certain licensing
            fees which
            are being expensed as they are incurred. The Company paid $175,000 in
            up front
            licensing fees which is included in 2002 research and development expense.
            In
            addition, pursuant to the License Agreement, the Company issued 1,000,000
            shares
            of its common stock to OED. The Company valued these shares at their
            then
            estimated fair value of $1,000.
 
 In
            connection with the License Agreement, the Company has agreed to milestone
            payments to OED as follows:
 
 (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");
            (ii)
            $250,000 upon the treatment of the first patient in a Phase II clinical
            trial
            under a Company-sponsored IND; (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, 2005, the Company paid $425,000 in licensing
            fees.
 
 In
            addition to the License Agreement, the Company entered into a consulting
            agreement with OED. The agreement became effective in February 2002,
            at a fee of
            $6,250 per month, and will terminate when the License Agreement terminates.
            The
            fees associated with the consulting agreement are expensed as incurred.
            OED
            agreed to serve as a member of the Company's Scientific Advisory Board
            and to
            render consultative and advisory services to the Company. Such services
            include
            research, development and clinical testing of the Company's technology
            as well
            as the reporting of the findings of such tests, assistance in the filing
            of
            patent applications and oversight and direction of efforts in regards
            to
            personnel for clinical development.
  F-23
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                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 In
            April
            2003, the Company entered into a license and development agreement with
            NovaDel
            Pharma, Inc. (“NovaDel”), under which the Company received certain worldwide,
            exclusive rights to develop and commercialize products related to NovaDel’s
            proprietary lingual spray technology for delivering propofol for pre-procedural
            sedation. Under the terms of this agreement, the Company agreed to use
            its
            commercially reasonable efforts to develop and commercialize the licensed
            products, to obtain necessary regulatory approvals and to thereafter
            exploit the
            licensed products. The agreement also provides that NovaDel will undertake
            to
            perform, at the Company’s expense, a substantial portion of the development
            activities, including, without limitation, preparation and filing of
            various
            applications with applicable regulatory authorities. Holders of a significant
            portion of the Company’s common stock own a significant portion of the common
            stock of NovaDel. (See Note 8.)
 
 In
            consideration for the Company’s rights under the NovaDel license agreement, the
            Company paid NovaDel an initial license fee of $500,000 upon the completion
            of a
            $10 million private placement of Series A Convertible Preferred Stock
            in
            November 2003. In addition, the license agreement requires the Company
            to make
            certain milestone payments as follows: $1,000,000 payable following the
            date
            that the first NDA for lingual spray propofol is accepted for review
            by the FDA;
            $1,000,000 following the date that the first European Marketing Application
            is
            accepted for review by any European Union country; $2,000,000 following
            the date
            when the first filed NDA for lingual spray propofol is approved by the
            FDA;
            $2,000,000 following the date when the first filed European Marketing
            Application for lingual spray propofol is accepted for review; $1,000,000
            following the date on which an application for commercial approval of
            lingual
            spray propofol is approved by the appropriate regulatory authority in
            each of
            Australia, Canada, Japan and South Africa; and $50,000 following the
            date on
            which an application for commercial approval for lingual spray propofol
            is
            approved in any other country (other than the U.S, a member of the European
            Union, Australia, Canada, Japan or South Africa).
 
 In
            addition, the Company is obligated to pay to NovaDel an annual royalty
            based on
            a fixed rate of net sales of licensed products, or if greater, the annual
            royalty is based on the Company’s net profits from the sale of licensed products
            at a rate that is twice the net sales rate. In the event the Company
            sublicenses
            the licensed product to a third party, the Company is obligated to pay
            royalties
            based on a fixed rate of fees or royalties received from the sublicensee
            until
            such time as the Company recovers its out-of-pocket costs, and thereafter
            the
            royalty rate doubles. Because of the continuing development efforts required
            of
            NovaDel under the agreement, the royalty rates are substantially higher
            than
            customary for the industry. The Company is also required to pay an up-front
            fee
            in installments contingent on whether the Company receives certain amounts
            through financings, revenues or otherwise. Through December 31, 2005,
            the
            Company has paid and expensed $500,000 of such up-front fee.
  F-24
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                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
 NovaDel
            may terminate the agreement (i) upon 10 days’ notice if the Company fails to
            make any required milestone or royalty payments, or (ii) if the Company
            becomes
            bankrupt or if a petition in bankruptcy or insolvency is filed and not
            dismissed
            within 60 days or if the Company becomes subject to a receiver or trustee
            for
            the benefit of creditors. Each party may terminate the agreement upon
            30 days’
written notice and an opportunity to cure in the event the other party
            committed
            a material breach or default. The Company may also terminate the agreement
            for
            any reason upon 90 days’ notice to NovaDel.
  On
            April
            1, 2005, as part of the acquisition of Tarpan Therapeutics, Inc., the
            Company
            acquired a Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April
            14, 2004. Under the IGI Agreement the Company received the exclusive,
            world-wide, royalty bearing sublicense to develop and commercialize the
            licensed
            technology (see Note 1). Under the terms of the IGI Agreement, the Company
            is
            responsible for the cost of the preclinical and clinical development
            of the
            project, including research and development, manufacturing, laboratory
            and
            clinical testing and trials and marketing of licensed products for which
            the
            company will be responsible.
  In
            consideration for the Company’s rights under the IGI Agreement, a payment of
            $300,000 was made upon execution of the agreement, prior to the Company’s
            acquisition of Tarpan. In addition the IGI Agreement requires the Company
            to
            make certain milestone payments as follows: $300,000 payable upon the
            commencement of a Phase II clinical trial; $500,000 upon the commencement
            of a
            Phase III clinical trial; $1,500,000 upon the acceptance of an NDA application
            by the FDA; $2,400,000 upon the approval of an NDA by the FDA; $500,000
            upon the
            commencement of a Phase III clinical trial for an indication other than
            psoriasis; $1,500,000 upon the acceptance of and NDA application for
            an
            indication other than psoriasis by the FDA; and $2,400,000 upon the approval
            of
            an NDA for an indication other than psoriasis by the FDA.
  In
            addition, the Company is obligated to pay IGI, Inc. an annual royalty
            of 6%
            annual net sales on annual net sales up to $200,000,000. In any calendar
            year in
            which net sales exceed $200,000,000, the Company is obligated to pay
            IGI, Inc.
            an annual royalty of 9% annual net sales. Through December 31, 2005,
            the Company
            has not paid any such milestones or royalties.
  IGI,
            Inc.
            may terminate the agreement (i) upon 60 days’ notice if the Company fails to
            make any required milestone or royalty payments, or (ii) if the Company
            becomes
            bankrupt or if a petition in bankruptcy is filed, or if the Company is
            placed in
            the hands of a receiver or trustee for the benefit of creditors. IGI,
            Inc. may
            terminate the agreement upon 60 days’ written notice and an opportunity to cure
            in the event the Company commits a material breach or default. Eighteen
            months
            from the date of the IGI Agreement, the Company may terminate the agreement
            in
            whole or as to any portion of the PTH patent rights upon 90 days’ notice to IGI,
            Inc.
  **(11)**
                  **Commitments
                      and Contingencies**
  ***Legal
            Proceedings***
  The
            Company is currently not party to any claims or lawsuits.
  F-25
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                  to Financial
                  Statements**
  **MANHATTAN
                PHARMACEUTICALS, INC.**
 (A
                Development Stage Company)
 
 Notes
                to
                Consolidated Financial Statements
 December
                31, 2005 and 2004
  ***Employment
            Agreement***
  The
            Company has employment agreements with three employees for the payment
            of
            aggregate base salary of $775,000 as well as performance based bonuses.
            Two of
            these agreements have terms ranging from two to three years and have
            a remaining
            obligation of $825,000 as of December 31, 2005. The third agreement effective
            February 1, 2006 has a term of three years and a remaining obligation
            of
            $875,000.
  ***Leases***
  Rent
            expense for the years ended December 31, 2005 and 2004 was $120,209 and
            $112,176, respectively.
  Future
            minimum rental payments subsequent to December 31, 2005 under an operating
            lease
            for the Company’s office facility are as follows:
 Years
                      Ending
                    December
                      31,
                  
                  Commitment2006
                  
                  $
                  141,6002007
                  
                  $
                  141,6002008
                  
                  $
                  100,000
  **(12)**
                  **Subsequent
                      Events**
  Effective
            as of February 1, 2006, the Company appointed Alan G. Harris, MD, PhD
            as its
            Chief Medical Officer. Prior to joining Manhattan Pharmaceuticals, Dr.
            Harris
            served as Head of the Worldwide Medical Endocrine Care group at Pfizer,
            Inc. and
            Vice President, Global Healthcare Research & Outcomes at Schering-Plough
            Corporation.
 
 The
            Company and Dr. Harris entered into an Employment Agreement dated January
            26,
            2006 (the "Agreement") whereby Dr. Harris will serve as the Company's
            Chief
            Medical Officer for a period of three years commencing on February 1,
            2006 and
            will receive in exchange for his services: (i) an annual base salary
            of
            $275,000; (ii) a guaranteed cash bonus of $50,000; (iii) an annual milestone
            bonus on each anniversary of the Agreement during the term of the Agreement
            in
            an amount up to 30% of Dr. Harris' base salary, at the discretion of
            the Chief
            Executive Officer and the Board; and (iv) an option to purchase 300,000
            shares
            of the Company's common stock at an exercise price equal to the last
            closing
            sale price of the Company's common stock on February 1, 2006, such options
            to
            vest in equal amounts over three years and be exercisable for a 10-year
            term. In
            the event Dr. Harris' employment is terminated upon a change of control
            of the
            Company and the fair market value of the Company's common stock, as determined
            in the good faith discretion of the Board of Directors of the Company,
            is less
            than $40,000,000 on the date of the change of control, Dr. Harris shall
            continue
            to receive his base salary and benefits for a period of three months
            from the
            date of termination. In the event such termination is for a reason other
            than
            for cause or pursuant to a change of control of the Company, Dr. Harris
            shall be
            entitled to receive his base salary for a period of six months from the
            date of
            termination.
  F-26
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                  Statements**
 
 **Index
            to Exhibits Filed with this Report**
 Exhibit
                        No.
                    
                    Description
 23.1
                    
                    Consent
                        of J.H. Cohn LLP.31.1
                    
                    Certification
                        of Principal Executive Officer.31.2
                    
                    Certification
                        of Principal Financial Officer.32.1
                    
                    Certifications
                        pursuant to Section 906 of the Sarbanes-Oxley Act of
                        2002.