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 September 30, 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
November 8, 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
                                10Item
      2.
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                26Item
      3.
                                Quantitative
      and Qualitative Disclosure About Market Risk
                                39Item
      4.
                                Controls
      and Procedures
                                39PART
      II
                                OTHER
      INFORMATIONItem
      1.
                                Legal
      Proceedings
                                40Item
      1A.
                                Risk
      Factors
                                40Item
      6.
                                Exhibits
                                40Signatures
                                41




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 SUBSIDIARY


(A
Development Stage Company)


Condensed
Consolidated Balance Sheets





September
      30,
                          
                          
                          December
      31,2010
                          
                          
                          2009(unaudited)
                          
                          
                          (See
      Note 1)AssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          1,075,966
                          
                          
                          $
                          17,996Debt
      issue costs, current portion
                          
                          
                          44,260
                          
                          
                          
                          158,552Other
      current assets
                          
                          
                          147,435
                          
                          
                          
                          87,177Total
      current assets
                          
                          
                          1,267,661
                          
                          
                          
                          263,725In-process
      research and development
                          
                          
                          17,742,110
                          
                          
                          
                          -Property
      and equipment, net
                          
                          
                          3,741
                          
                          
                          
                          3,541Debt
      issue costs
                          
                          
                          -
                          
                          
                          
                          77,026Other
      assets
                          
                          
                          21,370
                          
                          
                          
                          21,370Total
      assets
                          
                          $
                          19,034,882
                          
                          
                          $
                          365,662Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Notes
      payable, current portion, net
                          
                          $
                          2,036,645
                          
                          
                          $
                          1,274,062Accounts
      payable and accrued expenses
                          
                          
                          395,817
                          
                          
                          
                          291,175Interest
      payable, current portion
                          
                          
                          415,256
                          
                          
                          
                          182,193Derivative
      liability
                          
                          
                          1,359,998
                          
                          
                          
                          784,777Total
      current liabilities
                          
                          
                          4,207,716
                          
                          
                          
                          2,532,207Notes
      payable, noncurrent portion, net
                          
                          
                          16,179,693
                          
                          
                          
                          614,181Interest
      payable, noncurrent portion
                          
                          
                          433,537
                          
                          
                          
                          55,048Exchange
      obligation
                          
                          
                          3,949,176
                          
                          
                          
                          3,949,176Total
      liabilities
                          
                          
                          24,770,122
                          
                          
                          
                          7,150,612Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no shares issued and
      outstanding at September 30, 2010 and December 31, 2009
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, $.001 par value. Authorized 500,000,000 shares; 120,965,260 shares
      issued and outstanding at September 30, 2010 and 70,624,232 shares issued
      and outstanding on December 31, 2009
                          
                          
                          120,966
                          
                          
                          
                          70,624Contingently
      issuable shares
                          
                          
                          15,890
                          
                          
                          
                          -Additional
      paid-in capital
                          
                          
                          55,802,925
                          
                          
                          
                          55,077,861Deficit
      accumulated during the development stage
                          
                          
                          (61,675,021
                          )
                          
                          
                          (61,933,435
                          )Total
      stockholders’ deficiency
                          
                          
                          (5,735,240
                          )
                          
                          
                          (6,784,950
                          )Total
      liabilities and stockholders' deficiency
                          
                          $
                          19,034,882
                          
                          
                          $
                          365,662





See
accompanying notes to condensed consolidated financial
statements.


4


MANHATTAN PHARMACEUTICALS, INC. and
SUBSIDIARY


(A
Development Stage Company)


Condensed
Consolidated Statements of Operations


(Unaudited)





Three months ended
                  September 30,
                
                
                Nine months ended
                  September 30,
                
                
                Cumulative
                  period
      from
                  August
      6, 2001
                  (inception)
      to
                  September
      30,2010
                
                
                2009
                
                
                2010
                
                
                2009
                
                
                2010Revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Costs
      and expenses:Research
      and development
                
                
                236,734
                
                
                
                5,574
                
                
                
                305,500
                
                
                
                57,154
                
                
                
                28,637,711General
      and administrative
                
                
                278,897
                
                
                
                390,066
                
                
                
                1,264,666
                
                
                
                1,373,083
                
                
                
                19,458,121In-process
      research and development charge
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,887,807Impairment
      of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,248,230Loss
      on disposition of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,213,878Total
      operating expenses
                
                
                515,631
                
                
                
                395,640
                
                
                
                1,570,166
                
                
                
                1,430,237
                
                
                
                62,445,747Operating
      loss
                
                
                (515,631
                )
                
                
                (395,640
                )
                
                
                (1,570,166
                )
                
                
                (1,430,237
                )
                
                
                (62,445,747
                )Other
      (income) expense:Equity
      in losses of Hedrin JV
                
                
                -
                
                
                
                105,362
                
                
                
                -
                
                
                
                337,048
                
                
                
                750,000Change
      in fair value of derivative liability
                
                
                (830,165
                )
                
                
                (157,778
                )
                
                
                (2,696,900
                )
                
                
                658,889
                
                
                
                (2,266,830
                )Interest
      and other income
                
                
                (76,275
                )
                
                
                (63,873
                )
                
                
                (228,305
                )
                
                
                (252,500
                )
                
                
                (2,095,534
                )Interest
      expense
                
                
                349,562
                
                
                
                136,738
                
                
                
                937,555
                
                
                
                396,698
                
                
                
                1,578,955Loss
      on early extinguishment of debt
                
                
                -
                
                
                
                -
                
                
                
                159,070
                
                
                
                -
                
                
                
                159,070Realized
      gain on sale of marketable equity securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (76,032
                )Total
      other (income) expense
                
                
                (556,878
                )
                
                
                20,449
                
                
                
                (1,828,580
                )
                
                
                1,140,135
                
                
                
                (1,950,371
                )Net
      income  (loss)
                
                
                41,247
                
                
                
                (416,089
                )
                
                
                258,414
                
                
                
                (2,570,372
                )
                
                
                (60,495,376
                )Preferred
      stock dividends (including imputed amounts)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,179,645
                )Net
      income (loss) applicable to common shares
                
                $
                41,247
                
                
                $
                (416,089
                )
                
                $
                258,414
                
                
                $
                (2,570,372
                )
                
                $
                (61,675,021
                )Net
      income (loss) per common share:Basic
      and diluted
                
                $
                0.00
                
                
                $
                (0.01
                )
                
                $
                0.00
                
                
                $
                (0.04
                )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                
                
                120,965,244
                
                
                
                70,624,232
                
                
                
                108,812,838
                
                
                
                70,624,232





See
accompanying notes to condensed consolidated financial
statements.


5




MANHATTAN PHARMACEUTICALS, INC. and
SUBSIDIARY


(A
Development Stage Company)


Condensed
Consolidated Statements of Stockholders' Equity (Deficiency)


(Unaudited)




Common
                      stock
                      shares
                    
                    
                    Common
                      stock
                      amount
                    
                    
                    Additional
                      paid-
                      incapital
                    
                    
                    Deficit
                      accumulated
                      during
      the
                      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 SUBSIDIARY


(A
Development Stage Company)


Condensed
Consolidated Statements of Stockholders' Equity (Deficiency)


(Unaudited)





Common
                      stock
                      shares
                    
                    
                    Common
                      stock
                      amount
                    
                    
                    Additional
                      paid-in
                      capital
                    
                    
                    Deficit
                      accumulated
                      during
      the
                      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 directors at $0.72 per share in satisfaction of accounts
      payable
                    
                    
                    27,776
                    
                    
                    
                    28
                    
                    
                    
                    19,972
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,000Common
      stock issued 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
                    
                    
                    43,278,605
                    
                    
                    
                    43,279
                    
                    
                    
                    2,542,207
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,585,486Shares
      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
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,497,898
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,497,898
                    )Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    211,771
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    211,771Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    258,414
                    
                    
                    
                    -
                    
                    
                    
                    258,414Balance
      at September 30, 2010
                    
                    
                    120,965,260
                    
                    
                    $
                    120,966
                    
                    
                    $
                    55,802,925
                    
                    
                    $
                    (61,675,021
                    )
                    
                    $
                    15,890
                    
                    
                    $
                    (5,735,240
                    )





See
accompanying notes to condensed consolidated financial
statements.


7





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(A
Development Stage Company)


Condensed
Consoliated Statements of Cash Flows


(Unaudited)





Nine
      months ended September 30,
                    
                    
                    Cumulative
      period
                      from
      August 6, 2001
                      (inception)
      to2010
                    
                    
                    2009
                    
                    
                    September
      30, 2010Cash
      flows from operating activities:Net
      income/(loss)
                    
                    $
                    258,414
                    
                    
                    $
                    (2,570,372
                    )
                    
                    $
                    (60,495,376
                    )Adjustments
      to reconcile net income/(loss) to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                    
                    
                    -
                    
                    
                    
                    337,048
                    
                    
                    
                    750,000Share-based
      compensation
                    
                    
                    211,771
                    
                    
                    
                    271,075
                    
                    
                    
                    4,394,082Amortization
      of OID and issue costs on Secured 12% Notes
                    
                    
                    288,772
                    
                    
                    
                    380,261
                    
                    
                    
                    872,745Change
      in fair value of derivative liability
                    
                    
                    (2,696,900
                    )
                    
                    
                    658,889
                    
                    
                    
                    (2,266,830
                    )Loss
      on early extinguishment of debt
                    
                    
                    159,070
                    
                    
                    
                    -
                    
                    
                    
                    159,070Shares
      issued in connection with in-licensing agreement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    232,500Amortization
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    145,162Depreciation
                    
                    
                    2,644
                    
                    
                    
                    4,297
                    
                    
                    
                    230,106Noncash
      portion of in-process research and development charge
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,721,623Loss
      on impairment and disposition of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,462,108Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    31,555Changes
      in operating assets and liabilities, net of acquisitions:Decrease
      in restricted cash
                    
                    
                    -
                    
                    
                    
                    730,499
                    
                    
                    
                    -Decrease/(increase)
      in prepaid expenses and other current assets
                    
                    
                    60,612
                    
                    
                    
                    (48,891
                    )
                    
                    
                    31,678Decrease/(increase)
      in other assets
                    
                    
                    -
                    
                    
                    
                    13,525
                    
                    
                    
                    (36,370
                    )Increase/(decrease)
      in accounts payable and accrued expenses
                    
                    
                    (332,972
                    )
                    
                    
                    (498,983
                    )
                    
                    
                    49,994Increase
      in interest payable, current portion
                    
                    
                    233,063
                    
                    
                    
                    
                    
                    
                    
                    233,063Increase
      in interest payable, noncurrent portion
                    
                    
                    387,156
                    
                    
                    
                    
                    
                    
                    
                    387,156Net
      cash used in operating activities
                    
                    
                    (1,428,370
                    )
                    
                    
                    (722,652
                    )
                    
                    
                    (41,097,734
                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    (2,844
                    )
                    
                    
                    -
                    
                    
                    
                    (242,452
                    )Cash
      acquired 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
                    
                    
                    516,521
                    
                    
                    
                    -
                    
                    
                    
                    886,821Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                    
                    
                    -
                    
                    
                    
                    500,000
                    
                    
                    
                    3,199,176Proceeds
      from sale of notes payable
                    
                    
                    -
                    
                    
                    
                    340,270
                    
                    
                    
                    1,345,413Repayments
      of notes payable
                    
                    
                    (193,667
                    )
                    
                    
                    (70,000
                    )
                    
                    
                    (887,067
                    )Proceeds
      related to sale of common stock, net
                    
                    
                    2,163,486
                    
                    
                    
                    -
                    
                    
                    
                    28,059,748Proceeds
      from sale of preferred stock, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,046,176Proceeds
      from exercise of warrants and stock options and sale of
      warrant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    288,219Other,
      net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    235,214Net
      cash provided by financing activities
                    
                    
                    1,969,819
                    
                    
                    
                    770,270
                    
                    
                    
                    41,286,879Net
      increase in cash and cash equivalents
                    
                    
                    1,057,970
                    
                    
                    
                    47,618
                    
                    
                    
                    1,075,966Cash
      and cash equivalents at beginning of period
                    
                    
                    17,996
                    
                    
                    
                    106,023
                    
                    
                    
                    -Cash
      and cash equivalents at end of period
                    
                    $
                    1,075,966
                    
                    
                    $
                    153,641
                    
                    
                    $
                    1,075,966





See
accompanying notes to condensed consolidated financial statements.




8





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(A
Development Stage Company)


Condensed
Consoliated Statements of Cash Flows


(Unaudited)





Nine
      months ended September 30,
                    
                    
                    Cumulative
      period
                      from
      August 6, 2001
                      (inception)
      to2010
                    
                    
                    2009
                    
                    
                    September
      30, 2010Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    28,212
                    
                    
                    $
                    -
                    
                    
                    $
                    59,642Supplemental
      disclosure of noncash investing and financing activities:Issuance
      of common stock for acquisitions
                    
                    $
                    1,491,937
                    
                    
                    $
                    -
                    
                    
                    $
                    14,881,163Conversion
      of debt to common stock and warrants
                    
                    
                    422,000
                    
                    
                    
                    -
                    
                    
                    
                    422,000Investment
      in Hedrin JV
                    
                    
                    500,000
                    
                    
                    
                    500,000
                    
                    
                    
                    750,000Warrants
      issued with notes payable
                    
                    
                    -
                    
                    
                    
                    53,044
                    
                    
                    
                    250,562Note
      issued to settle accrued expenses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    211,900Common
      stock issued in satisfaction of accounts payable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    770,000Imputed
      and accrued preferred stock dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,179,644Conversion
      of preferred stock to common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,067Preferred
      stock dividends paid by issuance of shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    759,134Issuance
      of common stock 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
                    )Cashless
      exercise of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    33





See
accompanying notes to condensed consolidated financial
statements


9


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of Manhattan
Pharmaceuticals, Inc.  (“Manhattan”) and subsidiaries (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
September 30, 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, Manhattan 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 Manhattan.  The operating results of
Ariston from March 8, 2010 to September 30, 2010 are included in the
accompanying condensed consolidated statements of operations.  The
condensed consolidated balance sheet as of September 30, 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
September 30, 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 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. On April 8, 2010, the
holder of the convertible 12% note exercised its option to convert (see Note
6).





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.




10


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





New
Accounting Pronouncements





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued a new
pronouncement, Improving Disclosures about Fair Value Measurements. 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 April 2010, the FASB
issued a new pronouncement “Revenue Recognition – Milestone Method”. This
pronouncement provides  guidance on the criteria that should be met
for determining whether the milestone method of revenue recognition is
appropriate.  A vendor can recognize consideration that is contingent upon
achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered
substantive.  The following criteria must be met for a milestone to be
considered substantive.  The consideration earned by achieving the
milestone should 1.  Be commensurate with either the level of effort
required to achieve the milestone or the enhancement of the value of the item
delivered as a result of a specific outcome resulting from the vendor’s
performance to achieve the milestone.  2, Related solely to past
performance.  3.  Be reasonable relative to all deliverables and
payment terms in the arrangement.  No bifurcation of an individual
milestone is allowed and there can be more than one milestone in an
arrangement.  Accordingly, an arrangement may contain both substantive and
nonsubstantive milestones.   This pronouncement is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010.  The adoption of
this guidance does not have a material impact on our financial
statements.





Ariston
Merger





On March
8, 2010, Manhattan 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
Manhattan.





Under the
terms of the Merger Agreement, the consideration payable by Manhattan to the
stockholders and note holders of Ariston consists of the issuance of 7,062,423
shares of Manhattan’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 Manhattan 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 Manhattan  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 Manhattan’s  Common Stock at the rate of
$0.40 per share.  Further, Manhattan  has reserved 5,000,000
shares of its Common Stock for possible future issuance in connection with the
conversion of the $1.0 million outstanding Ariston convertible promissory note
issued in satisfaction of a trade payable.  The noteholder will not have
any recourse to Manhattan  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 Manhattan’s  Common Stock at the rate of $0.20
per share.





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


·
            Upon the affirmative decision of
      Manhattan’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, Manhattan  would
      issue 8,828,029 of the Milestone
Shares.


·
            Upon the acceptance by the FDA of
      the Ariston’s filing of the first New Drug Application for the AST-726
      product candidate, Manhattan 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, Manhattan would issue 8,828,029 of the Milestone
      Shares.


11


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Certain
members and former members of Manhattan’s  board of directors and
principal stockholders of Manhattan 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 or 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.





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-licensed,
developed and planned 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.  At the time of the Merger, the
Company did not believe the attainment of the milestone for AST-915 was highly
probable and, therefore, 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 September 30,
2010 as a component of stockholders’ deficiency, contingently issuable
shares.





The
following table summarizes the 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




12


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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 September 30, 2009 and nine month period
ended September 30, 2009 and on January 1, 2010 for the quarter ended September
30, 2010 and the nine month period ended September 30, 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 September 30,
                    
                    
                    Nine months ended September
    30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Revenue
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Net
      income(loss)
                    
                    $
                    41,247
                    
                    
                    $
                    (731,126
                    )
                    
                    $
                    104,411
                    
                    
                    $
                    (4,328,629
                    )Basic
      and diluted earnings(loss) per share
                    
                    $
                    0.01
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.00
                    
                    
                    $
                    (0.06
                    )





2.
            LIQUIDITY





The
Company had a net income of $258,414 and negative cash flows from operating
activities of $1,428,370 for the nine month period ended September 30, 2010. The
net loss applicable to common shares from date of inception, August 6, 2001, to
September 30, 2010 amounts to $61,675,021.





During
the nine months ended September 30, 2009 the Company received approximately $0.3
million from the final closing of the sale of Secured 12% Notes and
approximately $0.5 million from a joint venture agreement.





During
the nine months ended September 30, 2010, the Company received $40,000 from
Ariston Pharmaceuticals, Inc. in exchange for notes in January 2010 and
approximately $2.2 million from an equity financing transaction (see Note 7). In
addition approximately $422,000 of notes payable and interest payable thereon
was converted in this equity financing transaction.  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
September 30, 2011 and for the foreseeable future.  Based on the resources
of the Company available at September 30, 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. In addition, $1,725,000 principal amount of
debt plus interest thereon matures in three tranches beginning in November
2010.  The Company does not have the funds to repay this debt and is
negotiating with representatives of the debt holders for either an extension of
the maturity date or a conversion into of the debt into equity.  If
the Company cannot reach agreement with the debt holders the Company will be in
default on the debt. 
 In
November 2010 $1,316,000 of principal and interest matures, in December 2010
$356,000 of interest and principal matures and in February 2011 $521,000 of
principal and interest matures.  If the Company defaults on these debt
obligations the debtholders have the right to appoint a collateral agent and
have that collateral agent foreclose on the collateral.  The
collateral is principally comprised of Manhattan’s investment in Ariston and the
Company’s interest in the Hedrin JV.  Foreclosure on the collateral
would render the Company bankrupt.  If the Company cannot reach
agreement with the debtholders the Company may have to file for voluntary
bankruptcy.
  The
Company does not have the financial resources necessary to conduct the pivotal
trial of AST-726 and will have to raise funds for that
purpose.




The
Company’s continued operation 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.


13


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





3.
            COMPUTATION OF NET INCOME (LOSS)
      PER COMMON SHARE





Basic net
income (loss) per common share is calculated by dividing net income
(loss)  applicable to common shares by the weighted-average number of
common shares outstanding for the period.  Diluted net income
(loss)  per common share is the same as basic net income
(loss)  per common share for the three and nine months ended September
30, 2009, since potentially dilutive securities from stock options and stock
warrants would have an antidilutive effect because the Company incurred a net
loss during each of those periods.  The amounts of potentially dilutive
securities excluded from the calculation were 211,559,852 and 99,159,628 shares
at September 30, 2010 and 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). At September 30, 2010, all of the dilutive
securities are out of the money and are, therefore, excluded from the
computation of diluted earnings per share for the three and nine month periods
ended September 30, 2010.





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.
On January 1, 2006, the Company adopted the share-based payment method for
employee options using the modified prospective transition method.  Under
the modified prospective transition method, the Company recognized compensation
cost for the quarters ended September 30, 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 accounting
methodology.





The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.    The Company
recognized share-based compensation cost of $5,630 and $78,605 for the three
month periods ended September 30, 2010 and 2009 respectively, and $211,771 and
$271,075 for the nine month periods ended September 30, 2010 and 2009,
respectively.  The Company did not capitalize any share-based
compensation cost.


14


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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, the Company recognized share-based
compensation cost of $33 and $107, respectively, for the three-and nine months
ended September 30, 2010 and $382 and $1,151, respectively, for the three-and
nine months ended September 30, 2009.  The Company has allocated
share-based compensation costs to general and administrative and research and
development expenses as follows:





Three months ended
                    September 30,
                  
                  
                  Nine months ended September
                    30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009General
      and administrative expense:Share-based
      employee compensation cost
                  
                  $
                  5,597
                  
                  
                  $
                  78,223
                  
                  
                  $
                  211,664
                  
                  
                  $
                  269,924Share-based
      consultant and non-employee cost
                  
                  
                  3
                  
                  
                  
                  38
                  
                  
                  
                  11
                  
                  
                  
                  1155,600
                  
                  
                  
                  78,261
                  
                  
                  
                  211,675
                  
                  
                  
                  270,039Research
      and development expense:Share-based
      employee compensation cost
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Share-based
      consultant and non-employee cost
                  
                  
                  30
                  
                  
                  
                  344
                  
                  
                  
                  96
                  
                  
                  
                  1,03630
                  
                  
                  
                  344
                  
                  
                  
                  96
                  
                  
                  
                  1,036Total
      share-based cost
                  
                  $
                  5,630
                  
                  
                  $
                  78,605
                  
                  
                  $
                  211,771
                  
                  
                  $
                  271,075




To
compute compensation charges 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:




Nine months ended September
    30,2010
                            
                            
                            2009Expected
      volatility
                            
                            
                            88
                            %
                            
                            
                            94
                            %Dividend
      yield
                            
                            
                            -
                            
                            
                            
                            -Expected
      term (in years)
                            
                            
                            5.7
                            
                            
                            
                            6Risk-free
      interest rate
                            
                            
                            2.46
                            %
                            
                            
                            2.08
                            %


15


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




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 September 30, 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 September 30, 2010 options to purchase 11,574,936 shares were
outstanding, 27,776 shares of common stock were issued and  there were
4,524,528 shares reserved for future grants under the 2003 Plan.




In July
1995, the Company established the 1995 Stock Option Plan (the”1995 Plan”), which
provided for the granting of options to purchase up to 130,000 shares of the
Company’s common stock to officers, directors, employees and
consultants.  The 1995 Plan was amended several times to increase the
number of shares reserved for stock option grants.  In June 2005 the
1995 Plan expired and no further options can be granted.   At
September 30, 2010 options to purchase 1,127,240 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 September 30, 2010 and
changes during the period then ended is presented below:




Shares
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term(years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2009
                  
                  
                  7,459,936
                  
                  
                  $
                  0.718
                  
                  
                  
                  6.160Granted
                  
                  
                  4,125,000
                  
                  
                  $
                  0.070
                  
                  
                  
                  5.697Exercised
                  
                  
                  -Cancelled
                  
                  
                  (10,000
                  )
                  
                  $
                  0.280Outstanding
      at September 30, 2010
                  
                  
                  11,574,936
                  
                  
                  $
                  0.487
                  
                  
                  
                  7.220
                  
                  
                  $
                  -Exercisable
      at September 30, 2010
                  
                  
                  9,983,269
                  
                  
                  $
                  0.554
                  
                  
                  
                  6.870
                  
                  
                  $
                  -Weighted-average
      fair value of options granted during the nine month period ended September
      30, 2010
                  
                  $
                  0.046





As of
September 30, 2010, the total compensation cost related to nonvested option
awards not yet recognized is $61,919.  The weighted average period
over which it is expected to be recognized is approximately 2.42
years.




16


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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.





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 September 30, ,2010, the Company’s exchange obligation is
$3,949,176.




During
the nine months ended September 30, 2010 and 2009, the Company recognized $0 and
$337,048, 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 September 30, 2010 and $268,314 at September 30, 2009.  As
of September 30, 2010, the Company’s estimated share of the losses is $985,000;
equity in losses previously recognized was $500,000 leaving an estimated balance
of $485,000 of losses that were not recognized as of September 30, 2010, since
the investment was already written down to zero.




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 nine months
ended September 30, 2010 and 2009, the Company has recognized $225,000 and
$258,845, respectively, of other income from management fees earned from the
Hedrin JV which is included in the Company’s statements of operations for the
nine months ended September 30, 2010 and 2009 as a component of interest and
other income.


17


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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 with 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.





In April
2010 Nordic filed a Schedule 13D/A (the “Amended 13D”) with
the SEC. 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 and 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.





In July
2010, Nordic delivered a written notice to the Company for a $500,000 capital
increase to the Hedrin JV and made a $500,000 capital
contribution.  No valuation has been set yet for this capital
contribution.  Manhattan’s ownership interest will be reduced once the
valuation for this capital contribution is set.


18


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In a
letter dated October 19, 2010, addressed to the Hedrin JV, Thornton & Ross
(which licenses certain intellectual property with respect to the Hedrin product
to the Hedrin JV) made a demand for assurances and alleged that the Hedrin JV
has not used commercially reasonable efforts to develop and secure marketing
authorization for the Hedrin product and that the Hedrin JV does not have the
financial means to perform even the most basic obligations under the License
Agreement between Thornton & Ross and the Hedrin JV.  The
assurances that Thornton & Ross demand are: (1) a realistic and
comprehensive clinical development plan through FDA approval of the Hedrin
product, (2) an aggressive, yet realistic, development plan and timetable
through Hedrin product launch, (3) enforceable funding commitments from a liquid
source initially of up to $5 million, and (4) new management with the necessary
experience and commitment to move this program to successful
commercialization.





To the
Company’s knowledge, the Hedrin JV has not yet formally responded to Thornton
& Ross.  Our knowledge of the Hedrin JV’s efforts to develop and
secure marketing authorization for the Hedrin product, however, is limited from
and after August 18, 2010, as the Company has been denied its right to actively
participate in the Hedrin JV from and after that date.  (This is part
of the disputes with Nordic that the Company is currently trying to
resolve.)  The Company believes that subsequent to August 18, 2010,
representatives of Nordic and Thornton & Ross met, although no minutes of
that meeting have been provided to the Company.  Notwithstanding the
Company’s disputes with Nordic, the Company expects to work with Nordic to cause
the Hedrin JV to respond to the Thornton & Ross letter within 30 days of its
receipt by the Hedrin JV.





6.
            NOTES
    PAYABLE





The following is a summary of Notes
Payable:





At September30, 2010
                          
                          
                          At December31, 2009Current
                            portion, net
                          
                          
                          Noncurrent
                            portion, net
                          
                          
                          Total
                          
                          
                          Current
                            portion, net
                          
                          
                          Noncurrent
                            portion, net
                          
                          
                          TotalSecured
      12% Notes Payable
                          
                          $
                          1,703,312
                          
                          
                          $
                          -
                          
                          
                          $
                          1,703,312
                          
                          
                          $
                          1,247,062
                          
                          
                          $
                          384,473
                          
                          
                          $
                          1,631,5358%
      Note Payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          27,000
                          
                          
                          
                          -
                          
                          
                          
                          27,000Non-interest
      Bearing Note Payable
                          
                          
                          -
                          
                          
                          
                          226,900
                          
                          
                          
                          226,900
                          
                          
                          
                          -
                          
                          
                          
                          211,901
                          
                          
                          
                          211,901Convertible
      12% Note Payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          17,807
                          
                          
                          
                          17,807Convertible
      5% Notes Payable
                          
                          
                          -
                          
                          
                          
                          15,452,793
                          
                          
                          
                          15,452,793
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -ICON
      Convertible Note Payable
                          
                          
                          333,333
                          
                          
                          
                          500,000
                          
                          
                          
                          833,333
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          2,036,645
                          
                          
                          $
                          16,179,693
                          
                          
                          $
                          18,216,338
                          
                          
                          $
                          1,274,062
                          
                          
                          $
                          614,181
                          
                          
                          $
                          1,888,243


19


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




a.
           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.





National
Securities Corporation (“National”) was the placement agent for the Secured 12%
Notes Transaction.  National’s compensation for acting as placement
agent was 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 September 30, 2010 and December 31, 2009, accrued and
unpaid interest on the Secured 12% Notes amounted to approximately $415,000 and
$229,000, and is reflected in the accompanying balance sheets at September
30, 2010 and December 31, 2009, respectively, as part of interest 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 nine months ended September
30, 2010 and the year ended December 31, 2009, the amount amortized into
interest expense was approximately $157,000 and $206,000,
respectively.  The remaining unamortized balance of approximately
$44,000 and $201,000 is reflected in the accompanying balance sheets as of
September 30, 2010 and December 31, 2009, respectively, as debt issue
costs.





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 nine
months ended September 30, 2010 and year ended December 31, 2009 the amount
amortized into interest expense was approximately $72,000 and $94,000,
respectively.  The remaining unamortized balance of approximately
$22,000 and $93,000 has been netted against the face amount of Notes Payable in
the accompanying balance sheets as of September 30, 2010 and December 31, 2009,
respectively.


20


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





b.           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.




c.           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 nine months ended
September 30, 2010 and the year ended December 31, 2009, the Company amortized
$15,000 and $1,900 of the OID into interest expense,
respectively.  The remaining unamortized balance of $23,100 has been
netted against the face amount of Notes Payable in the accompanying balance
sheet as of September 30, 2010.





d.           Convertible
12% Note Payable


In
October 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
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 December 31, 2009, accrued and unpaid interest on the
Convertible 12% Note amounted to approximately  $9,000, and is
reflected in the accompanying balance sheet at December 31, 2009 as a component
of interest payable.





On April
8, 2010, the holder (the "Noteholder") of the outstanding Convertible12% Note,
dated October 28, 2009, with a stated value of $400,000 and $22,000 of accrued
interest, exercised its option to convert its note (including all accrued
interest thereon into 16.88 Units (as described in Note 7).  The
conversion price was equal to the per Unit purchase price paid by the Investors
in the private placement.  As a result of this conversion, the Company
accelerated the amortization of approximately $30,000 in issue costs and
$160,000 original issue discount, which is reflected as a loss on early
extinguishment in the accompanying statement of operations for the nine months
ended September 30, 2010.


21


MANHATTAN PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





e.
            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 Manhattan’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 AST-915.  The 5% Notes Payable are solely the obligation
of Ariston and have no recourse to Manhattan other than the conversion feature
discussed above.  For the nine months ended September 30, 2010, the
Company recorded approximately $434,000 in accrued interest, which is reflected
as a component of interest payable in the accompanying balance sheet as of
September 30, 2010.





f.
           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.  During the nine months ended September 30, 2010, the Company
has paid approximately $193,000 in principal and interest to
ICON.  For the nine months ended September 30, 2010, the Company
recorded approximately $26,000 in interest expense as reflected on the
accompanying statement of operations for the nine months ended September 30,
2010.





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.




22





MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The
following table shows the effect of Nordic’s anti-dilution rights.





Shares Issuable
                              Upon Exercise of
                              Nordic's Put
                            
                            
                            Shares Issuable
                              Upon Exercise of
                              Nordic's Warrant
                            
                            
                            Total Shares Issuable
                              Upon Exercise ofNordic's
                              Put and 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 5.)




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.





On April
8, 2010, the Company completed the final closing of the 2010 Equity
Financing.  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 of the Convertible 12% Note (see Note 6)
with a stated value of $400,000 and $22,000 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.


23


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





8.
            DERIVATIVE
      LIABILITY




In April
2008, the FASB issued ASC 815 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 its subsequent conversion in April 2010, 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 ASC 815, 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
September 30, 2010, the fair value of these derivatives was $198,571 as recorded
in the accompanying balance sheet as of September 30, 2010, as a component of a
current liability, derivative liability. The change of $(151,429) and $(284,762)
in fair value during the three and nine months ended September 30, 2010,
respectively, is reported as a noncash charge in the accompanying consolidated
statements of operations as a component of other (income) expense.





In
accordance with ASC 815 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.  On April 8, 2010,
the holder of the Convertible 12% Note exercised his option to
convert.  As a result, the derivative liability associated with the
notes were reclassified to Convertible 12% Note Payable with the change in fair
value from the date of issuance $29,506 reclassified as a loss on early
extinguishment of debt in the accompanying statement of operations for the nine
months ended September 30, 2010.  As of September 30, 2010 the fair
value of these derivatives related to the warrants outstanding totaled $39,600
and are recorded in the accompanying balance sheet as of September 30, 2010 as a
component of derivative liability.  The change in fair value of
$(28,356) and $(81,400) during the three and nine months ended September 30,
2010, respectively, is reported as a non-cash charge in the accompanying
consolidated statements of operations as a component of other (income)
expense.





In
addition, in accordance with ASC 815, the Company estimated the fair value at
the date of issuance of the 9,042,853 warrants issued in connection with the
conversion of the Convertible 12% Note at $528,103.  As of September
30, 2010, the fair value of these derivatives was $151,016 as recorded in the
accompanying balance sheet as of September 30, 2010, as a component of a current
liability, derivative liability.  The change in fair value of
$(85,002) and $(377,086) in fair value during the three and nine months ended
September 30, 2010, respectively, is reported as a non-cash charge in the
accompanying consolidated statements of operations as a component of other
(income) expense.




Additionally,
in accordance with ASC 815 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 September 30, 2010 the fair value of
these derivatives totaled $949,125 and are recorded in the accompanying
consolidated balance sheet as of September 30, 2010 as a component of derivative
liability.  The change in fair value of $(553,171) and $(1,944,835)
during the three and nine months ended September 30, 2010, respectively, is
reported as a non-cash charge in the accompanying consolidated statements of
operations as a component of other (income) expense.




24


MANHATTAN
PHARMACEUTICALS, INC. and SUBSIDIARY


(a
Development Stage Company)


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Additionally,
in accordance with ASC 815 the Company estimated the fair value at the date of
issuance of the 1,285,714 warrants issued in connection with the final closing
of the 2010 Equity Financing in April 2010 and the fair value of the related
12,857 warrants issued to the placement agents in the final closing of the 2010
Equity Financing at $75,086 and $751, respectively.  As of
September 30, 2010 the fair value of these derivatives totaled $21,686 and are
recorded in the accompanying consolidated balance sheet as of September 30, 2010
as a component of derivative liability.  The change in fair value of
$(12,207) and $(54,151) during the three and nine months ended September 30,
2010, respectively, is reported as a non-cash charge in the accompanying
consolidated statements of operations as a component of other (income)
expense.





9.
            SUBSEQUENT
      EVENT





On
November 8, 2010, the Company was awarded $244,279 in funding under the U.S.
Government’s Qualifying Therapeutic Discovery Project (“QTDP”) credit
program.  The Company has received this funding for its lead product
candidate AST-726 for the treatment of vitamin B12 deficiency.





The QTDP
was created by Congress in March 2010, as enacted under the Patient
Protection and Affordable Care Act, and provides a tax credit or grant equal to
50% of eligible costs and expenses for the tax years 2009 and
2010.  The QTDP was designed to promote medical research and
innovation that could improve health and save lives.  The program
targeted projects in new innovative therapies to prevent, diagnose, and treat
acute and chronic diseases.  Companies that received QTDP grants were
selected jointly by the Treasury Department and the Department of Health and
Human Services. The grants were limited to companies with 250 or fewer
employees.


25


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
nine month period ended September 30, 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 September 30, 2010 are
included in the accompanying Condensed Consolidated Statements of
Operations.  The Condensed Consolidated Balance Sheet as of September
30, 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.




26


Results of
Operations




Nine-month
Periods ended September 30, 2010 vs 2009:





Nine months ended September 30,
                      
                      
                      Increase/
                      
                      
                      % Increase/2010
                      
                      
                      2009
                      
                      
                      (decrease)
                      
                      
                      (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                      
                      $
                      -
                      
                      
                      $
                      1,000
                      
                      
                      $
                      (1,000
                      )
                      
                      
                      -100.00
                      %Other
      research and development expenses
                      
                      
                      305,000
                      
                      
                      
                      56,000
                      
                      
                      
                      249,000
                      
                      
                      
                      444.64
                      %Total
      research and development expenses
                      
                      
                      305,000
                      
                      
                      
                      57,000
                      
                      
                      
                      248,000
                      
                      
                      
                      435.09
                      %General
      and administrative:Share-based
      compensation
                      
                      
                      212,000
                      
                      
                      
                      270,000
                      
                      
                      
                      (58,000
                      )
                      
                      
                      -21.48
                      %Other
      general and administrative expenses
                      
                      
                      1,053,000
                      
                      
                      
                      1,103,000
                      
                      
                      
                      (50,000
                      )
                      
                      
                      -4.53
                      %Total
      general and administrative expenses
                      
                      
                      1,265,000
                      
                      
                      
                      1,373,000
                      
                      
                      
                      (108,000
                      )
                      
                      
                      -7.87
                      %Other
      income/(expense):Equity
      in losses of Hedrin JV
                      
                      
                      -
                      
                      
                      
                      (337,000
                      )
                      
                      
                      337,000
                      
                      
                      
                      -100.00
                      %Change
      in fair value of derivative liability
                      
                      
                      2,697,000
                      
                      
                      
                      (659,000
                      )
                      
                      
                      3,356,000
                      
                      
                      
                      -509.26
                      %Loss
      on early extinguishment of debt
                      
                      
                      (159,000
                      )
                      
                      
                      -
                      
                      
                      
                      (159,000
                      )
                      
                      
                      N/AInterest
      expense
                      
                      
                      (938,000
                      )
                      
                      
                      (397,000
                      )
                      
                      
                      (541,000
                      )
                      
                      
                      136.27
                      %Interest
      and other income
                      
                      
                      228,000
                      
                      
                      
                      253,000
                      
                      
                      
                      (25,000
                      )
                      
                      
                      -9.88
                      %Total
      other income/(expense)
                      
                      
                      1,828,000
                      
                      
                      
                      (1,140,000
                      )
                      
                      
                      2,968,000
                      
                      
                      
                      -260.35
                      %Net
      income/(loss)
                      
                      $
                      258,000
                      
                      
                      $
                      (2,570,000
                      )
                      
                      $
                      2,828,000
                      
                      
                      
                      -110.04
                      %





During
each of the nine month periods ended September 30, 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
September 30, 2011, if at all.




For the
nine months ended September 30, 2010 research and development expense was
$305,000 as compared to $57,000 for the nine months ended September 30,
2009.  This increase of $248,000, or 435%, is primarily due to
commencement of development activity on our AST-726 project during the 2010
period and limited product development activity during the 2009
period.




For the
nine months ended September 30, 2010 general and administrative expense was
$1,265,000 as compared to $1,373,000 for the nine months ended September 30,
2009.  This decrease of $108,000, or 8%, is primarily due to a
reduction in staff.




For the
nine months ended September 30, 2010 other income/(expense) was $1,828,000 as
compared to $(1,140,000) for the nine months ended September 30,
2009.  This change of $2,968,000, or (260)%, is primarily due to a
change in fair value of derivative liability of $3,356,000 and a decrease in
equity in losses of Hedrin JV of $337,000, offset by an increase in interest
expense of $541,000, an increase of $159,000 in loss on early extinguishment of
debt and a decrease in other income of $25,000.  The increase in
interest expense is due to the increase in interest bearing debt of the Company
resulting from the Ariston Merger.





Net
income for the nine months ended September 30, 2010 was $258,000 as compared to
a net loss of $2,570,000 for the nine months ended September 30,
2009.  This change of $2,828,000, or (110)%, is primarily due to a
change in fair value of derivative liability of $3,356,000, offset by an
increase in interest expense of $541,000.


27





Three-month
Periods ended September 30, 2010 vs 2009:





Three months ended September 30,
                      
                      
                      Increase/
                      
                      
                      % Increase/2010
                      
                      
                      2009
                      
                      
                      (decrease)
                      
                      
                      (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      N/AOther
      research and development expenses
                      
                      
                      236,000
                      
                      
                      
                      5,000
                      
                      
                      
                      231,000
                      
                      
                      
                      4620.00
                      %Total
      research and development expenses
                      
                      
                      236,000
                      
                      
                      
                      5,000
                      
                      
                      
                      231,000
                      
                      
                      
                      4620.00
                      %General
      and administrative:Share-based
      compensation
                      
                      
                      6,000
                      
                      
                      
                      78,000
                      
                      
                      
                      (72,000
                      )
                      
                      
                      -92.31
                      %Other
      general and administrative expenses
                      
                      
                      273,000
                      
                      
                      
                      312,000
                      
                      
                      
                      (39,000
                      )
                      
                      
                      -12.50
                      %Total
      general and administrative expenses
                      
                      
                      279,000
                      
                      
                      
                      390,000
                      
                      
                      
                      (111,000
                      )
                      
                      
                      -28.46
                      %Other
      income/(expense):Equity
      in losses of Hedrin JV
                      
                      
                      -
                      
                      
                      
                      (105,000
                      )
                      
                      
                      105,000
                      
                      
                      
                      N/AChange
      in fair value of derivative liability
                      
                      
                      830,000
                      
                      
                      
                      158,000
                      
                      
                      
                      672,000
                      
                      
                      
                      425.32
                      %Loss
      on early extinguishment of debt
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      N/AInterest
      expense
                      
                      
                      (350,000
                      )
                      
                      
                      (138,000
                      )
                      
                      
                      (212,000
                      )
                      
                      
                      153.62
                      %Interest
      and other income
                      
                      
                      76,000
                      
                      
                      
                      64,000
                      
                      
                      
                      12,000
                      
                      
                      
                      18.75
                      %Total
      other income/(expense)
                      
                      
                      556,000
                      
                      
                      
                      (21,000
                      )
                      
                      
                      577,000
                      
                      
                      
                      -2747.62
                      %Net
      income/(loss)
                      
                      $
                      41,000
                      
                      
                      $
                      (416,000
                      )
                      
                      $
                      457,000
                      
                      
                      
                      -109.86
                      %





For the
three months ended September 30, 2010 research and development expense was
$236,000 as compared to $5,000 for the three months ended September 30,
2009.  This increase of $231,000, or 4,620%, is primarily due to
commencement of development activity on our AST-726 project during the 2010
period and limited product development activity during the 2009
period.




For the
three months ended September 30, 2010 general and administrative expense was
$279,000 as compared to $390,000 for the three months ended September 30,
2009.  This decrease of $111,000, or 28%, is primarily due to a
reduction in share-based compensation.




For the
three months ended September 30, 2010 other income/(expense) was $556,000 as
compared to $(21,000) for the three months ended September 30,
2009.  This change of $577,000, or 2748%, is primarily due to changes
in the fair value of a derivative of $672,000 and equity in losses of Hedrin JV
of $105,000, offset by an increase in interest expense of
$212,000.  The increase in interest expense is due to the increase in
interest bearing debt of the Company resulting from the Ariston
Merger.




Net
income for the three months ended September 30, 2010 was $41,000 as compared to
a net loss of $416,000 for the three months ended September 30,
2009.  This change of $457,000, or (111)%, is primarily due to a
change in fair value of derivative liability of $672,000, which resulted from a
decrease in the market price of our stock, a decrease in general and
administrative expense of $111,000, offset by increases in research and
development expense of $231,000 and interest expense of $212,000 .





Liquidity
and Capital Resources




From
inception to September 30, 2010, we incurred a deficit during the development
stage of $61,675,000 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least September 30, 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 nine months
ended September 30, 2010, we had a net increase in cash and cash equivalents of
$1.1 million.  This increase resulted largely from net cash provided
by financing activities of $2.2 million and $0.5 million of cash acquired in the
Ariston merger partially offset by net cash used in operating activities of $1.4
million and the repayment of $0.2 million of debt.  Total liquid
resources as of September 30, 2010 were $1.1 million compared to $18,000 at
December 31, 2009.


28





Our
current liabilities as of September 30, 2010 were $4,208,000 compared to
$2,532,000 at December 31, 2009, an increase of $1,676,000.  As of
September 30, 2010, we had working capital deficit of $2,940,000 compared to
working capital deficit of $2,268,000 at December 31, 2009.




The
Company received net proceeds of approximately $2,200,000 in March and April
2010 from the 2010 Equity Financing.  In addition $400,000 principal
amount of debt converted into the 2010 Equity Financing.  The Company
also acquired $519,000 of cash in the merger with Ariston and repaid $194,000 of
debt.




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 September 30, 2010, a significant
portion of our financing has been through private placements of debt, 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 September 30, 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.  In
addition, $1,725,000 principal amount of debt plus interest thereon matures in
three tranches beginning in November 2010.  The Company does not have
the funds to repay this debt and is negotiating with representatives of the debt
holders for either an extension of the maturity date or a conversion into of the
debt into equity.  If the Company cannot reach agreement with the debt
holders the Company will be in default on the debt.





In
November 2010 $1,316,000 of principal and interest matures, in December 2010
$356,000 of interest and principal matures and in February 2011 $521,000 of
principal and interest matures.  If the Company defaults on these debt
obligations the debtholders have the right to appoint a collateral agent and
have that collateral agent foreclose on the collateral.  The
collateral is principally comprised of Manhattan’s investment in Ariston and the
Company’s interest in the Hedrin JV.  Foreclosure on the collateral
would render the Company bankrupt.  If the Company cannot reach
agreement with the debtholders the Company may have to file for voluntary
bankruptcy.





The
Company does not have the financial resources necessary to conduct the pivotal
trial of AST-726 and will have to raise funds for that purpose.




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 income of $258,000 for the nine month periods ended September 30,
2010 and a net loss of $2,570,000 for the nine month periods ended September 30,
2009.  The net income for the nine month period in 2010 resulted from
a decrease in the Company’s derivative liability.  Without this
decrease, which was principally caused by a decrease in the market price of our
common stock, the Company would have sustained a loss during the 2010
period.  The net loss attributable to common shares from date of
inception, including preferred stock dividends, August 6, 2001 to September 30,
2010, amounts to $61,675,000.  Management believes that we will
continue to incur net losses through at least September 30, 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 nine month periods
ended September 30, 2010 and 2009 was approximately $225,000 and $259,000,
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, 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 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.  Nordic has not exercised this right.  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
the interest Nordic received in exchange for the first $5 million Nordic
invested 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.




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.


31





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 and the minimum
return each year from the Hedrin JV that Nordic is entitled to receive increased
from 6% to 6.34% on Hedrin sales.





In July
2010, Nordic delivered a written notice to us for a $500,000 capital increase to
the Hedrin JV and made a $500,000 capital contribution.  We do not
intend to make a capital contribution to the Hedrin JV at this
time.  No valuation has been set yet for this capital
contribution.  Our ownership interest will be reduced once the
valuation for this capital contribution has been set.





In a
letter dated October 19, 2010, addressed to the Hedrin JV, Thornton & Ross
(which licenses certain intellectual property with respect to the Hedrin product
to the Hedrin JV) made a demand for assurances and alleged that the Hedrin JV
has not used commercially reasonable efforts to develop and secure marketing
authorization for the Hedrin product and that the Hedrin JV does not have the
financial means to perform even the most basic obligations under the License
Agreement between Thornton & Ross and the Hedrin JV.  The
assurances that Thornton & Ross demand are: (1) a realistic and
comprehensive clinical development plan through FDA approval of the Hedrin
product, (2) an aggressive, yet realistic, development plan and timetable
through Hedrin product launch, (3) enforceable funding commitments from a liquid
source initially of up to $5 million, and (4) new management.





To our
knowledge, the Hedrin JV has not yet formally responded to Thornton & Ross,
and we expect that when the Hedrin JV does respond, the Hedrin JV will deny the
allegations of not using commercially reasonable efforts to develop and secure
marketing authorization for the Hedrin product.  Our knowledge of the
Hedrin JV’s efforts to develop and secure marketing authorization for the Hedrin
product, however, is limited from and after August 18, 2010, as we have been
denied our right to actively participate in the Hedrin JV from and after that
date.  (This is part of the disputes with Nordic that we are currently
trying to resolve.)  We believe that subsequent to August 18, 2010,
representatives of Nordic and Thornton & Ross met, although no minutes of
that meeting have been provided to us.





As to the
list of four assurances that Thornton & Ross has demanded, based on the
information that we have about the efforts of the Hedrin JV prior to August 18,
2010, we do not believe that Thornton & Ross is contractually entitled to
such assurances.  Notwithstanding our disputes with Nordic, we expect
to work with Nordic to cause the Hedrin JV to respond to the Thornton & Ross
letter within 30 days of its receipt by the Hedrin JV.


32





Disagreement
with Nordic


In April
2010 Nordic filed a Schedule 13D/A (the “Amended 13D”) with
the SEC. 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.





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 $22,000 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
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




AST-726




AST-726
is a nasally-delivered form of hydroxocobalamin, a natural Vitamin B12, for the
treatment of Vitamin B12
deficiency.  We acquired global rights to AST-726 as part of the Ariston
acquisition.  AST-726 has demonstrated pharmacokinetic equivalence to
intramuscular hydroxocobalamin, a marketed injection product for Vitamin B12
remediation.  We believe that AST-726 may enable both a single,
once-monthly treatment for maintenance of normal Vitamin B12 levels in
deficient patients, and more frequent administration to restore normal levels in
newly diagnosed B12
deficiency.  Further, we believe that AST-726 could offer a convenient,
painless, safe and cost-effective treatment for Vitamin B12
deficiency, without the need for intramuscular injections.





We have positioned AST-726 to currently
require only a single, relatively small Phase III clinical trial prior to
submission of a 505(b)(2) new drug application (“NDA”) to the FDA.  In
August 2010, we met with the FDA for the purpose of obtaining a Special Protocol
Assessment (SPA) for the planned Phase III pivotal study.  An SPA is
an agreement with the FDA that the proposed trial protocol design, clinical
endpoints, and analysis are acceptable to support regulatory
approval.  We expect to file the SPA with the FDA in the fourth
quarter 2010.




We have
developed a CMC/manufacturing process for AST-726 that we believe provides a
commercially viable stability profile.  We have two issued patents in the
United States with respect to AST-726, one of which relates to its application
in Vitamin B12
remediation.




More than
9 million people in the US are deficient in Vitamin B12,
indicating substantial market potential for a facile, convenient, safe and
effective treatment that can replace the need for painful and frequent
intramuscular injections or other less than fully effective delivery forms. We
believe that substantial market opportunity also exists
internationally.




Vitamin
B12
Deficiency-Background of the Disease




Untreated
Vitamin B12
deficiency can result in serious clinical problems including hematological
disorders, such as life-threatening anemias, and a range of central and
peripheral neurological abnormalities such as fatigue, confusion, cognition
impairment, dementia, depression, peripheral neuropathies and gait
disturbances.  Neuronal damage may involve peripheral nerves, the spinal
cord and the brain and if the condition is left untreated may become
permanent.  Furthermore, clinically asymptomatic patients with low normal
or below normal Vitamin B12 levels
may have changes in blood chemistries, including elevated levels of
methylmalonic acid or homocysteine, known risk factors for other medical
conditions associated with an increased risk of circulatory problems, blood
clots and cardiovascular disease.





A new
study published in September 2010 in the journal Public Library of Science One,
showed that high doses of B vitamins slow the rate of brain atrophy in patients
with mild cognitive impairment.  Brain atrophy, or brain shrinkage, is
one of the main symptoms of mild cognitive impairment, a precursor to dementia,
and sometimes Alzheimer’s disease.  The average brain atrophies, at a
rate of 0.5% a year after the age of 60.  The brains of those with
mild cognitive impairment shrink by approximately 1% per
year.  Alzheimer’s patients have brain shrinkage of 2.5% per
year.   The study results showed that high doses of B vitamins
slows the rate of brain atrophy by approximately 30%.  Also in
September 2010, the World Alzheimer Report stated that global healthcare costs
associated with dementia totaled $604 billion, a sum greater than 1% of the
global gross domestic product.  These new data support our belief that
there is strong economic incentive for care options that could prevent or slow
the onset of dementia.


34





The
primary diagnosis of Vitamin B12
deficiency is made when measurement of its blood concentration falls below the
expected normal range of 200 to 900 picograms/ml. Vitamin B12
deficiency is most often caused by pathological conditions that limit the body’s
ability to absorb the vitamin from food.  Such disorders include pernicious
anemia, atrophic gastritis, problems caused by gastric surgical procedures to
treat stomach cancer and obesity, Crohn’s disease and simple age-related
changes.  Some studies show the inability to properly absorb Vitamin B12 as a side
effect from chronic use of certain widely prescribed antacid medications such as
Prilosec® and
diabetes treatments such as Glucophage®.




Approximately
15% of the elderly and up to 40% of nursing home residents in the U.S. have
Vitamin B12
deficiency. A study of over 11,000 U.S. civilians ages four and older found a 3%
prevalence of Vitamin B12
deficiency in the general population using the 200 picograms/ml deficiency
standard, indicating that approximately 9 million people in the U.S. are in need
of B12
replacement therapy. Some experts advocate a higher deficiency standard of
300-350 picograms/ml on the basis that levels below this coincide with elevated
methylmalonic acid and homocysteine, risk factors for cardiovascular disease as
found in the Framingham Heart Study. On this basis the prevalence of Vitamin
B12
deficiency increases substantially.




Current
Treatments for Vitamin B12
Deficiency




Once
Vitamin B12
deficiency is diagnosed by a simple blood test, the goal of treatment is
generally to:




o 
     restore circulating blood levels to normal as rapidly as
possible;


o 
     replenish and normalize the substantial stores of the
vitamin in the body; and


o 
     institute a lifelong therapeutic regimen that will maintain
normal levels of the vitamin.





We
believe that parenteral (intramuscular injection) treatment is often considered
the treatment of choice for Vitamin B12
deficiency.  Cyanocobalamin is predominantly used for this purpose in the
United States, but hydroxocobalamin, the active ingredient in AST-726, is also
available for pediatrics and for adults for whom injection of cyanocobalamin is
poorly tolerated.  Hydroxocobalamin injection is the predominant treatment
for Vitamin B12
deficiency in Europe.




In the
United States, intramuscular injections are generally given by a physician or
nurse, necessitating an office/medical center visit by the patient or a visiting
nurse home call for each treatment. Following a diagnosis of B12
deficiency, injections are required quite frequently in order to restore normal
vitamin levels. Once normalization is achieved, the frequency can be reduced to
once or twice per month. While the treatment is usually highly effective, the
inconvenience and cost of frequent office visits and the pain and side-effects
associated with intramuscular injections are problematic for many
patients.




Intranasal
treatment with Vitamin B12
deficiency seeks to alleviate these problems, but the two intranasal products
currently available in the United States have to be administered on a daily or
weekly basis and are not recommended for the treatment of newly diagnosed
patients.  Both products are based on cyanocobalamin.




Oral or
sublingual administration of high doses of Vitamin B12 can
restore deficient patients to normal in certain cases.  Such high dose
supplements are generally available in pharmacies and nutrition/health food
stores.  Adequate results can almost certainly be obtained when nutritional
insufficiency (e.g., strict vegan diet) is the primary cause of the problem.
However, the normal gastrointestinal tract has a very limited capability to
absorb Vitamin B12 and if
this is compromised, as is the case in many deficient patients, oral or
sublingual supplementation may not be ideal for rapidly restoring circulating
levels and storage depots of the vitamin to normal. In such cases of
pathological Vitamin B12
deficiency, intramuscular injection still often remains the current treatment of
choice.




An
unapproved Vitamin B12 patch is
available in the United States, but we believe that its effectiveness in
moderate to severe Vitamin B12 deficient
patients is substantially untested.




Potential
Advantages of Ariston’s AST-726 Treatment




We
believe that AST-726 treatment has the potential to directly substitute for and
replace the need for injection treatment by applying the current injection
frequency paradigms for both newly diagnosed and normalized Vitamin B12 deficient
patients.  AST-726 is proposed to be self-administered at home by the
patient, without costly, time-consuming and inconvenient visits to a doctor’s
office or medical facility needed for each of the many intramuscular injections
required for life.  Because it is delivered through a nasal spray,
additional advantages include freedom from injection pain and reduced anxiety in
individuals, including children and the elderly, who may have fear of
injections.  We believe that the delivery profile of AST-726 is comparable
to that of the marketed intramuscular injection, and that therefore newly
diagnosed patients will be able to self-administer the nasal spray on a daily
basis or several times a week to restore their Vitamin B12 status to
normal and will then be self-maintained on a single monthly nasal spray
treatment.


35





Additional
Clinical Trial Is Needed




AST-726,
a commercial nasal spray formulation of hydroxocobalamin, has satisfactorily
completed preclinical toxicology, and an Investigational New Drug (“IND”)
Application has been filed with the FDA.  This product candidate is
being developed utilizing the 505(b)(2) regulatory pathway.  AST-726 has
also successfully completed a safety and pharmacokinetic study in healthy
volunteers and an end of Phase II meeting with FDA has been completed.  We
are planning a Phase III pivotal Vitamin B12
replacement study in the United States.  The study is designed to enroll
approximately 40 Vitamin B12 deficient
patients currently treated with injection therapy.  Patients will first be
evaluated on injection therapy and then will receive AST-726 by nasal spray on a
monthly basis for 12 weeks.  The primary purpose of this study is to
determine that levels of Vitamin B12 in the
patients’ bloodstream remain within the normal range following monthly
administration of AST-726.  We anticipate that the data from this study and
additional manufacturing information will support the planned 505(b)(2) new drug
application (“NDA”) filing for AST-726.  We currently do not have the
financial resources to conduct the Phase III pivotal study.  We
estimate that the cost of such a study will be between $1 million and $2
million, it could be higher depending on the SPA agreement we reach with the
FDA.





Through
September 30, 2010 we have incurred $297,000 of project costs related to the
development of AST-726.  These project costs have been incurred since
March 8, 2010, the date of the Ariston merger.




Hedrin




Hedrin is
a novel, non-insecticide, one hour treatment for pediculosis (head lice) that is
currently being developed as a prescription medical device in the United States
by H Pharmaceuticals, a joint venture entity between Manhattan Pharmaceuticals
and Nordic Biotech.  Hedrin is the top selling head lice treatment in
Europe.  It is currently marketed in over 30 countries and, according
to Thornton & Ross Ltd. (“T&R”), achieved 2008 annual sales through its
licensees of approximately $48 million (USD) at in-market public prices,
garnering approximately 23% market share across Europe.





Through
September 30, 2010, Hedrin has been clinically studied in over 400
subjects.  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.





In April
2009, T&R published a clinical field study where 40 adult and child subjects
with head lice infestations were treated with Hedrin using a 1 hour application
time.  Treatment was given twice with 7 days between
applications.  In this study, Hedrin achieved a cure rate of
90%.


36





In the U.S., the Hedrin JV is pursuing
the development of Hedrin as a prescription 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.  In July 2009, CDRH confirmed
that two pivotal studies, which can occur simultaneously, using the same
protocol consisting of approximately 60 subjects each, or 120 subjects in total,
are required for the completion of the PMA application.  In April
2010, the Hedrin JV received correspondence from the FDA in which the FDA raised
questions about certain manufacturing and non-clinical aspects of Hedrin(including certain
deficiencies in safety documentation that will require further
study).  The
Hedrin JV is in the process of responding to those questions and will not be
able to commence the confirmatory clinical trials,and the Hedrin JV's application to
conduct those clinical trials will not be accepted by the FDA, unless
anduntil such
questions are responded to, to the satisfaction of the FDA.




Through
September 30, 2010 we have incurred $1,084,000 of project costs for the
development of Hedrin.  None of these costs were incurred during the
nine month period ended September 30, 2010.  We do not expect to incur
any future costs as the Hedrin JV is now responsible for all costs associated
with Hedrin.




AST-915





AST-915
is an orally delivered treatment for essential tremor.  AST-915 was
formerly referred to as “AST-914 metabolite”.  We acquired global
rights to AST-915 as part of the Ariston acquisition.  This product
candidate is being studied under a Cooperative Research and Development
Agreement (CRADA) with the National Institutes of Health (NIH) and a Phase 1
clinical study is currently underway in essential tremor patients.  We
expect to announce results from this Phase I study in the fourth quarter of
2010.





Essential
tremor is a neurological disorder that is characterized by involuntary shaking
of the hands, arms, head, voice, and upper body. The most disabling tremors
occur during voluntary movement, affecting common skills such as writing, eating
and drinking.  Essential tremor is often misdiagnosed as Parkinson’s
disease, yet according to the National Institutes of Neurological Disorders and
Stroke, approximately 8 times as many people have essential tremor as have
Parkinson’s.  Essential tremor is not confined to the elderly. 
Children, newborns, and middle-aged people can also have the
condition.





Essential
tremor is the most common involuntary movement disorder, with increasing
incidence as people age.  According to the National Institute of Health
(NIH), essential tremor affects 14% of people 65 years and older, which equates
to approximately 5.4 million Americans.  There is no cure for essential
tremor and the currently available drug therapies do not work in many patients,
produce at best a 50% response in others, and have significant side
effects.  We believe AST-915 may provide a new treatment option for this
serious and prevalent disorder. We believe that
substantial market opportunity also exists internationally.




Topical
GEL for Psoriasis




The gel
vehicle (placebo) used in the below mentioned study is our 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.  We own worldwide rights to this topical GEL and are exploring
the possibility of developing it as an OTC product for mild
psoriasis.




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


37


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.


38





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 September 30, 2010, and we have never held such
instruments in the past.





Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of
September 30, 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




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.





Changes in Internal
Control




During
the quarter ended September 30, 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.




39


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 September 30, 2010 (although, as described in Note 18 to our
financial statements at and for the Years ended December 31, 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 September 30,
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.





40





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:
      November 15, 2010
              By:
              /s/  Michael G.
    McGuinnessMichael
      G. McGuinnessPrincipal
      Executive Officer




41





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.




42