UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended March 31, 2010





OR





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from _______ to _______





Commission
file number 001-32639





Manhattan
Pharmaceuticals, Inc.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
                (State
      or other jurisdiction of
                incorporation
      or organization)
              36-3898269
                (I.R.S.
      Employer Identification No.)





48 Wall
Street, New York, New York 10005


(Address
of principal executive offices)





(212)
582-3950


(Issuer’s
telephone number)





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 preceding 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  ̈





Indicate
by check mark whether the registrant has submitted and posted on its corporate
Web site, if any, every Interactive Data File  required to be submitted and
posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).


Yes 
          ̈     
     No            ̈





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


Large
      accelerated filer      ̈
            Accelerated
      filer      ̈
            Non-accelerated
      filer      ̈
            Smaller
      reporting company  x





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





As of May
17, 2010 there were 120,965,260 shares of the issuer’s common stock, $.001 par
value, outstanding.





INDEX




PagePART
      I
                  FINANCIAL
      INFORMATIONItem
      1.
                  Financial
      Statements:Unaudited
      Condensed Consolidated Balance Sheets
                  4Unaudited
      Condensed Consolidated Statements of Operations
                  5Unaudited
      Condensed Consolidated Statements of Stockholders’ Equity
      (Deficiency)
                  6Unaudited
      Condensed Consolidated Statements of Cash Flows
                  8Notes
      to Unaudited Condensed Consolidated Financial Statements
                  9Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  27Item
      3.
                  Quantitative
      and Qualitative Disclosure About Market Risk
                  37Item
      4.
                  Controls
      and Procedures
                  37PART
      II
                  OTHER
      INFORMATIONItem
      1.
                  Legal
      Proceedings
                  39Item
      1A.
                  Risk
      Factors
                  39Item
      6.
                  Exhibits
                  39Signatures
                  40


2


Forward-Looking
Statements




This
quarterly report on Form 10-Q 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 Securities and Exchange Act of 1934.
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.





3




Part
I – Financial Information


Item
1. Unaudited Condensed Consolidated Financial Statements


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
Development Stage Company)


Condensed
Consolidated Balance Sheets





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (See Note 1)AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    2,017,280
                    
                    
                    $
                    17,996Debt
      issue costs, current portion
                    
                    
                    148,733
                    
                    
                    
                    158,552Other
      current assets
                    
                    
                    119,704
                    
                    
                    
                    87,177Total
      current assets
                    
                    
                    2,285,717
                    
                    
                    
                    263,725In-process
      research and development
                    
                    
                    17,742,110
                    
                    
                    
                    -Property
      and equipment, net
                    
                    
                    2,745
                    
                    
                    
                    3,541Debt
      issue costs
                    
                    
                    29,922
                    
                    
                    
                    77,026Other
      assets
                    
                    
                    21,370
                    
                    
                    
                    21,370Total
      assets
                    
                    $
                    20,081,864
                    
                    
                    $
                    365,662Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Secured
      12% notes payable, current portion, net
                    
                    $
                    1,655,461
                    
                    
                    $
                    1,247,0628%
      note payable
                    
                    
                    -
                    
                    
                    
                    27,000ICON
      note payable, current portion
                    
                    
                    333,333
                    
                    
                    
                    -Accounts
      payable and accrued expenses
                    
                    
                    302,728
                    
                    
                    
                    291,175Interest
      payable, current portion
                    
                    
                    290,439
                    
                    
                    
                    182,193Derivative
      liability
                    
                    
                    4,620,998
                    
                    
                    
                    784,777Total
      current liabilities
                    
                    
                    7,202,959
                    
                    
                    
                    2,532,207Convertible
      5% notes payable
                    
                    
                    15,452,793
                    
                    
                    
                    -Secured
      12% notes payable, non-current portion, net
                    
                    
                    -
                    
                    
                    
                    384,473Convertible
      12% note payable, net
                    
                    
                    42,466
                    
                    
                    
                    17,808ICON
      convertible note payable, non-current portion
                    
                    
                    666,667
                    
                    
                    
                    -Non-interest
      bearing note payable, net
                    
                    
                    216,900
                    
                    
                    
                    211,900Interest
      payable, non-current portion
                    
                    
                    68,417
                    
                    
                    
                    55,048Exchange
      obligation
                    
                    
                    3,949,176
                    
                    
                    
                    3,949,176Total
      liabilities
                    
                    
                    27,599,378
                    
                    
                    
                    7,150,612Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no shares issued and
      outstanding at March 31, 2010 and December 31, 2009
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $.001 par value. Authorized 500,000,000 shares; 114,079,543
      shares issued and outstanding at March 31, 2010 and 70,624,232 issued and
      outstanding on December 31, 2009
                    
                    
                    114,080
                    
                    
                    
                    70,624Contingently
      issuable shares
                    
                    
                    15,890
                    
                    
                    
                    -Additional
      paid-in capital
                    
                    
                    55,919,120
                    
                    
                    
                    55,077,861Deficit
      accumulated during the development stage
                    
                    
                    (63,566,604
                    )
                    
                    
                    (61,933,435
                    )Total
      stockholders’ deficiency
                    
                    
                    (7,517,514
                    )
                    
                    
                    (6,784,950
                    )Total
      liabilities and stockholders' deficiency
                    
                    $
                    20,081,864
                    
                    
                    $
                    365,662





See
accompanying notes to consolidated financial statements.


4





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
Development Stage Company)


Condensed
Consolidated Statements of Operations


(Unaudited)





Three months ended March 31,
                
                
                Cumulative
                  periodfrom
                  August 6,2001
                  (inception) to
                  March 31,2010
                
                
                2009
                
                
                2010Revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -Costs
      and expenses:Research
      and development
                
                
                17,767
                
                
                
                44,936
                
                
                
                28,349,978General
      and administrative
                
                
                511,678
                
                
                
                512,400
                
                
                
                18,705,133In-process
      research and development charge
                
                
                -
                
                
                
                -
                
                
                
                11,887,807Impairment
      of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                1,248,230Loss
      on disposition of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                1,213,878Total
      operating expenses
                
                
                529,445
                
                
                
                557,336
                
                
                
                61,405,026Operating
      loss
                
                
                (529,445
                )
                
                
                (557,336
                )
                
                
                (61,405,026
                )Other
      (income) expense:Equity
      in losses of Hedrin JV
                
                
                -
                
                
                
                135,786
                
                
                
                750,000Change
      in fair value of derivative
                
                
                942,261
                
                
                
                70,000
                
                
                
                1,372,331Interest
      and other income
                
                
                (75,314
                )
                
                
                (126,728
                )
                
                
                (1,942,543
                )Interest
      expense
                
                
                236,777
                
                
                
                125,450
                
                
                
                878,177Realized
      gain on sale of marketable equity securities
                
                
                -
                
                
                
                -
                
                
                
                (76,032
                )Total
      other (income) expense
                
                
                1,103,724
                
                
                
                204,508
                
                
                
                981,933Net
      loss
                
                
                (1,633,169
                )
                
                
                (761,844
                )
                
                
                (62,386,959
                )Preferred
      stock dividends (including imputed amounts)
                
                
                -
                
                
                
                -
                
                
                
                (1,179,645
                )Net
      loss applicable to common shares
                
                $
                (1,633,169
                )
                
                $
                (761,844
                )
                
                $
                (63,566,604
                )Net
      loss per common share:Basic
      and diluted
                
                $
                (0.02
                )
                
                $
                (0.01
                )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                
                
                84,638,502
                
                
                
                70,624,232





See
accompanying notes to consolidated financial statements.


5





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
Development Stage Company)


Condensed
Consolidated Statements of Stockholders' Equity (Deficiency)


(Unaudited)





Commonstock
                              shares
                            
                            
                            Commonstock
                              amount
                            
                            
                            Additionalpaid-
                              incapital
                            
                            
                            Deficit
                              accumulated
                              during
                              development
                              stage
                            
                            
                            Other
                            
                            
                            Total
                              stockholders’
                              equity
                              (deficiency)Stock
      issued at $0.0004 per share for subscription receivable
                            
                            
                            10,167,741
                            
                            
                            $
                            10,168
                            
                            
                            $
                            (6,168
                            )
                            
                            $
                            -
                            
                            
                            $
                            (4,000
                            )
                            
                            $
                            -Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (56,796
                            )
                            
                            
                            -
                            
                            
                            
                            (56,796
                            )Balance
      at December 31, 2001
                            
                            
                            10,167,741
                            
                            
                            
                            10,168
                            
                            
                            
                            (6,168
                            )
                            
                            
                            (56,796
                            )
                            
                            
                            (4,000
                            )
                            
                            
                            (56,796
                            )Proceeds
      from subscription receivable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,000
                            
                            
                            
                            4,000Stock
      issued at $0.0004 per share for license rights
                            
                            
                            2,541,935
                            
                            
                            
                            2,542
                            
                            
                            
                            (1,542
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            1,000Stock
      options issued for consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            60,589
                            
                            
                            
                            -
                            
                            
                            
                            (60,589
                            )
                            
                            
                            -Amortization
      of unearned consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            22,721
                            
                            
                            
                            22,721Common
      stock issued at $0.63 per share, net of expenses
                            
                            
                            3,043,332
                            
                            
                            
                            3,043
                            
                            
                            
                            1,701,275
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,704,318Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            (1,037,320
                            )
                            
                            
                            
                            
                            
                            
                            (1,037,320
                            )Balance
      at December 31, 2002
                            
                            
                            15,753,008
                            
                            
                            
                            15,753
                            
                            
                            
                            1,754,154
                            
                            
                            
                            (1,094,116
                            )
                            
                            
                            (37,868
                            )
                            
                            
                            637,923Common
      stock issued at $0.63 per share, net of expenses
                            
                            
                            1,321,806
                            
                            
                            
                            1,322
                            
                            
                            
                            742,369
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            743,691Effect
      of reverse acquisition
                            
                            
                            6,287,582
                            
                            
                            
                            6,287
                            
                            
                            
                            2,329,954
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            2,336,241Amortization
      of unearned consulting costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            37,868
                            
                            
                            
                            37,868Unrealized
      loss on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (7,760
                            )
                            
                            
                            (7,760
                            )Payment
      for fractional shares for stock combination
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (300
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            (300
                            )Preferred
      stock issued at $10 per share, net of expenses
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9,045,176
                            
                            
                            
                            -
                            
                            
                            
                            1,000
                            
                            
                            
                            9,046,176Imputed
      preferred stock dividend
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            418,182
                            
                            
                            
                            (418,182
                            )
                            
                            
                            
                            
                            
                            
                            -Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,960,907
                            )
                            
                            
                            
                            
                            
                            
                            (5,960,907
                            )Balance
      at December 31, 2003
                            
                            
                            23,362,396
                            
                            
                            
                            23,362
                            
                            
                            
                            14,289,535
                            
                            
                            
                            (7,473,205
                            )
                            
                            
                            (6,760
                            )
                            
                            
                            6,832,932-Exercise
      of stock options
                            
                            
                            27,600
                            
                            
                            
                            27
                            
                            
                            
                            30,073
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            30,100Common
      stock issued at $1.10, net of expenses
                            
                            
                            3,368,952
                            
                            
                            
                            3,369
                            
                            
                            
                            3,358,349
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            3,361,718Preferred
      stock dividend accrued
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (585,799
                            )
                            
                            
                            
                            
                            
                            
                            (585,799
                            )Preferred
      stock dividends paid by issuance of shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            281,073
                            
                            
                            
                            -
                            
                            
                            
                            25
                            
                            
                            
                            281,098Conversion
      of preferred stock to common stock at $1.10 per share
                            
                            
                            1,550,239
                            
                            
                            
                            1,551
                            
                            
                            
                            (1,380
                            )
                            
                            
                            -
                            
                            
                            
                            (171
                            )
                            
                            
                            -Warrants
      issued for consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            125,558
                            
                            
                            
                            -
                            
                            
                            
                            (120,968
                            )
                            
                            
                            4,590Amortization
      of unearned consulting costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            100,800
                            
                            
                            
                            100,800Unrealized
      gain on short-term investments and reversal of unrealized loss on
      short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20,997
                            
                            
                            
                            20,997Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,896,031
                            )
                            
                            
                            -
                            
                            
                            
                            (5,896,031
                            )Balance
      at December 31, 2004
                            
                            
                            28,309,187
                            
                            
                            
                            28,309
                            
                            
                            
                            18,083,208
                            
                            
                            
                            (13,955,035
                            )
                            
                            
                            (6,077
                            )
                            
                            
                            4,150,405Common
      stock issued at $1.11 and $1.15, net of expenses
                            
                            
                            11,917,680
                            
                            
                            
                            11,918
                            
                            
                            
                            12,238,291
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            12,250,209Common
      stock issued to vendor at $1.11 per share in satisfaction of accounts
      payable
                            
                            
                            675,675
                            
                            
                            
                            676
                            
                            
                            
                            749,324
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            750,000Exercise
      of stock options
                            
                            
                            32,400
                            
                            
                            
                            33
                            
                            
                            
                            32,367
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            32,400Exercise
      of warrants
                            
                            
                            279,845
                            
                            
                            
                            279
                            
                            
                            
                            68,212
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            68,491Preferred
      stock dividend  accrued
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (175,663
                            )
                            
                            
                            
                            
                            
                            
                            (175,663
                            )Preferred
      stock dividends paid by issuance of shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            477,736
                            
                            
                            
                            —
                            
                            
                            
                            42
                            
                            
                            
                            477,778Conversion
      of preferred stock to common stock at $1.10 per share
                            
                            
                            8,146,858
                            
                            
                            
                            8,147
                            
                            
                            
                            (7,251
                            )
                            
                            
                            -
                            
                            
                            
                            (896
                            )
                            
                            
                            -Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            66,971
                            
                            
                            
                            -
                            
                            
                            
                            20,168
                            
                            
                            
                            87,139Reversal
      of unrealized gain on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (12,250
                            )
                            
                            
                            (12,250
                            )Stock
      issued in connection with acquisition of Tarpan Therapeutics,
      Inc.
                            
                            
                            10,731,052
                            
                            
                            
                            10,731
                            
                            
                            
                            11,042,253
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            11,052,984Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (19,140,997
                            )
                            
                            
                            
                            
                            
                            
                            (19,140,997
                            )Balance
      at December 31, 2005
                            
                            
                            60,092,697
                            
                            
                            
                            60,093
                            
                            
                            
                            42,751,111
                            
                            
                            
                            (33,271,695
                            )
                            
                            
                            987
                            
                            
                            
                            9,540,496Cashless
      exercise of warrants
                            
                            
                            27,341
                            
                            
                            
                            27
                            
                            
                            
                            (27
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,675,499
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            1,675,499Unrealized
      loss on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (987
                            )
                            
                            
                            (987
                            )Costs
      associated with private placement
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (15,257
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            (15,257
                            )Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (9,695,123
                            )
                            
                            
                            
                            
                            
                            
                            (9,695,123
                            )Balance
      at December 31, 2006
                            
                            
                            60,120,038
                            
                            
                            
                            60,120
                            
                            
                            
                            44,411,326
                            
                            
                            
                            (42,966,818
                            )
                            
                            
                            -
                            
                            
                            
                            1,504,628


6





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
Development Stage Company)


Condensed
Consolidated Statements of Stockholders' Equity (Deficiency)


(Unaudited)





Commonstock
                              shares
                            
                            
                            Common
                              stock
                              amount
                            
                            
                            Additional
                              paid-in
                              capital
                            
                            
                            Deficit
                              accumulated
                              during
                              development
                              stage
                            
                            
                            Other
                            
                            
                            Total
                              stockholders’
                              equity
                              (deficiency)Common
      stock issued at $0.84 and $0.90 per shares, net of
expenses
                            
                            
                            10,185,502
                            
                            
                            $
                            10,186
                            
                            
                            $
                            7,841,999
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            7,852,185Common
      stock issued to directors at $0.72 per share in satisfaction of accounts
      payable
                            
                            
                            27,776
                            
                            
                            
                            28
                            
                            
                            
                            19,972
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20,000Common
      stock issued to in connection with in-licensing agreement at $0.90 per
      share
                            
                            
                            125,000
                            
                            
                            
                            125
                            
                            
                            
                            112,375
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            112,500Common
      stock issued to in connection with in-licensing agreement at $0.80 per
      share
                            
                            
                            150,000
                            
                            
                            
                            150
                            
                            
                            
                            119,850
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            120,000Exercise
      of warrants
                            
                            
                            10,327
                            
                            
                            
                            15
                            
                            
                            
                            7,219
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            7,234Cashless
      exercise of warrants
                            
                            
                            5,589
                            
                            
                            
                            -
                            
                            
                            
                            (6
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6
                            )Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,440,956
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,440,956Warrants
      issued for consulting
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            83,670
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            83,670Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (12,032,252
                            )
                            
                            
                            
                            
                            
                            
                            (12,032,252
                            )Balance
      at December 31, 2007
                            
                            
                            70,624,232
                            
                            
                            
                            70,624
                            
                            
                            
                            54,037,361
                            
                            
                            
                            (54,999,070
                            )
                            
                            
                            -
                            
                            
                            
                            (891,085
                            )Sale
      of warrant
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            150,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            150,000Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            463,890
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            463,890Warrants
      issued with secured 12% notes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            170,128
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            170,128Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (4,268,858
                            )
                            
                            
                            -
                            
                            
                            
                            (4,268,858
                            )Balance
      at December 31, 2008
                            
                            
                            70,624,232
                            
                            
                            
                            70,624
                            
                            
                            
                            54,821,379
                            
                            
                            
                            (59,267,928
                            )
                            
                            
                            -
                            
                            
                            
                            (4,375,925
                            )Cumulative
      effect of a change in accounting principle
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (150,000
                            )
                            
                            
                            127,778
                            
                            
                            
                            -
                            
                            
                            
                            (22,222
                            )Balance
      at January 1, 2009, as adjusted
                            
                            
                            70,624,232
                            
                            
                            
                            70,624
                            
                            
                            
                            54,671,379
                            
                            
                            
                            (59,140,150
                            )
                            
                            
                            -
                            
                            
                            
                            (4,398,147
                            )Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            353,438
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            353,438Warrants
      issued with secured 12% notes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            46,125
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            46,125Warrant
      issued to placement agent - secured 12% notes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,919
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,919Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,793,285
                            )
                            
                            
                            -
                            
                            
                            
                            (2,793,285
                            )Balance
      at December 31, 2009
                            
                            
                            70,624,232
                            
                            
                            
                            70,624
                            
                            
                            
                            55,077,861
                            
                            
                            
                            (61,933,435
                            )
                            
                            
                            -
                            
                            
                            
                            (6,784,950
                            )Common
      stock issued at $0.07, net of expenses
                            
                            
                            36,392,888
                            
                            
                            
                            36,393
                            
                            
                            
                            2,075,353
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,111,746Shares
      issued and issuable in Merger
                            
                            
                            7,062,423
                            
                            
                            
                            7,063
                            
                            
                            
                            1,468,984
                            
                            
                            
                            -
                            
                            
                            
                            15,890
                            
                            
                            
                            1,491,937Derivative
      liability associated with issuance of common stock at
$0.07
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,893,960
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,893,960
                            )Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            190,882
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            190,882Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (1,633,169
                            )
                            
                            
                            -
                            
                            
                            
                            (1,633,169
                            )Balance
      at March 31, 2010
                            
                            
                            114,079,543
                            
                            
                            $
                            114,080
                            
                            
                            $
                            55,919,120
                            
                            
                            $
                            (63,566,604
                            )
                            
                            $
                            15,890
                            
                            
                            $
                            (7,517,514
                            )





See
accompanying notes to consolidated financial statements.


7





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(A
Development Stage Company)


Condensed
Consolidated Statements of Cash Flows


(Unaudited)





Three months ended March 31,
                    
                    
                    Cumulative period from
                      August 6, 2001
                      (inception) to March 31,2010
                    
                    
                    2009
                    
                    
                    2010Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (1,633,169
                    )
                    
                    $
                    (761,844
                    )
                    
                    $
                    (62,386,959
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                    
                    
                    -
                    
                    
                    
                    135,786
                    
                    
                    
                    750,000Share-based
      compensation
                    
                    
                    190,882
                    
                    
                    
                    104,097
                    
                    
                    
                    4,373,194Interest
      and amortization of OID and issue costs on Secured 12%
    Notes
                    
                    
                    110,507
                    
                    
                    
                    119,060
                    
                    
                    
                    694,480Change
      in fair value of derivative
                    
                    
                    942,261
                    
                    
                    
                    70,000
                    
                    
                    
                    1,372,331Shares
      issued in connection with in-licensing agreement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    232,500Warrants
      issued to consultant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    83,670Amortization
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    145,162Gain
      on sale of marketable equity securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (76,032
                    )Depreciation
                    
                    
                    796
                    
                    
                    
                    1,576
                    
                    
                    
                    228,258Non
      cash portion of in-process research and development charge
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,721,623Loss
      on impairment and disposition of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,462,108Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23,917Changes
      in operating assets and liabilities, net of acquisitions:Decrease/(increase)
      in restricted cash
                    
                    
                    -
                    
                    
                    
                    215,870
                    
                    
                    
                    -Decrease/(increase)
      in prepaid expenses and other current assets
                    
                    
                    88,343
                    
                    
                    
                    (14,850
                    )
                    
                    
                    59,408Decrease/(increase)
      in other assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (36,370
                    )Increase/(decrease)
      in accounts payable and accrued liabilities
                    
                    
                    (426,062
                    )
                    
                    
                    (515,492
                    )
                    
                    
                    (43,096
                    )Increase/(decrease)
      in interest payable, current portion
                    
                    
                    108,246
                    
                    
                    
                    -
                    
                    
                    
                    108,246Increase/(decrease)
      in interest payable, non-current portion
                    
                    
                    13,369
                    
                    
                    
                    -
                    
                    
                    
                    13,369Net
      cash used in operating activities
                    
                    
                    (604,827
                    )
                    
                    
                    (645,797
                    )
                    
                    
                    (40,274,191
                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (239,608
                    )Cash
      acquired/(paid) in connection with acquisitions
                    
                    
                    519,365
                    
                    
                    
                    -
                    
                    
                    
                    493,334Net
      cash provided from the purchase and sale of short-term
      investments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    435,938Proceeds
      from sale of license
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    200,001Net
      cash provided by investing activities
                    
                    
                    519,365
                    
                    
                    
                    -
                    
                    
                    
                    889,665Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                    
                    
                    -
                    
                    
                    
                    500,000
                    
                    
                    
                    3,199,176Sale
      of warrant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    150,000Repayment
      of Secured 10% Notes
                    
                    
                    -
                    
                    
                    
                    (70,000
                    )
                    
                    
                    -Repayment
      of 8% Notes
                    
                    
                    (27,000
                    )
                    
                    
                    
                    
                    
                    
                    -Proceeds
      from sale of Secured 12% Notes
                    
                    
                    -
                    
                    
                    
                    340,270
                    
                    
                    
                    1,345,413Proceeds
      from sale of Convertible 12% Notes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    164,502Repayments
      of notes payable to stockholders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (884,902
                    )Proceeds
      (costs) related to sale of common stock, net
                    
                    
                    2,111,746
                    
                    
                    
                    -
                    
                    
                    
                    28,008,008Proceeds
      from sale of preferred stock, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,046,176Proceeds
      from exercise of warrants and stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    138,219Other,
      net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    235,214Net
      cash provided by financing activities
                    
                    
                    2,084,746
                    
                    
                    
                    770,270
                    
                    
                    
                    41,401,806Net
      increase in cash and cash equivalents
                    
                    
                    1,999,284
                    
                    
                    
                    124,473
                    
                    
                    
                    2,017,280Cash
      and cash equivalents at beginning of period
                    
                    
                    17,996
                    
                    
                    
                    106,023
                    
                    
                    
                    -Cash
      and cash equivalents at end of period
                    
                    $
                    2,017,280
                    
                    
                    $
                    230,496
                    
                    
                    $
                    2,017,280Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    1,506
                    
                    
                    $
                    -
                    
                    
                    $
                    32,936Supplemental
      disclosure of noncash investing and financing activities:Investment
      in Hedrin JV
                    
                    $
                    -
                    
                    
                    $
                    250,000
                    
                    
                    $
                    750,000Warrants
      issued with Secured 12% Notes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    223,172Common
      stock issued in satisfaction of accounts payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    770,000Imputed
      and accrued preferred stock dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,179,645Conversion
      of preferred stock to common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,067Preferred
      stock dividends paid by issuance of shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    759,134Issuance
      of common stock for acquisitions
                    
                    
                    1,491,937
                    
                    
                    
                    -
                    
                    
                    
                    14,881,163Issuance
      of common stock in connection with in-licensing agreement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    232,500Marketable
      equity securities received in connection with sale of
    license
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    359,907Warrants
      issued to consultant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    83,670Net
      liabilities assumed over assets acquired in business
      combination
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (675,416
                    )





See
accompanying notes to consolidated financial statements


8





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of Manhattan
Pharmaceuticals, Inc. and subsidiaries (“Manhattan” or the “Company”) have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the rules and
regulations of the Securities and Exchange Commission.  Accordingly, the
unaudited condensed consolidated financial statements do not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete annual financial statements. 
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring adjustments, considered necessary for a fair presentation. 
Interim operating results are not necessarily indicative of results that may be
expected for the year ending December 31, 2010 or for any other interim
period.  These unaudited condensed consolidated financial statements should
be read in conjunction with the Company’s audited financial statements as of and
for the year ended December 31, 2009, which are included in the Company’s
Annual Report on Form 10-K  for such year.  The condensed balance
sheet as of December 31, 2009 has been derived from the audited financial
statements included in the Form 10-K for that year.





As of
March 31, 2010, the Company has not generated any revenues from the development
of its products and is therefore still considered to be a development stage
company.





On March
8, 2010, the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware
corporation ("Ariston") and Ariston Merger Corp., a Delaware corporation and
wholly-owned subsidiary of the Company (the "Merger Sub").  Pursuant to the
terms and conditions set forth in the Merger Agreement, on March 8, 2010, the
Merger Sub merged with and into Ariston (the "Merger"), with Ariston being the
surviving corporation of the Merger.  As a result of the Merger, Ariston
became a wholly-owned subsidiary of the Company.  The operating results of
Ariston from March 8, 2010 to March 31, 2010 are included in the accompanying
condensed consolidated statements of operations.  The condensed
consolidated balance sheets as of March 31, 2010 reflects the acquisition of
Ariston, effective March 8, 2010, the date of the Merger.





Segment
Reporting





The
Company has determined that it operates in only one segment currently, which is
biopharmaceutical research and development.





Financial
Instruments





At March
31, 2010 and December 31, 2009, the fair values of cash and cash equivalents,
accounts payable, the convertible 5% notes payable, the ICON convertible note
payable and the secured 12% notes payable approximate their carrying
values.  At March 31, 2010 and December 31, 2009 the fair value of the
convertible 12% note does not approximate its carrying value as a portion of the
fair value is reflected as a component of derivative liability.


9


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Equity
in Joint Venture





The
Company accounts for its investment in joint venture (see Note 5) using the
equity method of accounting. Under the equity method, the Company records its
pro-rata share of joint venture income or losses and adjusts the basis of its
investment accordingly.





New Accounting
Pronouncements





In May 2009, the Financial
Accounting Standards Board (“FASB”) issued a statement which sets forth the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. This statement was effective for interim or annual periods ending
after June 15, 2009, and the Company adopted the provisions of this
statement for the quarter ended June 30, 2009. The adoption of this
statement did not have a material impact on the Company’s financial
statements.  The Company has evaluated all events or transactions that
occurred after March 31, 2010 up through the date we issued these financial
statements, and we have disclosed all events or transactions that have a
material impact on the Company’s financial statements (see Note
10).





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





In
January 2010, the FASB issued a new pronouncement, Improving Disclosures about
Fair Value Measurements(ASU 2010-06). This provision amends previous provisions
that require reporting entities to make new disclosures about recurring and
nonrecurring fair value measurements including the amounts of and reasons for
significant transfers into and out of Level 1and Level 2 fair value measurements
and separate disclosure of purchases, sales, issuances, and settlements in the
reconciliation of Level 3 fair value measurements. This pronouncement was
effective for interim and annual reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for
interim and annual periods beginning after December 15, 2010.  The adoption
of this pronouncement did not have a material impact on the Company’s results of
operations or financial condition.





In
February 2010, the FASB issued new accounting guidance that amends the previous
guidance to (1) eliminate the requirement for an SEC filer to disclose the date
through which it has evaluated subsequent events, (2) clarify the period through
which conduit bond obligors must evaluate subsequent events and (3) refine the
scope of the disclosure requirements for reissued financial statements. The
Company adopted this new accounting guidance for the quarterly period ended
March 31, 2010. The adoption of this guidance did not have a material impact on
our financial statements.


10


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Ariston
Merger





On March
8, 2010, the Company entered into the Merger Agreement by and among the Company,
Ariston and Merger Sub.  Pursuant to the terms and conditions set forth in
the Merger Agreement, on March 8, 2010, the Merger Sub merged with and into
Ariston, with Ariston being the surviving corporation of the Merger.  As a
result of the Merger, Ariston became a wholly-owned subsidiary of the
Company.





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





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


·
            Upon
      the affirmative decision of the Company’s Board of Directors, provided
      that such decision is made prior to March 8, 2011, to further develop the
      AST-915, either internally or through a corporate partnership, the Company
      would issue 8,828,029 of the Milestone
Shares.


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


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





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


11


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





The
Merger date fair value of the total consideration paid was $1,491,937 which
consisted of 7,062,423 shares of the Company’s common stock issued upon the
Merger and 15,890,452 contingently issuable shares upon Ariston’s attaining
certain milestones as described above.  The Company does not believe the
attainment of the milestone for AST-915 is highly probable and has recorded no
contingent consideration relative to it.  The par value of the contingently
issuable common shares is reflected in the accompanying condensed consolidated
balance sheets as of March 31, 2010 as a component of stockholders’ deficiency,
contingently issuable shares.





The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the Merger date:





Cash
      and cash equivalents
                    
                    $
                    519,365Other
      assets
                    
                    
                    120,870Total
      identifiable assets
                    
                    
                    640,235Accounts
      payable and accrued expenses
                    
                    
                    437,615ICON
      convertible note payable
                    
                    
                    1,000,0005%
      convertible notes payable
                    
                    
                    15,452,793Total
      identifiable liabilities
                    
                    
                    16,890,408Net
      identifiable assets (liabilities)
                    
                    
                    (16,250,173
                    )In-process
      research and development acquired
                    
                    
                    17,742,110Net
      assets acquired
                    
                    $
                    1,491,937





The following supplemental pro forma
information presents the financial results as if the acquisition of Ariston had
occurred on January 1, 2009 for the quarter ended March 31, 2009 and on January
1, 2010 for the quarter ended March 31, 2010.  This supplemental pro forma
information has been prepared for comparative purposes and does not purport to
be indicative of what would have occurred had the acquisition been made on
January 1, 2009 or January 1, 2010, nor are they indicative of future
results.





Pro forma consolidated results:
                  
                  Quarter ended March 31,2009
                  
                  
                  2010Revenue
                  
                  $
                  -
                  
                  
                  $
                  -Net
      loss
                  
                  $
                  (1,544,229
                  )
                  
                  $
                  (1,787,172
                  )Basic
      and diluted earnings per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )


12


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





2.
              LIQUIDITY





The
Company incurred a net loss of $1,633,169 and negative cash flows from operating
activities of $604,827 for the three month period ended March 31, 2010 and
negative cash flows from operating activities of $645,797 for the three month
period ended March 31, 2009.  The net loss applicable to common shares from
date of inception, August 6, 2001, to March 31, 2010 amounts to
$63,566,604.





In the
first quarter of 2009 the Company received approximately $0.3 million from the
final closing of the sale of Secured 12% Notes and approximately $0.5 million in
February 2009 from a joint venture agreement.





In the
first quarter of 2010, the Company received $40,000 from Ariston
Pharmaceuticals, Inc. in exchange for notes in January 2010 and approximately
$2.1 million from an equity financing transaction (see Note 7). The Company
repaid the $40,000 received from Ariston in the first quarter of 2010 and the
$27,000 received from Ariston in the fourth quarter of 2009 together with
interest thereon prior to the Merger.





Management
believes that the Company will continue to incur net losses through at least
March 31, 2011 and for the foreseeable future thereafter.  Based on the
resources of the Company available at March 31, 2010, management believes that
the Company has sufficient capital to fund its operations through the end of
2010.  Management believes that the Company will need additional equity or
debt financing or will need to generate positive cash flow from a joint venture
agreement, see Note 5, or generate revenues through licensing of its products or
entering into strategic alliances to be able to sustain its operations into
2011.  Furthermore, the Company will need additional financing thereafter
to complete development and commercialization of our products.  There can
be no assurances that we can successfully complete development and
commercialization of our products.




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




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





3.
              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 and
stock warrants 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 164,890,446 and 95,358,343 shares
at March 31, 2010 and December 31, 2009, respectively.  These amounts do
not include the 71,428,571 shares issuable upon the exercise of the put or call
rights issued in connection with the Hedrin JV (see Note 5) which were subject
to anti-dilution rights upon the issuance of common shares in the 2010 equity
financing transaction (see Note 7).


13


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





4.
            SHARE-BASED
      COMPENSATION





The
Company has stockholder-approved stock incentive plans for employees, directors,
officers and consultants.  Prior to January 1, 2006, the Company accounted
for the employee, director and officer plans using the intrinsic value method.
Effective January 1, 2006, the Company adopted the share-based payment method
for employee options using the modified prospective transition method. This new
method of accounting for stock options eliminated the option to use the
intrinsic value method and required the Company to expense the fair value of all
employee options over the vesting period.  Under the modified prospective
transition method, the Company recognized compensation cost for the quarters
ended March 31, 2010 and 2009 which includes a) period compensation cost related
to share-based payments granted prior to, but not yet vested, as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions; and b) period compensation cost related to share-based
payments granted on or after January 1, 2006, based on the grant date fair value
estimated in accordance with the new accounting methodology. In accordance with
the modified prospective method, the Company has not restated prior period
results.





The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.  For the three month periods
ended March 31, 2010 and 2009, the Company recognized share-based employee
compensation cost of $190,882 and $104,097, respectively.  The Company did
not capitalize any share-based compensation cost.




Options
granted to consultants and other non-employees are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.  Accordingly, such options are recorded at fair value at
the date of grant and subsequently adjusted to fair value at the end of
each reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.  As a result of adjusting consultant and other non-employee
options to fair value as of March 31, 2010 and 2009 respectively, net of
amortization, the Company recognized an increase to general and administrative
and research and development expenses of $249 for the three month period ended
March 31, 2010 and an increase to general and administrative and research and
development expenses of $378 for the three month period ended March 31, 2009.
The Company has allocated share-based compensation costs to general and
administrative and research and development expenses as
follows:


14


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARIES


(a
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Three months ended March 31,2010
                  
                  
                  2009General
      and administrative expense:Share-based
      employee compensation cost
                  
                  $
                  190,633
                  
                  
                  $
                  103,719Share-based
      consultant and non-employee cost
                  
                  
                  25
                  
                  
                  
                  38190,658
                  
                  
                  
                  103,757Research
      and development expenseShare-based
      employee compensation cost
                  
                  
                  -
                  
                  
                  
                  -Share-based
      consultant and non-employee cost
                  
                  
                  224
                  
                  
                  
                  340224
                  
                  
                  
                  340Total
      share-based cost
                  
                  $
                  190,882
                  
                  
                  $
                  104,097




To
compute compensation expense in 2010 and 2009 the Company estimated the fair
value of each option award on the date of grant using the Black-Scholes model.
The Company based the expected volatility assumption on a volatility index of
peer companies as the Company did not have a sufficient number of years of
historical volatility of its common stock.  The expected term of options
granted represents the period of time that options are expected to be
outstanding.  The Company estimated the expected term of stock options by
the simplified method.  The expected forfeiture rates are based on the
historical employee forfeiture experiences. To determine the risk-free
interest rate, the Company utilized the U.S. Treasury yield curve in effect at
the time of grant with a term consistent with the expected term of the Company’s
awards.  The Company has not declared a dividend on its common stock since
its inception and has no intentions of declaring a dividend in the foreseeable
future and therefore used a dividend yield of zero.




The
following table shows the weighted average assumptions the Company used to
develop the fair value estimates for the determination of the compensation
charges in 2010 and 2009:




Three months ended March 31,2010
                    
                    
                    2009Expected
      volatility
                    
                    
                    88
                    %
                    
                    
                    94
                    %Dividend
      yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      term (in years)
                    
                    
                    6
                    
                    
                    
                    6Risk-free
      interest rate
                    
                    
                    2.47
                    %
                    
                    
                    1.88
                    %




The
Company has shareholder-approved incentive stock option plans for employees
under which it has granted non-qualified and incentive stock options.  In
December 2003, the Company established the 2003 Stock Option Plan (the “2003
Plan”), which provided for the granting of up to 5,400,000 options to officers,
directors, employees and consultants for the purchase of stock.  In August
2005, the Company increased the number of shares of common stock reserved for
issuance under the 2003 Plan by 2,000,000 shares.  In May 2007, the Company
increased the number of shares of common stock reserved for issuance under the
2003 Plan by 3,000,000 shares.  In November 2009, the Company increased the
number of shares of common stock reserved for issuance under the 2003 plan by an
additional 4,600,000 shares.  At March 31, 2010, 15,000,000 shares were
authorized for issuance.  The options have a maximum term of 10 years and
vest over a period determined by the Company’s Board of Directors (generally 3
years) and are issued at an exercise price equal to or greater than the fair
market value of the shares at the date of grant.  The 2003 Plan expires on
December 10, 2013 or when all options have been granted, whichever is sooner. At
March 31, 2010 options to purchase 11,584,936 shares were outstanding, 27,776
shares of common stock were issued and  there were 3,387,288 shares
reserved for future grants under the 2003 Plan.


15


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




In July
1995, the Company established the 1995 Stock Option Plan (the”1995 Plan”), which
provided for the granting of options to purchase up to 130,000 shares of the
Company’s common stock to officers, directors, employees and
consultants.  The 1995 Plan was amended several times to increase the
number of shares reserved for stock option grants.  In June 2005 the
1995 Plan expired and no further options can be granted.   At
March 31, 2010 options to purchase 1,137,240 shares were outstanding and no
shares were reserved for future stock option grants under the 1995
Plan.




A summary
of the status of the Company’s stock options as of March 31, 2010 and changes
during the period then ended is presented below:




Shares
                      
                      
                      Weighted
                        average
                        exercise
                        price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Term(years)
                      
                      
                      Aggregate
                        IntrinsicValueOutstanding
      at December 31, 2009
                      
                      
                      7,459,936
                      
                      
                      $
                      0.7180
                      
                      
                      
                      6.160Granted
                      
                      
                      4,125,000
                      
                      
                      $
                      0.0701
                      
                      
                      
                      9.330Exercised
                      
                      
                      -CancelledOutstanding
      at March 31, 2010
                      
                      
                      11,584,936
                      
                      
                      $
                      0.4871
                      
                      
                      
                      6.680
                      
                      
                      $
                      57,500Exercisable
      at March 31, 2010
                      
                      
                      9,886,602
                      
                      
                      $
                      0.5491
                      
                      
                      
                      6.150
                      
                      
                      $
                      -Weighted-average
      fair value of options granted during the three month period ended March
      31, 2010
                      
                      $
                      0.0464




As of
March 31, 2010, the total compensation cost related to nonvested option awards
not yet recognized is $83,607.  The weighted average period over which
it is expected to be recognized is approximately 2.6 years.





5.
            JOINT
      VENTURE




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


16


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




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




In June
2008, Nordic invested an additional $1.0 million, for a total of $3.5 million,
in the Hedrin JV and made an advance of $250,000 to the Hedrin JV and the Hedrin
JV made an additional $1.0 million payment, for a total of $3.0 million, to the
Company.  The Hedrin JV also distributed additional ownership equity
sufficient for each of the Company and Nordic to maintain their ownership
interest at 50%.  The FDA classified Hedrin as a Class III medical
device in February 2009.  Upon attaining this classification of Hedrin
by the FDA, Nordic invested an additional $1.25 million, for a total investment
of $5 million, into the Hedrin JV,  the Hedrin JV paid an additional
$0.5 million, for a total of $3.5 million, to the Company and the $250,000 that
Nordic advanced to the Hedrin JV in June became an equity investment in the
Hedrin JV by Nordic.




In
February 2009, the Company’s exchange obligation increased by $1,000,000 and the
Company’s investment in the Hedrin JV increased by $500,000 as a result of the
investment by Nordic of an additional $1.25 million into the Hedrin JV, the
reclassification of the advance made by Nordic in June 2008 to the Hedrin JV of
$250,000 into an equity interest and the payment of $500,000 by the Hedrin JV to
the Company. At March 31,2010, the Company’s exchange obligation is
$3,949,176.




During
the quarters ended March 31, 2010 and 2009, the Company recognized $0 and
$135,786, respectively, of equity in the losses of the Hedrin
JV.  This reduced the carrying value of its investment in the Hedrin
JV to $0 at March 31, 2010 and $364,214 at March 31, 2009.  As of
March 31, 2010, the Company’s share of the losses is $670,288; equity in losses
of Hedrin JV previously recognized was $500,000 leaving a remaining balance of
$170,288 of losses that was not recognized at March 31, 2010.




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




The
Hedrin JV has engaged the Company to provide management services to the Limited
Partnership in exchange for a management fee.  For the quarters ended
March 31, 2010 and 2009, the Company has recognized $75,000 and $108,845,
respectively, of other income from management fees earned from the Hedrin JV
which is included in the Company’s statements of operations for the quarters
ended March 31, 2010 and 2009 as a component of interest and other
income.




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


17


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





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





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





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





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





6.
            NOTES
      PAYABLE





a. Secured
10% Notes Payable


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


18


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




b.           Secured
12% Notes Payable


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





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




The
Secured 12% Notes mature two years after issuance.  Interest on
the  Secured 12% Notes is compounded quarterly and payable at
maturity.  At March 31, 2010 and December 31, 2009, accrued and unpaid
interest on the Secured 12% Notes amounted to approximately $290,000 and
$229,000,  and is reflected in the accompanying balance sheets at
March 31, 2010 and December 31, 2009, respectively, as interest payable on
secured 12% notes payable. The Secured 12% Notes are secured by a pledge of all
of the Company’s assets except for its investment in the Hedrin
JV.  In addition, to provide additional security for the Company’s
obligations under the notes, the Company entered into a default agreement, which
provides that upon an event of default under the notes, the Company shall, at
the request of the holders of the notes, use reasonable commercial efforts to
either (i) sell a part or all of the Company’s interests in the Hedrin joint
venture or (ii) transfer all or part of the Company’s interest in the Hedrin JV
to the holders of the notes, as necessary, in order to fulfill the Company’s
obligations under the notes, to the extent required and to the extent permitted
by the applicable Hedrin joint venture agreements.




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




The
Company incurred a total of approximately $424,000 of costs in the issuance of
the $1,725,000 of Secured 12% Notes sold in 2008
and  2009.  These costs were capitalized and are being
amortized over the life of the Secured 12% Notes into interest
expense.  During the quarter ended March 31, 2010 and the year ended
December 31, 2009, the amount amortized into interest expense was approximately
$52,000 and $206,000, respectively.  The remaining unamortized balance
of approximately $149,000 and $201,000 is reflected in the accompanying balance
sheets as of March 31, 2010 and December 31, 2009, respectively, as Secured 12%
Notes payable issue costs.


19


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




The
Company recognized an original issue discount (the “OID”) of approximately
$194,000 on the issuance of the Secured 12% Notes sold for the value of the
warrants issued to the investors.  The OID is being amortized over the
life of the Secured 12% Notes into interest expense.  During the
quarter ended March 31, 2010 and year ended December 31, 2009 the amount
amortized into interest expense was approximately $24,000 and $94,000,
respectively.  The remaining unamortized balance of approximately
$69,000 and $93,000 has been netted against the face amount of the Secured 12%
Notes in the accompanying balance sheets as of March 31, 2010 and December 31,
2009, respectively.  As per the terms of the 12% Notes Transaction the
Company’s officers agreed to certain modifications of their employment
agreements.





c.           8%
Note Payable


On
December 21, 2009, the Company entered into a Future Advance Promissory Note
(the “8% Note”) with Ariston under which the Company may withdraw up to $67,000
bearing interest at a rate of 8%.   As of December 31, 2009, the
Company had withdrawn $27,000 from Ariston subject to the terms of the 8%
Note.  On January 13, 2010, the Company withdrew an additional $20,000
subject to the 8% Note and on January 28, 2010, the Company withdrew an
additional $20,000 subject to the 8% Note.




On March
4, 2010, the Company repaid Ariston the $67,000 withdrawn subject to the 8% Note
and accrued interest of $816.




d.           Non-interest
Bearing Note Payable


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





In
connection with the non-interest bearing note, the Company recognized an
original issue discount of  $40,000 of imputed interest on the note,
which is being amortized into interest expense on a straight-line basis over the
two-year term of the note.  For the quarter ended March 31, 2010 and
the year ended December 31, 2009, the Company amortized $5,000 and $1,900 of the
OID into interest expense, respectively.  The remaining unamortized
balance of $33,100 has been netted against the face amount of the non-interest
bearing note payable in the accompanying balance sheets as of March 31,
2010.


20


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




e.           Convertible
12% Note Payable


In
conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma
described above, on October 28, 2009, the Company entered into a Subscription
Agreement (the “Subscription Agreement”) pursuant to which it sold a 12%
Original Issue Discount Senior Subordinated Convertible Debenture with a stated
value of $400,000 (the “Convertible 12% Note”) and a warrant to purchase
2,222,222 shares of the Company’s common stock, par value $.001 per
share  for a purchase price of $200,000.  The Convertible
12% Note is convertible into shares of Common Stock at an initial conversion
price of $0.09 per share, subject to adjustment, or, in the event the Company
issues new securities in connection with a financing, the Convertible 12% Note
may be converted into such new securities at a conversion price equal to the
purchase price paid by the purchasers of such new securities.  The
Company may also, in its sole discretion, elect to pay interest due on the
Convertible 12% Note quarterly in shares of the Company’s common stock provided
such shares are subject to an effective registration statement.  The
Convertible 12% Note is subordinated to the Company’s outstanding Secured 12%
Notes.  The Warrant is exercisable at an exercise price of $0.11 per
share, subject to adjustment.  Because the Convertible 12% Note and
the Warrant are convertible into shares of the Company, subject to adjustment,
the conversion feature is subject to Derivative Liability accounting (see Note
8).




National
Securities Corporation (“National”) was the placement agent for the Convertible
12% Note transaction.  In connection with the issuance of the
Securities, the Company issued warrants to purchase an aggregate of 222,222
shares of Common Stock at an exercise price of $0.11 per share, subject to
adjustment, to the placement agent and certain of its
designees.  Because the warrant is convertible into shares of the
Company, subject to adjustment, the warrants are subject to Derivative Liability
accounting (see Note 8). The warrants expire on October 28, 2014.




The
Convertible 12% Notes mature two years after issuance.  Interest on
the Convertible 12% Note is compounded quarterly and payable at
maturity.  At March 31, 2010 and December 31, 2009, accrued and unpaid
interest on the Convertible 12% Note amounted to approximately $21,000 and
$9,000, respectively,  and is reflected in the accompanying balance
sheet at March 31, 2010 and December 31, 2009, respectively, as interest payable
on convertible 12% notes payable.




The
Company incurred a total of approximately $38,000 of costs in the issuance of
the Convertible 12% Note sold in 2009.  These costs were capitalized
and are being amortized over the life of the  Convertible 12% Note
into interest expense.  During the quarter ended March 31, 2010 and
the year ended December 31, 2009, the amount amortized into interest expense was
approximately $5,000 and $3,000, respectively.  The remaining
unamortized balance of approximately $30,000 and $35,000, respectively, is
reflected in the accompanying balance sheet as of March 31, 2010 and December
31, 2009, as a non-current asset, convertible 12% note payable issue
costs.




The
Company recognized an original issue discount of approximately $200,000 on the
issuance of the Convertible 12% Notes. The OID is being amortized over the life
of the Convertible 12% Notes into interest expense.  During the
quarter ended March 31, 2010 and the year ended December 31, 2009 the amount
amortized into interest expense was approximately $24,000 and $18,000,
respectively.  The remaining unamortized balance of approximately
$158,000 and $182,000 has been netted against the face amount of the Convertible
12% Notes in the accompanying balance sheet as of March 31, 2010 and December
31, 2009, respectively.




f. Convertible
5% Notes Payable


Upon the
Merger, Ariston issued $15,452,793 of five-year 5% notes payable (the “5% Notes
Payable”) in satisfaction of several note payable issuances.  The
cumulative liability including accrued and unpaid interest of these several
issuances of notes was $15,452,793 as of the Merger date.  Interest is
payable at maturity and compounds annually.  The 5% Notes Payable and
accrued and unpaid interest thereon are convertible at the option of the holder
into the Company’s common stock at the conversion price of $0.40 per
share.  Ariston agreed to make quarterly payments on the 5% Notes
Payable equal to 50% of the gross proceeds resulting from the revenues received
from the exploitation or commercialization of Ariston’s product candidates,
AST-726 and AST915.  The 5% Notes Payable are solely the obligation of
Ariston and have no recourse to the Company other than the conversion feature
discussed above.


21


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




g. ICON
Convertible Note Payable


Upon the Merger, Ariston satisfied an account payable of $1,275,188 to ICON
Clinical Research Limited through the payment of $275,188 in cash and the
issuance of a three-year 5% note payable (the “ICON Note
Payable”).  The principal is to be repaid in 36 monthly installments
of $27,778 commencing in April 2010.  Interest is payable monthly in
arrears. .  The ICON Convertible Note Payable is convertible at the
option of the holder into the Company’s common stock at the conversion price of
$0.20 per share.





7.
            2010
      EQUITY FINANCING





On March
2, 2010, the Company raised aggregate gross proceeds of approximately $2,547,500
pursuant to a private placement of its securities (the “2010 Equity
Financing”).  The Company entered into subscription agreements (the
"Subscription Agreements") with seventy-seven accredited investors (the
"Investors") pursuant to which the Company sold an aggregate of 101.9 Units (as
defined herein) for a purchase price of $25,000 per Unit.  Pursuant to
the Subscription Agreements, the Company issued to each Investor units (the
"Units") consisting of (i) 357,143 shares of common stock, $0.001 par value per
share (the “Common Stock” or “Shares”) of the Company and (ii) 535,714 warrants
(each a “Warrant” and collectively the “Warrants”), each of which will entitle
the holder to purchase one additional share of Common Stock for a period of five
years (each a “Warrant Share” and collectively the “Warrant Shares”) at an
exercise price of $0.08 per share.  Because the Warrant Shares are
convertible into shares of the Company, subject to adjustment, the conversion
feature is subject to Derivative Liability accounting (see Note 8).




National
was the placement agent for the 2010 Equity Financing transaction.  In
connection with the issuance of the Securities, the Company issued warrants to
purchase an aggregate of 3,369,289 shares of Common Stock at an exercise price
of $0.08 per share, subject to adjustment, to the placement agent and certain of
its designees.  Because the warrant is convertible into shares of the
Company, subject to adjustment, the warrants are subject to Derivative Liability
accounting (see Note 8). The warrants expire on March 2, 2015.




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


22


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




SharesIssuable
                            UponExerciseof
                            Nordic'sPut
                          
                          
                          SharesIssuable
                            UponExerciseof
                            Nordic'sWarrant
                          
                          
                          TotalSharesIssuable
                            UponExerciseof
                            Nordic'sPutand
                            WarrantBefore
      the Equity Pipe Transaction
                          
                          
                          55,555,556
                          
                          
                          
                          11,111,111
                          
                          
                          
                          66,666,667Antidilution
      shares
                          
                          
                          15,873,015
                          
                          
                          
                          3,174,603
                          
                          
                          
                          19,047,618After
      the Equity Pipe Transaction
                          
                          
                          71,428,571
                          
                          
                          
                          14,285,714
                          
                          
                          
                          85,714,285





In March
2010, we received correspondence from Nordic that questions how we calculated
the anti-dilution shares, as shown above, and suggesting that we did not employ
a good faith estimate.  We believe our determination was made in good
faith and is appropriate. See Note 11.




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




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




The
Company received net proceeds of approximately $2,100,000 after payment of an
aggregate of approximately $300,000 of commissions and expense allowance to the
Placement Agent, and approximately $100,000 of other offering and related costs
in connection with the private placement. In addition, the Company issued a
warrant to purchase 3,639,289 shares of Common Stock at an exercise price of
$0.08 per share to the Placement Agent as additional compensation for its
services.




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


23


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




8.
            DERIVATIVE
      LIABILITY




In April
2008, the FASB issued a pronouncement which provides guidance on determining
what types of instruments or embedded features in an instrument held by a
reporting entity can be considered indexed to its own stock for the purpose of
evaluating the first criteria of the scope exception in the pronouncement on
accounting for derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
adoption of these requirements can affect the accounting for warrants and many
convertible instruments with provisions that protect holders from a decline in
the stock price (or “down-round” provisions). For example, warrants with such
provisions will no longer be recorded in equity. Down-round provisions reduce
the exercise price of a warrant or convertible instrument if a company either
issues equity shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that have a lower
exercise price. We evaluated whether warrants to acquire stock of the Company
contain provisions that protect holders from declines in the stock price or
otherwise could result in modification of the exercise price under the
respective warrant agreements. We determined that the warrant issued to Nordic
in April 2008 (the “Nordic Warrant”), the warrants issued in connection with the
2009 sale of the Convertible 12% Note Payable, and the warrants issued in
connection with the 2010 Equity Financing contained such provisions, thereby
concluding they were not indexed to the Company’s own stock and were
reclassified from equity to derivative liabilities.




In
accordance with this pronouncement, the Company estimated the fair value of the
Nordic  Warrant as of January 1, 2009 to be $22,222 by recording
a reduction in additional paid-in capital of $150,000 and a decrease in deficit
accumulated during the development stage of $127,778. The effect of this
adjustment is recorded as a cumulative effect of change in accounting principle
in our statements of stockholders’ equity (deficiency).  As of March
31, 2010, the fair value of these derivatives was $815,714 as recorded in the
accompanying balance sheet as of March 31, 2010, as a component of a current
liability, derivative liability. The change of $332,381 in fair value during the
quarter ended March 31, 2010 is reported as a non-cash charge in our statement
of operations as a component of other (income) expense.




In
accordance with this pronouncement the Company estimated the fair value at the
date of issuance of the conversion feature of the Convertible 12% Note and the
fair value of the related warrants to purchase 2,444,444 shares of the Company’s
common stock at $175,100 and $27,390, respectively.  As of March 31,
2010 the fair value of these derivatives totaled $375,622 and are recorded in
the accompanying balance sheet as of March 31, 2010 as a component of derivative
liability.  The change in fair value of $74,177 during quarter ended
March 31, 2010 is reported as a non-cash charge in our statement of operations
as a component of other (income) expense.




Additionally,
in accordance with this pronouncement the Company estimated the fair value at
the date of issuance of the 54,589,266 warrants issued in connection with the
2010 Equity Financing and the fair value of the related 3,369,289 warrants
issued to the placement agents in the 2010 Equity Financing  at
$2,713,087  and $180,873, respectively.  As of March 31,
2010 the fair value of these derivatives totaled $3,429,662 and are recorded in
the accompanying consolidated balance sheet as of March 31, 2010 as a component
of derivative liability.  The change in fair value of $535,703 during
quarter ended March 31, 2010 is reported as a non-cash charge in the
consolidated statement of operations as a component of other (income)
expense.




9.
            LICENSE
      AGREEMENTS




Altoderm
License Agreement





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




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


24


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




Altolyn
License Agreement





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




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




IGI
Agreement for PTH (1-34)




On April
1, 2005, as part of the acquisition of Tarpan Therapeutics, Inc., the Company
acquired a Sublicense Agreement with IGI, Inc. (the “IGI Agreement”) dated April
14, 2004.  Under the IGI Agreement the Company received the exclusive,
world-wide, royalty bearing sublicense to develop and commercialize the licensed
technology for the treatment of psoriasis.




In May
2009, the Company terminated the IGI Agreement.  The Company has no
further financial liability or commitment to IGI, Inc. under the IGI
Agreement.




10.
            SUBSEQUENT
      EVENTS





Final Closing of 2010 Equity
Financing


On April
8, 2010, the Company completed the final closing of the 2010 Equity Financing
(see Note 7).  In connection with the final closing, the Company sold
an aggregate of 2.4 additional Units and received net proceeds of approximately
$51,700 after payment of an aggregate of $8,300 of commissions and expense
allowance to placement agent. In connection with the final closing, the Company
also issued a warrant to purchase 12,857 shares of Common Stock at an exercise
price of $0.08 per share to the placement agent as additional compensation for
its services.





In
addition on April 8, 2010, the holder the 12% Convertible Note (see Note 6) with
a stated value of $400,000 and $21,886 of accrued interest, exercised its option
to convert its Debenture (including all accrued interest thereon) into 16.88
Units.  The conversion price was equal to the per Unit purchase price
paid by the Investors in the private placement.





The
Company issued a total of 6,885,717 shares of common stock and warrants to
purchase 10,328,566 shares of common stock at an exercise price of $0.08 per
share to the investors in the final closing of the 2010 Equity Financing,
including the conversion of the 12% Convertible Note.


25




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


Disagreement
with Nordic


In April
2010 Nordic filed a Schedule 13D/A (the “Amended 13D”). The
Company is not in agreement with the Amended 13D and has written a letter to
Nordic explaining its disagreements.  The Amended 13D shows an
aggregate number of shares of the Company’s common stock beneficially owned by
Nordic of 216,666,666, or 65.5%.  The Company believes the correct
beneficial ownership is 85,714,286 shares, or 42.9%.  The Amended
13D/A states that Nordic does not believe the Company’s determination of the
anti-dilution shares accruing to Nordic as a result of the 2010 Equity Financing
was neither reasonable nor made in good faith.  As the Company has
previously stated we believe our determination was both reasonable and made in
good faith.  The Amended 13D/A further states that Nordic acquired the
right to purchase an additional 5,555,556 shares of the Company’s common stock
upon exercise of the Nordic Put as a result of Nordic’s making an additional
investment in the Hedrin JV of $500,000 in January 2010.  The Company
is not in agreement with this claim, there is no adjustment to Nordic’s Put as a
result of Nordic making additional capital contributions to the Hedrin
JV.  In the letter to Nordic the Company also points out that Nordic’s
valuation suggestions for the warrants issued in the 2010 Equity Financing
ignore the concept of relative value inherent in the Hedrin JV
Agreement.


26




Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.




You
should read the following discussion of our results of operations and financial
condition in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2009 (the “Annual Report”) and our financial statements for the
three month period ended March 31, 2010 included elsewhere in this
report.




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




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




On March
8, 2010, the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement") by and among the Company, Ariston Pharmaceuticals, Inc., a Delaware
corporation ("Ariston") and Ariston Merger Corp., a Delaware corporation and
wholly-owned subsidiary of the Company (the "Merger Sub").  Pursuant
to the terms and conditions set forth in the Merger Agreement, on March 8, 2010,
the Merger Sub merged with and into Ariston (the "Merger"), with Ariston being
the surviving corporation of the Merger.  As a result of the Merger,
Ariston became a wholly-owned subsidiary of the Company.  The
operating results of Ariston from March 8, 2010 to March 31, 2009 are included
in the accompanying Condensed Consolidated Statements of
Operations.  The Condensed Consolidated Balance Sheet as of March 31,
2010 reflects the acquisition of Ariston, effective March 8, 2010, the date of
the Merger.




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




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 the Annual Report, and should not unduly rely on these forward looking
statements.


27


Results
Of Operations




Three-month
Period ended March 31, 2010 vs 2009




Quarters ended March 31,
                        
                        
                        Increase
                        
                        
                        % Increase2010
                        
                        
                        2009
                        
                        
                        (decrease)
                        
                        
                        (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        0.00
                        %Other
      research and development expenses
                        
                        
                        18,000
                        
                        
                        
                        45,000
                        
                        
                        
                        (27,000
                        )
                        
                        
                        -60.00
                        %Total
      research and development expenses
                        
                        
                        18,000
                        
                        
                        
                        45,000
                        
                        
                        
                        (27,000
                        )
                        
                        
                        -60.00
                        %General
      and administrative:Share-based
      compensation
                        
                        
                        191,000
                        
                        
                        
                        104,000
                        
                        
                        
                        87,000
                        
                        
                        
                        83.65
                        %Other
      general and administrative expenses
                        
                        
                        320,000
                        
                        
                        
                        408,000
                        
                        
                        
                        (88,000
                        )
                        
                        
                        -21.57
                        %Total
      general and administrative expenses
                        
                        
                        511,000
                        
                        
                        
                        512,000
                        
                        
                        
                        (1,000
                        )
                        
                        
                        -0.20
                        %Other
      income/(expense)
                        
                        
                        (1,104,000
                        )
                        
                        
                        (205,000
                        )
                        
                        
                        (899,000
                        )
                        
                        
                        438.54
                        %Net
      loss
                        
                        $
                        1,633,000
                        
                        
                        $
                        762,000
                        
                        
                        $
                        871,000
                        
                        
                        
                        114.30
                        %




During
each of the three month periods ended March 31, 2010 and 2009, we did not
recognize any revenues.  We are considered a development stage company
and do not expect to have revenues relating to our products candidates prior to
March 31, 2011, if at all.




For the
quarter ended March 31, 2010 research and development expense was $18,000 as
compared to $45,000 for the quarter ended March 31, 2009.  This
decrease of $27,000, or 60%, is primarily due to there being no active product
development projects during the 2010 period and limited product development
activity during the 2009 period.




For the
quarter ended March 31, 2010 general and administrative expense was $511,000 as
compared to $512,000 for the quarter ended March 31, 2009.  This
decrease of $1,000 is less than 1%.




For the
quarter ended March 31, 2010 other income/(expense) was $(1,104,000) as compared
to $(205,000) for the quarter ended March 31, 2009.  This change of
$(899,000), or 439%, is primarily due to a change in fair value of a derivative
of $872,000, an increase in interest expense of $111,000, a decrease in other
income of $52,000 offset by a decrease in equity in losses of Hedrin JV of
$136,000.




Net loss
for the quarter ended March 31, 2010 was $1,633,000 as compared to $762,000 for
the quarter ended March 31, 2009.  This increase of $871,000, or 114%,
is primarily due to an increase in other expense of $899,000 and a decrease in
research and development expenses of $27,000.




Liquidity
and Capital Resources




From
inception to March 31, 2010, we incurred a deficit during the development stage
of $63,566,604 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least March 31, 2011 and for the
foreseeable future.  These losses have been incurred through a
combination of research and development activities related to the various
technologies under our control and expenses supporting those
activities.




We have
financed our operations since inception primarily through equity and debt
financings and a joint venture transaction.  During the quarter ended
March 31, 2010, we had a net increase in cash and cash equivalents of $2.0
million.  This increase resulted largely from net cash provided by
financing activities of $2.1 million and $0.5 million of cash acquired in the
Ariston merger partially offset by net cash used in operating activities of $0.6
million.  Total liquid resources as of March 31, 2010 were $2.0
million compared to $18,000 at December 31, 2009.


28




Our
current liabilities as of March 31, 2010 were $7,203,000 compared to $2,532,000
at December 31, 2009, an increase of $4,671,000.  As of March 31,
2010, we had working capital deficit of $4,917,000 compared to working capital
deficit of $2,268,000 at December 31, 2009.




The
Company received net proceeds of approximately $2,100,000 in March 2010 from the
2010 Equity Financing.  The Company also acquired $519,000 of cash in
the merger with Ariston.




Our
available working capital and capital requirements will depend upon numerous
factors, including progress of our research and development programs, our
progress in and the cost of ongoing and planned nonclinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, in-licensing activities, competing technological
and market developments, changes in our existing collaborative and licensing
relationships, the resources that we devote to developing manufacturing and
commercializing capabilities, the status of our competitors, our ability to
establish collaborative arrangements with other organizations and our need to
purchase additional capital equipment.




Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing,
other collaborative agreements, strategic alliances, and our ability to realize
the full potential of our technology in development.  Such additional
funds may not become available on acceptable terms and there can be no assurance
that any additional funding that we do obtain will be sufficient to meet our
needs in the long term.  Through March 31, 2010, a significant portion
of our financing has been through private placements of common stock and
warrants.  Unless our operations generate significant revenues and
cash flows from operating activities, we will continue to fund operations from
cash on hand and through the similar sources of capital previously
described.  We can give no assurances that any additional capital that
we are able to obtain will be sufficient to meet our needs.  We
believe that we will continue to incur net losses and negative cash flows from
operating activities for the foreseeable future.




Based on
the resources of the Company available at March 31, 2010, management believes
that the Company has sufficient capital to fund its operations through
2010.  Management believes that the Company will need additional
equity or debt financing or will need to generate positive cash flow from the
Hedrin JV, or generate revenues through licensing of its products or entering
into strategic alliances to be able to sustain its operations into
2011.  Furthermore, the Company will need additional financing
thereafter to complete development and commercialization of its
products.  There can be no assurances that we can successfully
complete development and commercialization of our products.




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




We have
reported net losses of $1,633,000 and $762,000 for the three month periods ended
March 31, 2010 and 2009, respectively.  The net loss attributable to
common shares from date of inception, including preferred stock dividends,
August 6, 2001 to March 31, 2010, amounts to $63,567,000.  Management
believes that we will continue to incur net losses through at least March 31,
2011.


29




Joint
Venture Agreement




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





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





The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The
Hedrin JV has engaged us to provide management services to the Hedrin JV in
exchange for an annualized management fee, which for the three month periods
ended March 31, 2010 and 2009 was approximately $75,000 and $109,000,
respectively.




The
profits of the Hedrin JV will be shared by us and Nordic in accordance with our
respective equity interests in the Hedrin JV, of which we each currently hold
47.62%, except that Nordic is entitled to receive a minimum return each year
from the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Hedrin JV, before any distribution is made to
us.  If the Hedrin JV realizes a profit in excess of the Nordic
minimum return in any year, then such excess shall first be distributed to us
until our distribution and the Nordic minimum return are in the same ratio as
our respective equity interests in the Hedrin JV and then the remainder, if any,
is distributed to Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5.5 million) plus 10% per year, less the cumulative
distributions received by Nordic from the Hedrin JV before any distribution is
made to us.  If the Hedrin JV’s assets in liquidation exceed the
Nordic liquidation preference amount, then any excess shall first be distributed
to us until our distribution and the Nordic liquidation preference amount are in
the same ratio as our respective equity interests in the Hedrin JV and then the
remainder, if any, is distributed to Nordic and us in the same ratio as our
respective equity interests.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.




Pursuant
to the terms of the joint venture agreement, Nordic has the right to nominate
one person for election or appointment to our board of directors.  The
Hedrin JV's board of directors consists of four members, two members appointed
by us and two members appointed by Nordic.  Nordic has the right to
appoint one of the directors as chairman of the board.  The chairman
has certain tie breaking powers.





Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.07, as adjusted for the 2010 Equity Financing, and as further adjusted
from time to time for stock splits and other specified events, multiplied by a
conversion factor, which is (i) 1.00 for so long as Nordic's distributions from
the Hedrin JV are less than the amount of its investment, (ii) 1.25 for so long
as Nordic's distributions from the Hedrin JV are less than two times the amount
of its investment but greater than or equal to the amount of its investment
amount, (iii) 1.50 for so long as Nordic's distributions from the Hedrin JV are
less than three times the amount of its investment but greater than or equal to
two times the amount of its investment amount, (iv) 2.00 for so long as Nordic's
distributions from the Hedrin JV are less than four times the amount of its
investment but greater than or equal to three times the amount of its investment
amount and (v) 3.00 for so long as Nordic’s distributions from Hedrin JV are
greater than or equal to four times the amount of its investment.  The
put right expires upon the earlier to occur of (i) February 25, 2018 and (ii) 30
days after the date when Nordic's distributions from the Hedrin JV exceed five
times the amount Nordic has invested in the Hedrin JV (or 10 days after such
date if we have provided Nordic notice thereof).


30





Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.07, as adjusted for the sale of  the Secured
12% Notes in the fourth quarter of 2008, and as further adjusted from time to
time for stock splits and other specified events.  The call right is
only exercisable by us if the price of our common stock has closed at or above
$1.40 per share for 30 consecutive trading days.  During the first 30
consecutive trading days in which our common stock closes at or above $1.40 per
share, we may exercise up to 25% of the call right.  During the second
30 consecutive trading days in which our common stock closes at or above $1.40
per share, we may exercise up to 50% of the call right on a cumulative
basis.  During the third consecutive 30 trading days in which our
common stock closes at or above $1.40 per share, we may exercise up to 75% of
the call right on a cumulative basis.  During the fourth consecutive
30 days in which our common stock closes at or above $1.40 per share, we may
exercise up to 100% of the call right on a cumulative basis.  Nordic
may refuse the call, either by paying $1.5 million multiplied by the percentage
of Nordic's investment being called or forfeiting an equivalent portion of the
put right, calculated on a pro rata basis for the percentage of the Nordic
equity interest called by us.   The call right expires on
February 25, 2013.  For purposes of Nordic’s right to put, and our
right to call, all or a portion of Nordic’s equity interest in the Hedrin JV,
the amount of Nordic’s investment is currently $5,000,000.





In
connection with our joint venture agreement, on February 25, 2008, Nordic paid
us a non-refundable fee of $150,000 in exchange for the right to receive a
warrant to purchase up to 14,285,714 shares of our common stock at $0.07 per
share, as adjusted for the 2010 Equity Financing, and as further adjusted from
time to time for stock splits and other specified events.





In connection with the joint venture
agreement, we and Nordic entered into a registration rights agreement, on
February 25, 2008, as modified pursuant to a letter agreement, dated September
17, 2008, pursuant to which we agreed to file with the Securities and Exchange
Commission, or the SEC, by no later than 10 calendar days following the date on
which our Annual Report on Form 10-K for the year ended December 31, 2007 is
required to be filed with the SEC, which was subsequently waived by Nordic until
May 1, 2008, an initial registration statement registering the resale by Nordic
of any shares of our common stock issuable to Nordic through the exercise of the
warrant or the put right.  We filed an initial registration statement
on May 1, 2008, which was declared effective on October 15, 2008.





We also
have agreed to file with the SEC any additional registration statements which
may be required no later than 45 days after the date we first know such
additional registration statement is required; provided, however, that (i) in
the case of the classification by the FDA of Hedrin as a Class II or Class III
medical device described above and the payment in full by Nordic of the related
final milestone payment of $1.25 million, the registration statement with
respect to the additional shares of our common stock relating to such additional
investment must be filed within 45 days after achievement of such
classification; and (ii) in the event we provide Nordic with notice of exercise
of our right to call all or a portion of Nordic's equity interest in the Hedrin
JV, a registration statement with respect to the shares of our common stock
payable to Nordic in connection with such call right (after giving effect to any
reduction in the number of such shares resulting from Nordic's refusal of all or
a portion of such call in accordance with the terms of our joint venture
agreement) must be filed within 16 days after delivery of such notice to
Nordic.  If we fail to file a registration statement on time or if a
registration statement is not declared effective by the SEC within 105 days of
the required filing date, or otherwise fail to diligently pursue registration
with the SEC in accordance with the terms of the registration rights agreement,
we will be required to pay as partial liquidated damages and not as a penalty,
to Nordic or its assigns, an amount equal to 0.5% of the amount invested in the
Hedrin JV by Nordic pursuant to the joint venture agreement per month until the
registration rights agreement is declared effective by the SEC; provided,
however, that in no event shall the aggregate amount payable by us exceed 9% of
the amount invested in the Hedrin JV by Nordic under the joint venture
agreement.


31





The
Company was required to file an additional registration statement with 45 days
of Nordic’s investment of an additional $1.25 million in the Hedrin JV in
February 2009.  The Company did not meet this requirement as it had
our registration statements pending.  The Company has requested a
waiver until May 31, 2009 of Nordic’s registration rights in order to meet this
obligation.  Nordic has verbally agreed to the waiver.





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





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





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





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





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





Disagreement
with Nordic


In April
2010 Nordic filed a Schedule 13D/A (the “Amended 13D”). We are
not in agreement with the Amended 13D and have written a letter to Nordic
explaining its disagreements.  The Amended 13D shows an aggregate
number of shares of the Company’s common stock beneficially owned by Nordic of
216,666,666, or 65.5%.  We believe the correct beneficial ownership is
85,714,286 shares, or 42.9%.  The Amended 13D/A states that Nordic
does not believe the Company’s determination of the anti-dilution shares
accruing to Nordic as a result of the 2010 Equity Financing was neither
reasonable nor made in good faith.  As we have previously stated we
believe our determination was both reasonable and made in good
faith.  The Amended 13D/A further states that Nordic acquired the
right to purchase an additional 5,555,556 shares of the Company’s common stock
upon exercise of the Nordic Put as a result of Nordic’s making an additional
investment in the Hedrin JV of $500,000 in January 2010.  We are not
in agreement with this claim, there is no adjustment to Nordic’s Put as a result
of Nordic making additional capital contributions to the Hedrin
JV.  In the letter to Nordic the Company also points out that Nordic’s
valuation suggestions for the warrants issued in the 2010 Equity Financing
ignore the concept of relative value inherent in the Hedrin JV
Agreement.


32


2010
Equity Financing





On March
and April 2010, we raised aggregate gross proceeds of approximately $2.6 million
pursuant to a private placement of our securities (the “2010 Equity
Financing”).  We sold an aggregate of 104.3 Units  for a
purchase price of $25,000 per Unit.  We issued to each Investor units
(the "Units") consisting of  357,143 shares of common stock, $0.001
par value per share of the Company and 535,714 warrants, each of which will
entitle the holder to purchase one additional share of Common Stock for a period
of five years at an exercise price of $0.08 per share.In
addition in April 2010, the holder of the 12% Convertible Note with a stated
value of $400,000 and $21,886 of accrued interest, exercised its option to
convert its Debenture (including all accrued interest thereon) into 16.88
Units.  The conversion price was equal to the per Unit purchase price
paid by the Investors in the private placement.





Convertible
12% Note Payable





In October 2009, we sold a 12% Original
Issue Discount Senior Subordinated Convertible Debenture with a stated value of
$400,000 and a warrant to purchase 2,222,222 shares of the Company’s common
stock, par value $.001 per share  for a purchase price of
$200,000.  The Convertible 12% Note is convertible into shares of
Common Stock at an initial conversion price of $0.09 per share, subject to
adjustment, or, in the event the Company issues new securities in connection
with a financing, the Convertible 12% Note may be converted into such new
securities at a conversion price equal to the purchase price paid by the
purchasers of such new securities.  The Convertible 12% Note was
converted into the 2010 Equity Financing in April 2010 as described
above.





Secured
10% Notes Payable





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





Secured
12% Notes Payable




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





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


33





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





Commitments




Development
Commitments




At
present the Company has no development commitments.




Research
and Development Projects




Hedrin




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




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




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




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


34


In the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a medical device.  In January 2009, the U.S.
Food and Drug Administration (“FDA”) Center for Devices and Radiological Health
(“CDRH”) notified H Pharmaceuticals that Hedrin had been classified as a Class
III medical device.  A Class III designation means that a Premarket
Approval (“PMA”) Application will need to be obtained before Hedrin can be
marketed in the U.S.  The Company expects to be required to complete
at least one clinical trial as part of that PMA Application.  At a
July 2009 meeting with the FDA, the FDA requested of the Hedrin JV that the
confirmatory clinical trials consist of two parallel studies.  The
Hedrin JV estimates that each of the parallel studies will consist of 60
patients.  In April 2010, the Hedrin JV received correspondence from
the FDA in which the FDA raised certain questions about the non-clinical aspects
of Hedrin.  The Hedrin JV is in the process of responding to those
questions and will not be able to commence the confirmatory clinical trials
until such questions are responded to, to the satisfaction of the
FDA.




To date,
we have incurred $1,084,000 of project costs for the development of
Hedrin.  None of these costs were incurred during the three month
period ended March 31, 2010.  We do not expect to incur any future
costs as the Hedrin JV is now responsible for all costs associated with
Hedrin.




Topical
GEL for Psoriasis




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




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




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




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




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




To date,
we have incurred $6,504,000 of project costs related to our development of
Topical PTH (1-34).  These project costs have been incurred since
April 1, 2005, the date of the Tarpan Therapeutics acquisition.  None
of these costs were incurred during the three month period ended March 31,
2010.


35




Summary
of Contractual Commitments




Employment
Agreement




None.




Off-Balance
Sheet Arrangements




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




Critical
Accounting Policies




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




Use
of Estimates




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




Research
and Development Expenses




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




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




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




Share-Based
Compensation




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


36





Item
3.  Quantitative and Qualitative Disclosure About Market Risk


Our
exposure to market risk is confined to our cash and cash equivalents. We have
attempted to minimize risk by investing in high-quality financial instruments,
primarily money market funds with no security having an effective duration
longer than 90 days. If the market interest rate decreases by 100 basis points
or 1%, the fair value of our cash and cash equivalents portfolio would have
minimal to no impact on the carrying value of our portfolio. We did not hold any
derivative instruments as of March 31, 2010, and we have never held such
instruments in the past.





Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of
March 31, 2010, we carried out an evaluation, under the supervision and with the
participation of our Principal Executive Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)). Based upon that evaluation, our Chief Operating
and Financial Officer concluded that our disclosure controls and procedures were
effective as of that date to ensure that information required to be disclosed in
our reports filed or submitted under the Exchange Act is recorded , processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and to ensure that information required to be disclosed by us in such
reports is accumulated and communicated to the our management, including our
Chief Operating and Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.  There were no changes in our internal
controls over financial reporting (as defined in Exchange Act Rules 13a – 15(f)
and 15d – 15(f)) during  the quarter ended March 31, 2010 that have
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.




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




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


37


Changes
in Internal Control




During
the quarter ended March 31, 2010, there were no changes in internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting.


38


Part
II – Other Information





Item
1.  Legal Proceedings





None.





Item
1A.  Risk Factors




We
are controlled by current officers, directors and principal stockholders; a
dispute with our Hedrin JV joint venture partner may adversely affect the
Company.




Our
directors, executive officers and principal stockholders beneficially own
approximately 20 percent of our outstanding voting stock and, including shares
underlying outstanding options and warrants.   In addition, Nordic
Biotech Venture Fund has the right to acquire up to 85,714,285 shares of our
common stock which would result in Nordic owning approximately 43% of our common
stock as of March 23, 2010 (although, as described in Note 18 to our financial
statements at and for the Years ended December 231, 2009 and 2008, and as
described in an amendment to Nordic’s 13-D filing with respect to the Company,
an anti-dilution calculation with respect to this amount has been disputed by
Nordic; Nordic alleges that using an alternative approach to valuing the
Company’s recent private placement of stock and warrants, an approach that the
Company believes is neither correct nor appropriate, as a result of the
anti-dilution adjustment Nordic would beneficially own 85,714,286 shares of our
common stock, which represents 42.9% of our common stock as of March 23,
2010).  Through its stock ownership, its right to acquire additional
shares, its substantial control over the management of the Hedrin JV (which
includes the ability to terminate our management contract with the Hedrin JV),
Nordic has the ability to exert substantial influence over the election of our
Board of Directors, the outcome of issues submitted to our stockholders, the
development of Hedrin and our ability, as a company, to benefit from the
successful development of Hedrin.  Even without the exercise of its rights
to acquire additional shares of our common stock, our directors, officers and
principal stockholders, taken as a whole, have the ability to exert substantial
influence over the election of our Board of Directors and the outcome of
issues submitted to our stockholders.  Any dispute with Nordic,
including the dispute concerning the appropriate valuation methodology for the
antidilution calculation, may adversely affect the Company’s operations and the
Company’s ability to raise additional capital in the future, and may divert the
Company’s limited management time and attention,




Item
6.  Exhibits




Exhibit No.
                  
                  Description31.1
                  
                  Certification
      of Principal Executive and Financial Officer32.1
                  
                  Certifications
      of Principal Executive and Financial Officer pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.


39


SIGNATURES





In accordance with the requirements of
the Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





MANHATTAN
      PHARMACEUTICALS, INC.Date:
      May 24, 2010
                  By:
                  /s/  Michael G.
    McGuinnessMichael
      G. McGuinnessPrincipal
      Executive
Officer


40


Index to Exhibits Filed with
this Report




Exhibit
      No.
                      
                      Description31.1
                      
                      Certification
      of Principal Executive and Financial Officer.32.1
                      
                      Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.


41