UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





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


For the
quarterly period ended March 31, 2009





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 electronically 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
x




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




Large
accelerated filer  o  Accelerated
filer  o  Non-accelerated filer  oSmaller reporting
company  x





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





As of May
4, 2009 there were 70,624,232 shares of the issuer’s common stock, $.001 par
value, outstanding.





INDEX




PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements:Unaudited
      Condensed Balance Sheets
                4Unaudited
      Condensed Statements of Operations
                5Unaudited
      Condensed Statement of Stockholders’ Equity (Deficiency)
                6Unaudited
      Condensed Statements of Cash Flows
                8Notes
      to Unaudited Condensed  Financial Statements
                9Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                21Item
      3.
                Quantitative
      and Qualitative Disclosure About Market Risk
                32Item
      4.
                Controls
      and Procedures
                32PART
      II
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                33Item
      1A.
                Risk
      Factors
                33Item
      6.
                Exhibits
                33Signatures
                34


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 Financial Statements


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Balance Sheets





March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (See Note 1_)AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      230,496
                      
                      
                      $
                      106,023Restricted
      cash
                      
                      
                      514,629
                      
                      
                      
                      730,499Prepaid
      expenses
                      
                      
                      52,568
                      
                      
                      
                      37,718Total
      current assets
                      
                      
                      797,693
                      
                      
                      
                      874,240Investment
      in Hedrin JV
                      
                      
                      364,214
                      
                      
                      
                      -Property
      and equipment, net
                      
                      
                      7,496
                      
                      
                      
                      9,072Secured
      12% notes payable issue costs
                      
                      
                      357,682
                      
                      
                      
                      330,756Other
      assets
                      
                      
                      34,895
                      
                      
                      
                      34,895Total
      assets
                      
                      $
                      1,561,980
                      
                      
                      $
                      1,248,963Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Secured
      10% notes payable
                      
                      $
                      -
                      
                      
                      $
                      70,000Accounts
      payable
                      
                      
                      144,476
                      
                      
                      
                      542,296Accrued
      expenses
                      
                      
                      756,400
                      
                      
                      
                      874,072Derivative
      liability
                      
                      
                      92,222
                      
                      
                      
                      -Total
      current liabilities
                      
                      
                      993,098
                      
                      
                      
                      1,486,368Secured
      12% notes payable, net
                      
                      
                      1,559,759
                      
                      
                      
                      1,174,107Interest
      payable on secured 12% notes payable
                      
                      
                      62,797
                      
                      
                      
                      15,237Exchange
      obligation
                      
                      
                      3,949,176
                      
                      
                      
                      2,949,176Total
      liabilities
                      
                      
                      6,564,830
                      
                      
                      
                      5,624,888Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no shares issued
      and outstanding at March 31, 2009 and December 31, 2008
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $.001 par value. Authorized 300,000,000 shares; 70,624,232
      shares issued and outstanding at March 31, 2009 and December 31,
      2008
                      
                      
                      70,624
                      
                      
                      
                      70,624Additional
      paid-in capital
                      
                      
                      54,828,520
                      
                      
                      
                      54,821,379Deficit
      accumulated during the development stage
                      
                      
                      (59,901,994
                      )
                      
                      
                      (59,267,928
                      )Total
      stockholders’ deficiency
                      
                      
                      (5,002,850
                      )
                      
                      
                      (4,375,925
                      )Total
      liabilities and stockholders' deficiency
                      
                      $
                      1,561,980
                      
                      
                      $
                      1,248,963





See
accompanying notes to financial statements.


4





MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Operations


(Unaudited)





Three months ended March 31,
                    
                    
                    Cumulative
                      period from
                      August 6, 2001
                      (inception) to
                      March 31,2009
                    
                    
                    2008
                    
                    
                    2009Revenue
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Costs
      and expenses:Research
      and development
                    
                    
                    44,936
                    
                    
                    
                    800,071
                    
                    
                    
                    28,336,771General
      and administrative
                    
                    
                    512,400
                    
                    
                    
                    814,060
                    
                    
                    
                    16,974,673In-process
      research and development charge
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,887,807Impairment
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,248,230Loss
      on disposition of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,213,878Total
      operating expenses
                    
                    
                    557,336
                    
                    
                    
                    1,614,131
                    
                    
                    
                    59,661,359Operating
      loss
                    
                    
                    (557,336
                    )
                    
                    
                    (1,614,131
                    )
                    
                    
                    (59,661,359
                    )Other
      (income) expense:Equity
      in losses of Hedrin JV
                    
                    
                    135,786
                    
                    
                    
                    19,873
                    
                    
                    
                    385,786Change
      in fair value of derivative
                    
                    
                    70,000
                    
                    
                    
                    -
                    
                    
                    
                    (57,778
                    )Interest
      and other income
                    
                    
                    (126,728
                    )
                    
                    
                    (54,657
                    )
                    
                    
                    (1,407,259
                    )Interest
      expense
                    
                    
                    125,450
                    
                    
                    
                    -
                    
                    
                    
                    216,274Realized
      gain on sale of marketable equity securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (76,032
                    )Total
      other (income) expense
                    
                    
                    204,508
                    
                    
                    
                    (34,784
                    )
                    
                    
                    (939,009
                    )Net
      loss
                    
                    
                    (761,844
                    )
                    
                    
                    (1,579,347
                    )
                    
                    
                    (58,722,350
                    )Preferred
      stock dividends (including imputed amounts)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,179,644
                    )Net
      loss applicable to common shares
                    
                    $
                    (761,844
                    )
                    
                    $
                    (1,579,347
                    )
                    
                    $
                    (59,901,994
                    )Net
      loss per common share:Basic
      and diluted
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.02
                    )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                    
                    
                    70,624,232
                    
                    
                    
                    70,624,232





See
accompanying notes to financial statements.


5


MANHATTAN
PAHRMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statement of Stockholders' Equity (Deficiency)


(Unaudited)





Common
                  stock
                  shares
                
                
                Common
                  stock
                  amount
                
                
                Additional
                  paid-in
                  capital
                
                
                Deficit
                  accumulated
                  during
                  development
                  stage
                
                
                Other
                
                
                Total
                  stockholders’
                  equity
                  (deficiency)Stock
      issued at $0.0004 per share for subscription receivable
                
                
                10,167,741
                
                
                $
                10,168
                
                
                $
                (6,168
                )
                
                $
                -
                
                
                $
                (4,000
                )
                
                $
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (56,796
                )
                
                
                -
                
                
                
                (56,796
                )Balance
      at December 31, 2001
                
                
                10,167,741
                
                
                
                10,168
                
                
                
                (6,168
                )
                
                
                (56,796
                )
                
                
                (4,000
                )
                
                
                (56,796
                )Proceeds
      from subscription receivable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,000
                
                
                
                4,000Stock
      issued at $0.0004 per share for license rights
                
                
                2,541,935
                
                
                
                2,542
                
                
                
                (1,542
                )
                
                
                -
                
                
                
                
                
                
                
                1,000Stock
      options issued for consulting services
                
                
                -
                
                
                
                -
                
                
                
                60,589
                
                
                
                -
                
                
                
                (60,589
                )
                
                
                -Amortization
      of unearned consulting services
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22,721
                
                
                
                22,721Common
      stock issued at $0.63 per share, net of expenses
                
                
                3,043,332
                
                
                
                3,043
                
                
                
                1,701,275
                
                
                
                -
                
                
                
                -
                
                
                
                1,704,318Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                (1,037,320
                )
                
                
                
                
                
                
                (1,037,320
                )Balance
      at December 31, 2002
                
                
                15,753,008
                
                
                
                15,753
                
                
                
                1,754,154
                
                
                
                (1,094,116
                )
                
                
                (37,868
                )
                
                
                637,923Common
      stock issued at $0.63 per share, net of expenses
                
                
                1,321,806
                
                
                
                1,322
                
                
                
                742,369
                
                
                
                -
                
                
                
                
                
                
                
                743,691Effect
      of reverse acquisition
                
                
                6,287,582
                
                
                
                6,287
                
                
                
                2,329,954
                
                
                
                -
                
                
                
                
                
                
                
                2,336,241Amortization
      of unearned consulting costs
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                37,868
                
                
                
                37,868Unrealized
      loss on short-term investments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7,760
                )
                
                
                (7,760
                )Payment
      for fractional shares for stock combination
                
                
                -
                
                
                
                -
                
                
                
                (300
                )
                
                
                -
                
                
                
                
                
                
                
                (300
                )Preferred
      stock issued at $10 per share, net of expenses
                
                
                -
                
                
                
                -
                
                
                
                9,045,176
                
                
                
                -
                
                
                
                1,000
                
                
                
                9,046,176Imputed
      preferred stock dividend
                
                
                
                
                
                
                
                
                
                
                418,182
                
                
                
                (418,182
                )
                
                
                
                
                
                
                -Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (5,960,907
                )
                
                
                
                
                
                
                (5,960,907
                )Balance
      at December 31, 2003
                
                
                23,362,396
                
                
                
                23,362
                
                
                
                14,289,535
                
                
                
                (7,473,205
                )
                
                
                (6,760
                )
                
                
                6,832,932-Exercise
      of stock options
                
                
                27,600
                
                
                
                27
                
                
                
                30,073
                
                
                
                -
                
                
                
                
                
                
                
                30,100Common
      stock issued at $1.10, net of expenses
                
                
                3,368,952
                
                
                
                3,369
                
                
                
                3,358,349
                
                
                
                -
                
                
                
                
                
                
                
                3,361,718Preferred
      stock dividend accrued
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (585,799
                )
                
                
                585,799
                
                
                
                -Preferred
      stock dividends paid by issuance of shares
                
                
                -
                
                
                
                -
                
                
                
                281,073
                
                
                
                -
                
                
                
                (282,363
                )
                
                
                (1,290
                )Conversion
      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
                )
                
                
                297,334
                
                
                
                4,453,816Common
      stock issued at $1.11 and $1.15, net of expenses
                
                
                11,917,680
                
                
                
                11,918
                
                
                
                12,238,291
                
                
                
                -
                
                
                
                
                
                
                
                12,250,209Common
      stock issued to vendor at $1.11 per share in satisfaction 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
                
                
                
                —
                
                
                
                (479,032
                )
                
                
                (1,296
                )Conversion
      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
PAHRMACEUTICALS, INC.
 (A
Development Stage Company)
 Condensed
Statement of Stockholders' Equity (Deficiency)
 (Unaudited)
  Commonstock shares
                                    
                                    
                                    Commonstock amount
                                    
                                    
                                    Additionalpaid-in
      capital
                                    
                                    
                                    Deficitaccumulated during
      development stage
                                    
                                    
                                    Other
                                    
                                    
                                    Totalstockholders’equity
      (deficiency)Common stock issued at $0.84 and
      $0.90 per shares, net of expenses
                                    
                                    $
                                    10,185,502
                                    
                                    
                                    $
                                    10,186
                                    
                                    
                                    $
                                    7,841,999
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    7,852,185Common stock issued to directors
      at $0.72 per share in satisfaction of accounts
    payable
                                    
                                    
                                    27,776
                                    
                                    
                                    
                                    28
                                    
                                    
                                    
                                    19,972
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    20,000Common stock issued to in
      connection with in-licensing agreement at $0.90 per
      share
                                    
                                    
                                    125,000
                                    
                                    
                                    
                                    125
                                    
                                    
                                    
                                    112,375
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    112,500Common stock issued to in
      connection with in-licensing agreement at $0.80 per
      share
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    150
                                    
                                    
                                    
                                    119,850
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    120,000Exercise of
      warrants
                                    
                                    
                                    10,327
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    7,219
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    7,234Cashless exercise of
      warrants
                                    
                                    
                                    5,589
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (6
                                    )Share-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,440,956
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    1,440,956Warrants issued for
      consulting
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    83,670
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    83,670Net loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (12,032,252
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (12,032,252
                                    )Balance at December 31,
      2007
                                    
                                    
                                    70,624,232
                                    
                                    
                                    
                                    70,624
                                    
                                    
                                    
                                    54,037,361
                                    
                                    
                                    
                                    (54,999,070
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (891,085
                                    )Sale of
    warrant
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    150,000Share-based
      compensation
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    463,890
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    463,890Warrants issued with secured 12%
      notes
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    170,128
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    170,128Net loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,268,858
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,268,858
                                    )Balance at December 31,
      2008
                                    
                                    
                                    70,624,232
                                    
                                    
                                    
                                    70,624
                                    
                                    
                                    
                                    54,821,379
                                    
                                    
                                    
                                    (59,267,928
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,375,925
                                    )Cumulative effect of a change in
      accounting principle
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (150,000
                                    )
                                    
                                    
                                    127,778
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (22,222
                                    )Balance at January 1, 2009, as
      adjusted
                                    
                                    
                                    70,624,232
                                    
                                    
                                    
                                    70,624
                                    
                                    
                                    
                                    54,671,379
                                    
                                    
                                    
                                    (59,140,150
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,398,147
                                    )Share-based
      compensation
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    104,097
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    104,097Warrants issued with secured 12%
      notes
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    53,044
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    53,044Net loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (761,844
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (761,844
                                    )Balance at March 31,
      2009
                                    
                                    
                                    70,624,232
                                    
                                    
                                    $
                                    70,624
                                    
                                    
                                    $
                                    54,828,520
                                    
                                    
                                    $
                                    (59,901,994
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    (5,002,850
                                    )
  See
accompanying notes to financial
statements.


7


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Cash Flows


(Unaudited)





Three months ended March 31,
                        
                        
                        Cumulative period from
                          August 6, 2001
                          (inception) to
                          March 31,2009
                        
                        
                        2008
                        
                        
                        2009Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (761,844
                        )
                        
                        $
                        (1,579,347
                        )
                        
                        $
                        (58,722,350
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                        
                        
                        135,786
                        
                        
                        
                        19,873
                        
                        
                        
                        385,786Share-based
      compensation
                        
                        
                        104,097
                        
                        
                        
                        192,854
                        
                        
                        
                        3,932,970Interest
      and amortization of OID and issue costs on Secured 12%
    Notes
                        
                        
                        119,060
                        
                        
                        
                        -
                        
                        
                        
                        157,634Change
      in fair value of derivative
                        
                        
                        70,000
                        
                        
                        
                        -
                        
                        
                        
                        (57,778
                        )Shares
      issued in connection with in-licensing agreement
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        232,500Warrants
      issued to consultant
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        83,670Amortization
      of intangible assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        145,162Gain
      on sale of marketable equity securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (76,032
                        )Depreciation
                        
                        
                        1,576
                        
                        
                        
                        7,912
                        
                        
                        
                        223,506Non
      cash portion of in-process research and development charge
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,721,623Loss
      on impairment and disposition of intangible assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,462,108Other
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23,917Changes
      in operating assets and liabilities, net of acquisitions:Decrease/(increase)
      in restricted cash
                        
                        
                        215,870
                        
                        
                        
                        -
                        
                        
                        
                        (514,629
                        )Decrease/(increase)
      in prepaid expenses and other current assets
                        
                        
                        (14,850
                        )
                        
                        
                        (17,693
                        )
                        
                        
                        5,678Decrease/(increase)
      in other assets
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (49,895
                        )Increase/(decrease)
      in accounts payable
                        
                        
                        (397,820
                        )
                        
                        
                        (293,262
                        )
                        
                        
                        564,689Increase/(decrease)
      in accrued expenses
                        
                        
                        (117,672
                        )
                        
                        
                        208,038
                        
                        
                        
                        216,079Net
      cash used in operating activities
                        
                        
                        (645,797
                        )
                        
                        
                        (1,461,625
                        )
                        
                        
                        (39,265,362
                        )Cash
      flows from investing activities:Purchase
      of property and equipment
                        
                        
                        -
                        
                        
                        
                        (13,620
                        )
                        
                        
                        (239,608
                        )Cash
      paid in connection with acquisitions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (26,031
                        )Net
      cash provided from the purchase and sale of short-term
      investments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        435,938Proceeds
      from sale of license
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        200,001Net
      cash (used in) provided by investing activities
                        
                        
                        -
                        
                        
                        
                        (13,620
                        )
                        
                        
                        370,300Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                        
                        
                        500,000
                        
                        
                        
                        1,958,683
                        
                        
                        
                        3,199,176Sale
      of warrant
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        150,000Repayment
      of Secured 10% Notes
                        
                        
                        (70,000
                        )
                        
                        
                        
                        
                        
                        
                        -Proceeds
      from sale of Secured 12% Notes
                        
                        
                        340,270
                        
                        
                        
                        
                        
                        
                        
                        1,345,413Repayments
      of notes payable to stockholders
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (884,902
                        )Proceeds
      (costs) related to sale of common stock, net
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        25,896,262Proceeds
      from sale of preferred stock, net
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,046,176Proceeds
      from exercise of warrants and stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        138,219Other,
      net
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        235,214Net
      cash provided by (used in) financing activities
                        
                        
                        770,270
                        
                        
                        
                        1,958,683
                        
                        
                        
                        39,125,558Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        124,473
                        
                        
                        
                        483,438
                        
                        
                        
                        230,496Cash
      and cash equivalents at beginning of period
                        
                        
                        106,023
                        
                        
                        
                        649,686
                        
                        
                        
                        -Cash
      and cash equivalents at end of period
                        
                        $
                        230,496
                        
                        
                        $
                        1,133,124
                        
                        
                        $
                        230,496Supplemental
      disclosure of cash flow information:Interest
      paid
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        26,033Supplemental
      disclosure of noncash investing and financing activities:Investment
      in Hedrin JV
                        
                        $
                        500,000
                        
                        
                        $
                        250,000
                        
                        
                        $
                        750,000Warrants
      issued with Secured 12% Notes
                        
                        
                        53,044
                        
                        
                        
                        -
                        
                        
                        
                        223,172Common
      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 for acquisitions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        13,389,226Issuance
      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 financial statements.


8




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




1.       
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
accompanying unaudited condensed financial statements of Manhattan
Pharmaceuticals, Inc. (“Manhattan” or the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the rules and regulations of the
Securities and Exchange Commission.  Accordingly, the unaudited
condensed 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 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, 2009 or for any other interim period.  These
unaudited condensed financial statements should be read in conjunction with the
Company’s audited consolidated financial statements as of and for the year ended
December 31, 2008, which are included in the Company’s Annual Report on
Form 10-K  for such year.  The condensed balance sheet as of
December 31, 2008 has been derived from the audited financial statements
included in the Form 10-K for that year.





As of
March 31, 2009, the Company has not generated any revenues from the development
of its products and is therefore still considered to be a development stage
company.





Segment
Reporting





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





Income
Taxes





Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB No. 109”.  The
implementation of FIN 48 had no impact on the Company’s financial statements as
the Company has no unrecognized tax benefits.  The
Company’s policy is to recognize interest and penalties related to income tax
matters in income tax expense.





Equity
in Joint Venture





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





New Accounting
Pronouncements





In December 2007, the FASB issued
Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling
interest in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires
all entities to report noncontrolling (minority) interests in subsidiaries as
equity in the consolidated financial statements. SFAS 160 establishes a single
method of accounting for changes in a parent's ownership interest in a
subsidiary that do not result in deconsolidation and expands disclosures in the
consolidated financial statements. SFAS 160 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years.
The adoption of SFAS 160 did not have any impact on the Company’s financial
statements.


9




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




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




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




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




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




In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock" (“EITF 07-5”).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The adoption of EITF 07-5 had an impact on the
Company’s financial statements (see Note 10 to our financial statements for the
period ended March 31, 2009).




In
April 2009, the FASB issued FSP No. 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,”
(“FSP FAS 157-4”) which provides guidance on determining when there has been a
significant decrease in the volume and level of activity for an asset or
liability, when a transaction is not orderly, and how that information must be
incorporated into a fair value measurement. FSP SFAS 157-4 also requires
expanded disclosures on valuation techniques and inputs and specifies the level
of aggregation required for all quantitative disclosures.  The
provisions of FSP SFAS 157-4 are effective for the Company’s quarter ending
June 30, 2009. The Company does not expect this FSP to have a material impact on
its financial statements.


10




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




In
April 2009, the FASB issued FSP  SFAS No. 115-2 and
No. 124-2,  “Recognition and Presentation of Other-Than-Temporary
Impairments,” which makes the guidance on other-than-temporary impairments of
debt securities more operational and requires additional disclosures when a
company records an other-than-temporary impairment. FSP FAS 115-2 and
FAS 124-2 are effective for interim and annual reporting periods ending
after June 15, 2009. We will be required to adopt the principles of
FSP FAS 115-2 and FAS 124-2 in the second quarter of 2009. We do
not expect the adoption to have a material effect on the Company’s financial
statements.





2.
            LIQUIDITY





The
Company incurred a net loss of $761,844 and negative cash flows from operating
activities of $645,797 for the three month period ended March 31, 2009 and
$1,579,347 and negative cash flows from operating activities of $1,461,625 for
the three month period ended March 31, 2008.  The net loss applicable
to common shares from date of inception, August 6, 2001, to March 31, 2009
amounts to $59,901,994.





The
Company received approximately $1.8 million in February 2008, approximately $0.9
million in June 2008 and $0.5 million in February 2009 from a joint venture
agreement.  This joint venture agreement is more fully described in
Note 6.  The Company received $70,000 in Secured 10% Notes in
September 2008 which was repaid in full in February 2009.  The Company
received $1.0 million in November and December 2008 and $0.3 million in February
2009 from the sale of Secured 12% Notes. These notes are more fully described in
Notes 7 and 8.




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




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




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





3.
            COMPUTATION
      OF NET LOSS PER COMMON SHARE





Basic net
loss per common share is calculated by dividing net loss applicable to common
shares by the weighted-average number of common shares outstanding for the
period.  Diluted net loss per common share is the same as basic net
loss per common share, since potentially dilutive securities from stock options
and stock warrants would have an antidilutive effect because the Company
incurred a net loss during each period presented.  The amounts of
potentially dilutive securities excluded from the calculation were 95,358,343
and 19,685,161 shares at March 31, 2009 and 2008, respectively.  These
amounts do not include the 55,555,555 shares issuable upon the exercise of the
put or call rights issued in connection with the Hedrin JV (see Note 6) which
were subject to anti-dilution rights upon the issuance of warrants with the
Secured 12% Notes (see Note 8).


11




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




4.
            SHARE-BASED
      COMPENSATION





The
Company adopted SFAS No. 123(R), “Share-Based Payment,” (“Statement 123(R)”) for
employee options using the modified prospective transition method. Statement
123(R) revised Statement 123 to eliminate the option to use the intrinsic value
method and required the Company to expense the fair value of all employee
options over the vesting period.  Under the modified prospective
transition method, the Company recognized compensation cost for the three month
periods ended March 31, 2009 and 2008 which includes a) period compensation cost
related to share-based payments granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of Statement 123; and b) period compensation cost
related to share-based payments granted on or after January 1, 2006, based on
the grant date fair value estimated in accordance with Statement 123(R). In
accordance with the modified prospective method, the Company has not restated
prior period results.





The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.  For the three month
periods ended March 31, 2009 and 2008, the Company recognized share-based
employee compensation cost of $104,097 and $192,854, respectively, in accordance
with Statement 123(R).  The Company did not capitalize any share-based
compensation cost.




Options
granted to consultants and other non-employees are accounted for in accordance
with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".  Accordingly, such options are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.  As a result of adjusting consultant and other non-employee
options to fair value as of March 31, 2009 and 2008 respectively, net of
amortization, the Company recognized an increase to general and administrative
and research and development expenses of $378 for the three month period ended
March 31, 2009 and an increase to general and administrative and research and
development expenses of $546 for the three month period ended March 31, 2008.
The Company has allocated share-based compensation costs to general and
administrative and research and development expenses as follows:




Three months ended March 31,2009
                  
                  
                  2008General
      and administrative expense:Share-based
      employee compensation cost
                  
                  $
                  103,719
                  
                  
                  $
                  140,043Share-based
      consultant and non-employee cost
                  
                  
                  38
                  
                  
                  
                  -103,757
                  
                  
                  
                  140,043Research
      and development expenseShare-based
      employee compensation cost
                  
                  
                  -
                  
                  
                  
                  52,265Share-based
      consultant and non-employee cost
                  
                  
                  340
                  
                  
                  
                  546340
                  
                  
                  
                  52,811Total
      share-based cost
                  
                  $
                  104,097
                  
                  
                  $
                  192,854




To
compute compensation expense in 2009 and 2008 the Company estimated the fair
value of each option award on the date of grant using the Black-Scholes model.
The Company based the expected volatility assumption on a volatility index of
peer companies as the Company did not have a sufficient number of years of
historical volatility of its common stock for the application of Statement 123
(R).  The expected term of options granted represents the period of time
that options are expected to be outstanding.  The Company estimated the
expected term of stock options by the simplified method as prescribed in Staff
Accounting Bulletin Nos. 107 and 110.  The expected forfeiture rates
are based on the historical employee forfeiture experiences. To determine the
risk-free interest rate, the Company utilized the U.S. Treasury yield curve in
effect at the time of grant with a term consistent with the expected term of the
Company’s awards.  The Company has not declared a dividend on its
common stock since its inception and has no intentions of declaring a dividend
in the foreseeable future and therefore used a dividend yield of
zero.


12




MANHATTAN
PHARMACEUTICALS, INC
 (A
Development Stage Company)
 NOTES
TO CONDENSED FINANCIAL STATEMENTS


The
following table shows the weighted average assumptions the Company used to
develop the fair value estimates for the determination of the compensation
charges in 2009 and 2008:




Three months ended March 31,2009
                  
                  
                  2008Expected
      volatility
                  
                  
                  94
                  %
                  
                  
                  93
                  %Dividend
      yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      term (in years)
                  
                  
                  6
                  
                  
                  
                  6Risk-free
      interest rate
                  
                  
                  1.88
                  %
                  
                  
                  2.81




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.  At March 31, 2009, 10,400,000 shares were authorized for
issuance.  The options have a maximum term of 10 years and vest over a
period determined by the Company’s Board of Directors (generally 3 years) and
are issued at an exercise price equal to or greater than the fair market value
of the shares at the date of grant.  The 2003 Plan expires on December
10, 2013 or when all options have been granted, whichever is sooner. At March
31, 2009, options to purchase 9,496,596 shares were outstanding, 27,776 shares
of common stock were issued and  there were 875,628 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
March 31, 2009 options to purchase 1,137,240 shares were outstanding and no
shares were reserved for future stock option grants under the 1995
Plan.


13




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




A summary
of the status of the Company’s stock options as of March 31, 2009 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, 2008
                  
                  
                  10,633,836
                  
                  
                  $
                  0.938Granted
                  
                  
                  -Exercised
                  
                  
                  -Cancelled
                  
                  
                  -Outstanding
      at March 31, 2009
                  
                  
                  10,633,836
                  
                  
                  $
                  0.938
                  
                  
                  
                  6.690
                  
                  
                  $
                  -Exercisable
      at March 31, 2009
                  
                  
                  9,108,010
                  
                  
                  $
                  1.022
                  
                  
                  
                  6.370
                  
                  
                  $
                  -Weighted-average
      fair value of options granted during the three month period ended March
      31, 2009
                  
                  None
      issued




As of
March 31, 2009, the total compensation cost related to nonvested option awards
not yet recognized is $321,569.  The weighted average period over
which it is expected to be recognized is approximately 1 year.




5.
            COMMITMENTS
      AND CONTINGENCIES




Swiss
Pharma





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




The
Company had previously recognized a liability to Swiss Pharma in the amount of
approximately $104,000 for the final services invoice.  The remainder
of the award, approximately $542,000, was expensed in September
2008.    The Company will continue to accrue interest at 5%
per annum on the approximate $371,000 until such amount has been
settled.




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




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


14




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




Employment
Agreement





The
Company has an employment agreement with one employee for the payment of an
annual base salary of $300,000 as well as performance based
bonuses.  This agreement has a remaining term of three months and a
remaining obligation of $83,000 as of March 31, 2009.  As per the
terms of the Secured 12% Notes sold in the fourth quarter of 2008 and the first
quarter of 2009 management, comprised of the two employees, including one under
contract, has agreed to reduce their salaries effective as of October 1,
2008.  If the Company sells at least $1.5 million but less than $2
million of Secured 12% Notes then their salaries shall be reduced by
20%.  The Company sold $1.725 million of Secured 12% Notes, management
therefore was paid 80% of their salaries during the fourth quarter of 2008. Also
as per the terms of the Secured 12% Notes the reduction in management’s salaries
shall be reduced to 10% if the Company realizes gross proceeds of $500,000 or
more from other sources and there will be no reduction if the Company realizes
gross proceeds of $1,000,000 or more from other sources.  In February
2009 the Company received a $500,000 milestone payment from the Hedrin JV;
therefore management’s salaries are currently reduced by 10%.




6.
            JOINT
      VENTURE




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




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




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




In June
2008, the Hedrin JV Agreement was amended (the "Hedrin JV Amended
Agreement").  Under the amended terms Nordic invested an additional
$1.0 million, for a total of $3.5 million, in the Hedrin JV and made an advance
of $250,000 to the Hedrin JV and the Hedrin JV made an additional $1.0 million
payment, for a total of $3.0 million, to the Company.  The Hedrin JV
also distributed additional ownership equity sufficient for each of the Company
and Nordic to maintain their ownership interest at 50%.  The FDA
classified Hedrin as a Class III medical device in February
2009.  Under the amended terms, 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. The Hedrin JV is now obligated to issue
to the Company and Nordic additional ownership interest in the Hedrin JV,
thereby maintaining each of the Company’s and Nordic’s 50% ownership interest in
the Hedrin JV.


15




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




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




During
the three month periods ended March 31, 2009 and 2008, the Company recognized
$135,786 and $19,873, respectively, of equity in the losses of the Hedrin
JV.  This reduced the carrying value of its investment in the Hedrin
JV to $364,214 at March 31, 2009.  As of March 31, 2009, the Hedrin JV
had cumulative losses since inception of $771,572, the Company’s share of the
losses is $385,786, equity in losses of Hedrin JV previous recognized was
$250,000 leaving a $135,786 share of the cumulative losses of the Hedrin JV to
be recognized by the Company at March 31, 2009.




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




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




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




The
Hedrin JV has engaged the Company to provide management services to the Limited
Partnership in exchange for a management fee.  For the three month
periods ended March 31, 2009 and 2008, the Company has recognized $108,845 and
$51,496, respectively, of other income from management fees earned from the
Hedrin JV which is included in the Company’s condensed statements of operations
for the three month periods ended March 31, 2009 and 2008 as a component of
interest and other income.


16




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




Nordic
paid to the Company a non-refundable fee of $150,000 at the closing for the
right to receive a warrant covering 11.1 million shares of the Company’s common
stock, as adjusted due to the 12% Notes Transaction, see note 11, exercisable
for $0.09 per share, as adjusted due to the 12% Notes Transaction, see note
11.  The warrant is issuable 90 days from closing, provided Nordic has
not exercised all or a part of its put, as described below.  The
Company issued the warrant to Nordic on April 30, 2008.  The per share
exercise price of the warrant was initially based on the volume weighted average
price of the Company’s common stock for the period prior to the signing of the
Hedrin JV Agreement and has been subsequently adjusted due to the 12% Notes
Transaction, see Note 8.




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




Nordic
has the right to nominate a person to serve on the Company’s Board of
Directors.  Nordic has nominated a person, however, that person has
declined to stand for appointment to the Company’s Board of
Directors.




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





The
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.





The
profits of the Hedrin JV will be shared by the Company and Nordic in accordance
with their respective equity interests in the Limited Partnership, which are
currently 50% to each, except that Nordic will get a minimum distribution from
the Hedrin JV equal to 5% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Limited Partnership.  If the Hedrin JV
realizes a profit equal to or greater than a 10% royalty on Hedrin sales, then
profits will be shared by the Company and Nordic in accordance with their
respective equity interests in the Limited Partnership.  However, in
the event of a liquidation of the Limited Partnership, Nordic’s distribution in
liquidation will be at least equal to the amount Nordic invested in the Hedrin
JV ($5 million) plus 10% per year, less the cumulative distributions received by
Nordic from the Hedrin JV.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.





7.           SECURED
10% NOTES PAYABLE





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


17




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




8.
            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 “12% Notes
Transaction”).  The Company sold $1,725,000 of 12% senior secured
notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase
57.5 million shares of the Company’s common stock at $0.09 per
share.  The warrants expire on December 31, 2013.  Net
proceeds of $1.4 million were realized from the three closings.  In
addition, $78,000 of issuance costs were paid outside of the
closings.   Per the terms of the 12% Notes Transaction the net
proceeds were paid into a deposit account  (the “Deposit Account”) and
are to be paid out to the Company in monthly installments of $113,300
retroactive to October 1, 2008 and a one-time payment of
$200,000.  Per the terms of the 12% Notes Transaction the monthly
installments are to be used exclusively to fund the current operating expenses
of the Company and the one-time payment was to be used for trade payables
incurred prior to October 1, 2008.  The Company received $362,000 of
such monthly installments and the one –time payment of $200,000 during the three
month period ended March 31,  2009.  The remaining balance
in the Deposit Account at March 31, 2009 of approximately $515,000 is reflected
in the accompanying balance sheets as of March 31, 2009 as restricted
cash.




National
Securities Corporation (“National”) was the placement agent for the 12% Notes
Transaction.  National’s compensation for acting as placement agent is
a cash fee of 10% of the gross proceeds received, a non-accountable expense
allowance of 1.5% of the gross proceeds, reimbursement of certain expenses and a
warrant to purchase such number of shares of the Company’s common stock equal to
15% of the shares underlying the warrants issued to the
investors.  The Company paid National a total of  $202,000
in placement agent fees, a non-accountable expense allowance and reimbursement
of certain expenses, of which $47,000 was paid during the three month period
ended March 31, 2009.  In addition, the Company issued warrants to
purchase 8.6 million shares of the Company’s common stock at $0.09 per
share.  These warrants were valued at $29,110 and are a component of
Secured 12% notes payable issue costs.  The warrants expire on
December 31, 2013.




The
Secured 12% Notes mature two years after issuance.  Interest on
the  Secured 12% Notes is compounded quarterly and payable at
maturity.  At March 31, 2009, accrued and unpaid interest on the
Secured 12% Notes amounted to approximately $63,000 and is reflected in the
accompanying balance sheet at March 31, 2009 as interest payable on secured 12%
notes payable. The Secured 12% Notes are secured by a pledge of all of the
Company’s assets except for its investment in the Hedrin JV.  The
asset pledge includes the cash balance in the Deposit Account.  In
addition, to provide additional security for the Company’s obligations under the
notes, the Company entered into a default agreement, which provides that upon an
event of default under the notes, the Company shall, at the request of the
holders of the notes, use reasonable commercial efforts to either (i) sell a
part or all of the Company’s interests in the Hedrin joint venture or (ii)
transfer all or part of the Company’s interest in the Hedrin JV to the holders
of the notes, as necessary, in order to fulfill the Company’s obligations under
the notes, to the extent required and to the extent permitted by the applicable
Hedrin joint venture agreements.





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 three month period ended March 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.


18


MANHATTAN
PHARMACEUTICALS, INC
 (A
Development Stage Company)
 NOTES
TO CONDENSED FINANCIAL STATEMENTS


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




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




The
conditions for the additional shares becoming issuable upon the exercise of
Nordic’s Put were met during the three month period ended March 31,
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.  These costs were
capitalized and are being amortized over the life of the Secured 12% Notes into
interest expense.  During the three month period ended March 31, 2009,
the amount amortized into interest expense was approximately
$50,000.  The remaining unamortized balance of approximately $358,000
is reflected in the accompanying balance sheet as of March 31, 2009 as a
non-current asset, secured 12% notes payable 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 three
month period ended March 31, 2009 the amount amortized into interest expense was
approximately $22,000.  The remaining unamortized balance of
approximately $165,000 has been netted against the face amount of the Secured
12% Notes in the accompanying balance sheet as of March 31, 2009.  As
per the terms of the 12% Notes Transaction the Company’s officers agreed to
certain modifications of their employment agreements(seeNote 5).




9.
            LICENSE
      AGREEMENTS




Altoderm
License Agreement





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


19




MANHATTAN
PHARMACEUTICALS, INC


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS


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




Altolyn
License Agreement





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




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




10.
            DERIVATIVE
      LIABILITY




In April
2008, the Financial Accounting Standards Board (“FASB”) issued EITF 07-05,
Determining whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock, (“EITF 07-05”). EITF 07-05 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 paragraph 11(a) of SFAS
133. EITF 07-05 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of EITF 07-5’s 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 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 EITF 07-5, the Company, estimated the fair value of these
warrants as of January 1, 2009 to be $22,222 by recording a reduction in
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 principles in our condensed statements
of stockholder’s equity (deficiency).  As of March 31, 2009 the
fair value of this derivative was $92,222. The change of $70,000 in fair value
during the three month period ended March 31, 2009 is reported as a non-cash
charge in our condensed statement of operations as a component of other (income)
expense.


20


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, 2008 (the “Annual Report”) and our financial statements for the
three month period ended March 31, 2009 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.  Through the merger, we acquired Tarpan’s
primary product candidate, Topical PTH (1-34) for the treatment of
psoriasis.  In consideration for their shares of Tarpan’s capital
stock, the stockholders of Tarpan received an aggregate of approximately
10,731,000 shares of our common stock, representing approximately 20% of our
then outstanding common shares.  This transaction was accounted for as
a purchase of Tarpan by the Company.




We are a
specialty healthcare product company focused on developing and
commercializing  pharmaceutical treatments for underserved patient
populations.  We aim to acquire rights to these technologies by
licensing or otherwise acquiring an ownership interest, funding their research
and development and eventually either bringing the technologies to market or
out-licensing.  In the short term we are focusing our efforts on the
commercialization of the two product candidates we currently have in
development:  HedrinTM,
through the Hedrin JV, a novel, non-insecticide treatment of pediculitis (head
lice) and a topical product for the treatment of psoriasis.  Longer
term we intend to acquire and commercialize low risk, quick to market products,
specifically products that could be marketed over-the-counter (“OTC”), treat
everyday maladies, are simple to manufacture, and/or could be classified as
medical devices by the FDA.




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.


21


Results
Of Operations




Three-month
Period ended March 31, 2009 vs 2008




Quarters
      ended March 31,
                                  
                                  
                                  Increase
                                  
                                  
                                  %
    Increase2009
                                  
                                  
                                  2008
                                  
                                  
                                  (decrease)
                                  
                                  
                                  (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  53,000
                                  
                                  
                                  $
                                  (53,000
                                  )
                                  
                                  
                                  -100.00
                                  %Other
      research and development expenses
                                  
                                  
                                  45,000
                                  
                                  
                                  
                                  747,000
                                  
                                  
                                  
                                  (702,000
                                  )
                                  
                                  
                                  -93.98
                                  %Total
      research and development expenses
                                  
                                  
                                  45,000
                                  
                                  
                                  
                                  800,000
                                  
                                  
                                  
                                  (755,000
                                  )
                                  
                                  
                                  -94.38
                                  %General
      and administrative:Share-based
      compensation
                                  
                                  
                                  104,000
                                  
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  (36,000
                                  )
                                  
                                  
                                  -25.71
                                  %Other
      general and administrative expenses
                                  
                                  
                                  408,000
                                  
                                  
                                  
                                  674,000
                                  
                                  
                                  
                                  (266,000
                                  )
                                  
                                  
                                  -39.47
                                  %Total
      general and administrative expenses
                                  
                                  
                                  512,000
                                  
                                  
                                  
                                  814,000
                                  
                                  
                                  
                                  (302,000
                                  )
                                  
                                  
                                  -37.10
                                  %Other
      income/(expense)
                                  
                                  
                                  (205,000
                                  )
                                  
                                  
                                  35,000
                                  
                                  
                                  
                                  (240,000
                                  )
                                  
                                  
                                  -685.71
                                  %Net
      loss
                                  
                                  $
                                  762,000
                                  
                                  
                                  $
                                  1,579,000
                                  
                                  
                                  $
                                  (817,000
                                  )
                                  
                                  
                                  -51.74
                                  %




During
each of the three month periods ended March 31, 2009 and 2008, we did not
recognize any revenues.  We are considered a development stage company
and do not expect to have revenues relating to our products candidates prior to
March 31, 2010, if at all.




For the
quarter ended March 31, 2009 research and development expense was $45,000 as
compared to $800,000 for the quarter ended March 31, 2008.  This
decrease of $755,000, or 94%, is primarily due to there being no active product
development projects during the 2009 period, as the Hedrin product is being
developed by the Hedrin JV and as we have ceased development of all other
products due to lack of funds and other factors.




For the
quarter ended March 31, 2009 general and administrative expense was $512,000 as
compared to $814,000 for the quarter ended March 31, 2008.  This
decrease of $302,000, or 37%, is primarily comprised of a decrease in
share-based compensation of $36,000 and a decrease in other general and
administrative expenses of $266,000.




For the
quarter ended March 31, 2009 other income/(expense) was $(205,000) as compared
to $35,000 for the quarter ended March 31, 2008.  This change of
$(240,000), or 686%, is primarily due to increases in equity in losses of from
the Hedrin JV of $116,000, a change in fair value of a derivative of $70,000 and
interest expense of $125,000 offset by an increase in interest and other income
of $72,000.




Net loss
for the quarter ended March 31, 2009 was $762,000 as compared to $1,579,000 for
the quarter ended March 31, 2008.  This decrease of $817,000, or 52%,
is primarily due to decreases in research and development expenses of $755,000
and in general and administrative expenses of $302,000 offset by a change in
other income/(expense) of $(240,000).




Liquidity
and Capital Resources




From
inception to March 31, 2009, we incurred a deficit during the development stage
of $59,902,000 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least March 31, 2010 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.


22




We have
financed our operations since inception primarily through equity and debt
financings and a joint venture transaction.  During the quarter ended
March 31, 2009, we had a net increase in cash and cash equivalents of
$124,000.  This increase resulted largely from net cash provided by
financing activities of $770,000 partially offset by net cash used in operating
activities of $646,000.  Total liquid resources as of March 31, 2009
were $230,000 compared to $106,000 at December 31, 2008.




Our
current liabilities as of March 31, 2009 were $993,000 compared to $1,486,000 at
December 31, 2008, a decrease of $493,000.  As of March 31, 2009, we
had working capital deficit of $195,000 compared to working capital deficit of
$612,000 at December 31, 2008.




The
Company received net proceeds of approximately $340,000 in February 2009 from
the final closing of the sale of the 12% Secured Notes and approximately
$500,000 in February 2009 from a joint venture agreement.  The Company
also repaid $70,000 in Secured 10% Notes in February 2009.




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




Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing,
other collaborative agreements, strategic alliances, and our ability to realize
the full potential of our technology in development.  Such additional
funds may not become available on acceptable terms and there can be no assurance
that any additional funding that we do obtain will be sufficient to meet our
needs in the long term.  Through March 31, 2009, a significant portion
of our financing has been through private placements of common stock and
warrants.  Unless our operations generate significant revenues and
cash flows from operating activities, we will continue to fund operations from
cash on hand and through the similar sources of capital previously
described.  We can give no assurances that any additional capital that
we are able to obtain will be sufficient to meet our needs.  We
believe that we will continue to incur net losses and negative cash flows from
operating activities for the foreseeable future.




Based on
the resources of the Company available at March 31, 2009, management believes
that the Company has sufficient capital to fund its operations through
2009.  Management believes that the Company will need additional
equity or debt financing or will need to generate positive cash flow from the
Hedrin joint venture, or generate revenues through licensing of its products or
entering into strategic alliances to be able to sustain its operations into
2010.  Furthermore, the Company will need additional financing
thereafter to complete development and commercialization of its
products.  There can be no assurances that we can successfully
complete development and commercialization of our products.




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




We have
reported net losses of $762,000 and $1,579,000 for the three month periods ended
March 31, 2009 and 2008, respectively.  The net loss attributable to
common shares from date of inception, including preferred stock dividends,
August 6, 2001 to March 31, 2009, amounts to $59,902,000.  Management
believes that we will continue to incur net losses through at least March 31,
2010.


23




Joint
Venture Agreement




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





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





The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The
Hedrin JV has engaged us to provide management services to the Hedrin JV in
exchange for an annualized management fee, which for the three month periods
ended March 31, 2009 and 2008 was approximately $109,000 and $51,000,
respectively.




The
profits of the Hedrin JV will be shared by us and Nordic in accordance with our
respective equity interests in the Hedrin JV, of which we each currently hold
50%, except that Nordic is entitled to receive a minimum return each year from
the Hedrin JV equal to 6% on Hedrin sales, as adjusted for any change in
Nordic’s equity interest in the Hedrin JV, before any distribution is made to
us.  If the Hedrin JV realizes a profit in excess of the Nordic
minimum return in any year, then such excess shall first be distributed to us
until our distribution and the Nordic minimum return are in the same ratio as
our respective equity interests in the Hedrin JV and then the remainder, if any,
is distributed to Nordic and us in the same ratio as our respective equity
interests.  However, in the event of a liquidation of the Hedrin JV,
Nordic’s distribution in liquidation must equal the amount Nordic invested in
the Hedrin JV ($5 million) plus 10% per year, less the cumulative distributions
received by Nordic from the Hedrin JV before any distribution is made to
us.  If the Hedrin JV’s assets in liquidation exceed the Nordic
liquidation preference amount, then any excess shall first be distributed to us
until our distribution and the Nordic liquidation preference amount are in the
same ratio as our respective equity interests in the Hedrin JV and then the
remainder, if any, is distributed to Nordic and us in the same ratio as our
respective equity interests.  Further, in no event shall Nordic’s
distribution in liquidation be greater than assets available for distribution in
liquidation.




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


24


Pursuant
to the joint venture agreement, Nordic has the right to put all or a portion of
its interest in the Hedrin JV in exchange for such number of shares of our
common stock equal to the amount of Nordic’s investment in the Hedrin JV divided
by $0.09, as adjusted for the sale of  the Secured 12% Notes in the
fourth quarter of 2008, and as further adjusted from time to time for stock
splits and other specified events, multiplied by a conversion factor, which is
(i) 1.00 for so long as Nordic's distributions from the Hedrin JV are less than
the amount of its investment, (ii) 1.25 for so long as Nordic's distributions
from the Hedrin JV are less than two times the amount of its investment but
greater than or equal to the amount of its investment amount, (iii) 1.50 for so
long as Nordic's distributions from the Hedrin JV are less than three times the
amount of its investment but greater than or equal to two times the amount of
its investment amount, (iv) 2.00 for so long as Nordic's distributions from the
Hedrin JV are less than four times the amount of its investment but greater than
or equal to three times the amount of its investment amount and (v) 3.00 for so
long as Nordic’s distributions from Hedrin JV are greater than or equal to four
times the amount of its investment.  The put right expires upon the
earlier to occur of (i) February 25, 2018 and (ii) 30 days after the date when
Nordic's distributions from the Hedrin JV exceed five times the amount Nordic
has invested in the Hedrin JV (or 10 days after such date if we have provided
Nordic notice thereof).





Pursuant
to the joint venture agreement, we have the right to call all or a portion of
Nordic's equity interest in the Hedrin JV in exchange for such number of shares
of our common stock equal to the portion of Nordic's investment in the Hedrin JV
that we call by the dollar amount of Nordic's investment as of such date in the
Hedrin JV, divided by $0.09, as adjusted for the sale of  the Secured
12% Notes in the fourth quarter of 2008, and as further adjusted from time to
time for stock splits and other specified events.  The call right is
only exercisable by us if the price of our common stock has closed at or above
$1.40 per share for 30 consecutive trading days.  During the first 30
consecutive trading days in which our common stock closes at or above $1.40 per
share, we may exercise up to 25% of the call right.  During the second
30 consecutive trading days in which our common stock closes at or above $1.40
per share, we may exercise up to 50% of the call right on a cumulative
basis.  During the third consecutive 30 trading days in which our
common stock closes at or above $1.40 per share, we may exercise up to 75% of
the call right on a cumulative basis.  During the fourth consecutive
30 days in which our common stock closes at or above $1.40 per share, we may
exercise up to 100% of the call right on a cumulative basis.  Nordic
may refuse the call, either by paying $1.5 million multiplied by the percentage
of Nordic's investment being called or forfeiting an equivalent portion of the
put right, calculated on a pro rata basis for the percentage of the Nordic
equity interest called by us.   The call right expires on
February 25, 2013.  For purposes of Nordic’s right to put, and our
right to call, all or a portion of Nordic’s equity interest in the Hedrin JV,
the amount of Nordic’s investment is currently $5,000,000.





In
connection with our joint venture agreement, on February 25, 2008, Nordic paid
us a non-refundable fee of $150,000 in exchange for the right to receive a
warrant to purchase up to 11,111,111 shares of our common stock at $0.09 per
share, as adjusted for the sale of the Secured 12% Notes in the fourth quarter
of 2008, and as further adjusted from time to time for stock splits and other
specified events, if Nordic did not exercise all or part of its put right on or
before April 30, 3008.  As of April 30, 2008, Nordic had not exercised
all or any portion of its put right and we issued the warrant to
Nordic.





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


25


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.





Secured
10% Notes Payable





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





Secured
12% Notes Payable




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





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





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.


26


Commitments




General




We often
contract with third parties to facilitate, coordinate and perform agreed upon
research and development of our product candidates.  To ensure that
research and development costs are expensed as incurred, we record monthly
accruals for clinical trials and nonclinical testing costs based on the work
performed under the contracts.




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




Swiss
Pharma Contract LTD, or Swiss Pharma, a clinical site that we used in one of our
obesity trials, gave notice to us that Swiss Pharma believed it was entitled to
receive an additional payment of $322,776 for services in connection with that
clinical trial.  The contract between us and Swiss Pharma provided for
arbitration in the event of a dispute, such as this claim for an additional
payment.  On March 10, 2008, Swiss Pharma filed for arbitration with
the Swiss Chamber of Commerce.  As we did not believe that Swiss
Pharma was entitled to additional payments, we defended our position in
arbitration.  On April 2, 2008, we filed our statement of defense and
counterclaim for recovery of costs incurred by us as a result of Swiss Pharma’s
failure to meet agreed upon deadlines under our contract.  On June 3,
2008, a hearing was held before the arbitrator.  On September 5, 2008,
the arbitrator rendered an award in favor of Swiss Pharma, awarding to Swiss
Pharma a total of approximately $646,000 which amount includes a contract
penalty of approximately $323,000, a final services invoice of approximately
$48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses
incurred in the arbitration process of approximately $245,000, reimbursement of
arbitration costs of approximately $13,000 and interest through September 5,
2008 of approximately $17,000.  Further, the arbitrator ruled that we
must pay interest at the rate of 5% per annum on approximately $371,000, the sum
of the contract penalty of approximately $323,000 and the final services invoice
of approximately $48,000, from October 12, 2007 until paid.  We had
previously recognized a liability to Swiss Pharma in the amount of $104,000 for
the final services invoice. The remainder of the award was expensed in
2008.  On January 22, 2009, we received notice that Swiss Pharma
submitted a petition to the Supreme Court of the State of New York, County of
New York seeking to confirm and to enter a judgment on the Arbitration
Award.  On February 17, 2009, we filed an answer to Swiss Pharma's
petition.  A hearing has not yet been scheduled.  We will
continue to accrue interest at the rate of 5% per annum on the approximate
$371,000 amount until such amount has been settled.  We do not have
sufficient cash or other current available assets to satisfy the arbitrator's
award.




Development
Commitments




At
present the Company has no development commitments.




Research
and Development Projects




Hedrin




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


27


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 the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a medical device.  In January 2009, the U.S.
Food and Drug Administration (“FDA”) Center for Devices and Radiological Health
(“CDRH”) notified H Pharmaceuticals that Hedrin had been classified as a Class
III medical device.  A Class III designation means that a Premarket
Approval (“PMA”) Application will need to be obtained before Hedrin can be
marketed in the U.S.  The Company expects to be required to complete
at least one clinical trial as part of that PMA Application.




To date,
we have incurred $1,084,000 of project costs for the development of
Hedrin.  None of these costs were incurred during the three month
period ended March 31, 2009.  We do not expect to incur any future
costs as the Hedrin JV is now responsible for all costs associated with
Hedrin.




Topical
PTH (1-34).




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




In April
2006, we encountered a stability issue with the original topical PTH (1-34)
product which utilized IGI’s Novosome®
formulation technology.  In order to resolve that stability issue we
created a new topical gel version of PTH (1-34) and filed new patent
applications in the U.S. for this new proprietary formulation.




In
September 2007, the U.S. FDA accepted our Investigational New Drug (“IND”)
application for this new gel formulation of Topical PTH (1-34), and in October
2007, we initiated and began dosing subjects in a Phase 2a clinical study of
Topical PTH (1-34) for the treatment of psoriasis.  This U.S.,
multi-center, randomized, double-blind, vehicle-controlled, parallel group study
was designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
in patients with mild to moderate psoriasis.  Approximately 54
subjects were enrolled and randomized to receive one of two dose levels of
Topical PTH (1-34), or the gel vehicle (placebo), for an 8 week treatment
period.  In this study the vehicle was the topical gel (“GEL”) without
the active ingredient, PTH (1-34).  In July 2008, we announced the
results of the Phase 2a study where Topical PTH (1-34) failed to demonstrate a
statistically significant or clinically meaningful improvement in
psoriasis.


28


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




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




To date,
we have incurred $6,504,000 of project costs related to our development of
Topical PTH (1-34).  These project costs have been incurred since
April 1, 2005, the date of the Tarpan Therapeutics acquisition.  None
of these costs were incurred during the three month period ended March 31,
2009.




Summary
of Contractual Commitments




Employment
Agreement




The Company has an employment agreement
with one employee for the payment of an annual base salary of $300,000 as well
as performance based bonuses.  This agreement has a remaining term of
three months and a remaining obligation of $83,000 as of March 31,
2009.  As per the terms of the Secured 12% Notes sold in the fourth
quarter of 2008 and the first quarter of 2009 management, comprised of the two
employees, including one under contract, has agreed to reduce their salaries
effective as of October 1, 2008.  If the Company sells at least $1.5
million but less than $2 million of Secured 12% Notes then their salaries shall
be reduced by 20%.  The Company sold $1.725 million of Secured 12%
Notes, management therefore was paid 80% of their salaries during the fourth
quarter of 2008. Also as per the terms of the Secured 12% Notes the reduction in
management’s salaries shall be reduced to 10% if the Company realizes gross
proceeds of $500,000 or more from other sources and there will be no reduction
if the Company realizes gross proceeds of $1,000,000 or more from other
sources.  In February 2009 the Company received a $500,000 milestone
payment from the Hedrin JV; therefore management’s salaries are currently
reduced by 10%.




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.


29


Research
and Development Expenses




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




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




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




Share-Based
Compensation




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




Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
transition method. Statement 123(R) revised Statement 123 to eliminate the
option to use the intrinsic value method and required the Company to expense the
fair value of all employee options over the vesting period.  Under the
modified prospective transition method, the Company recognizes compensation cost
for the three month periods ended March 31, 2009 and 2008 which includes a)
period compensation cost related to share-based payments granted prior to, but
not yet vested, as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement 123; and b)
period compensation cost related to share-based payments granted on or after
January 1, 2006, based on the grant date fair value estimated in accordance with
Statement 123(R). In accordance with the modified prospective method, the
Company has not restated prior period results.




New
Accounting Pronouncements




In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 160, “Noncontrolling interest in Consolidated Financial Statements”
(“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (minority)
interests in subsidiaries as equity in the consolidated financial statements.
SFAS 160 establishes a single method of accounting for changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation and
expands disclosures in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. The adoption of SFAS 160 did not have any impact on
our financial statements.


30


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




In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 "Determining the
Fair Value of a Financial Asset When the Market for That Asset is Not Active"
("FAS 157-3"), which is effective upon issuance for all financial statements
that have not been issued. FAS 157-3 clarifies the application of SFAS 157, in a
market that is not active.  FAS 157-3 did not have any impact on our
financial statements.




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




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




In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock" (“EITF 07-5”).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The adoption of EITF 07-5 had an impact on our
financial statements (see Note 10 to our financial statements for the period
ended March 31, 2009).




In
April 2009, the FASB issued Staff Position (“FSP”) No. 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly,” (“FSP FAS 157-4”) which provides guidance on determining when there
has been a significant decrease in the volume and level of activity for an asset
or liability, when a transaction is not orderly, and how that information must
be incorporated into a fair value measurement. FSP SFAS 157-4 also requires
expanded disclosures on valuation techniques and inputs and specifies the level
of aggregation required for all quantitative disclosures.  The
provisions of FSP SFAS 157-4 are effective for the Company’s quarter ending
June 30, 2009. We do not expect this FSP to have a material impact on our
financial statements.





In
April 2009, the FASB issued Staff Position (“FSP”) No. 115-2 and
No. 124-2, (“FSP FAS 155-2” and “FSP FAS 124-2”)“Recognition and
Presentation of Other-Than-Temporary Impairments,” which makes the guidance on
other-than-temporary impairments of debt securities more operational and
requires additional disclosures when a company records an other-than-temporary
impairment. FSP FAS 115-2 and FAS 124-2 are effective for interim
and annual reporting periods ending after June 15, 2009. We will be
required to adopt the principles of FSP FAS 115-2 and FAS 124-2
in the second quarter of 2009. We do not expect the adoption to have a material
effect on our financial statements.


31


Item
3.  Quantitative and Qualitative Disclosure About Market Risk




Our
exposure to market risk is confined to our cash and cash equivalents. We have
attempted to minimize risk by investing in high-quality financial instruments,
primarily money market funds with no security having an effective duration
longer than 90 days. If the market interest rate decreases by 100 basis points
or 1%, the fair value of our cash and cash equivalents portfolio would have
minimal to no impact on the carrying value of our portfolio. We did not hold any
derivative instruments as of March 31, 2009, and we have never held such
instruments in the past.




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of
March 31, 2009, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of that date were effective to ensure that
information required to be disclosed in the reports we file under the Securities
and Exchange Act is recorded, processed, summarized and reported on an accurate
and timely basis.




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




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




Changes
in Internal Control




During
the quarter ended March 31, 2009, 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.


32


Part
II





Item
1.  Legal Proceedings





Swiss
Pharma Contract LTD, or Swiss Pharma, a clinical site that we used in one of our
obesity trials, gave notice to us that Swiss Pharma believed it was entitled to
receive an additional payment of $322,776 for services in connection with that
clinical trial.  The contract between us and Swiss Pharma provided for
arbitration in the event of a dispute, such as this claim for an additional
payment.  On March 10, 2008, Swiss Pharma filed for arbitration with
the Swiss Chamber of Commerce.  As we did not believe that Swiss
Pharma was entitled to additional payments, we defended our position in
arbitration.  On April 2, 2008, we filed our statement of defense and
counterclaim for recovery of costs incurred by us as a result of Swiss Pharma’s
failure to meet agreed upon deadlines under our contract.  On June 3,
2008, a hearing was held before the arbitrator under the auspices of the Swiss
Chamber of Commerce.  On September 5, 2008, the arbitrator rendered an
award in favor of Swiss Pharma, awarding to Swiss Pharma a total of $646,000
which amount includes a $323,000 contract penalty, a final services invoice of
$48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses
incurred in the arbitration process of $245,000, reimbursement of arbitration
costs of $13,000 and interest through September 5, 2008 of
$17,000.  Further, the arbitrator ruled that we must pay interest at
the rate of 5% per annum on $371,000, the sum of the $323,000 contract penalty
and the final services invoice of $48,000, from October 12, 2007 until
paid.  We had previously recognized a liability to Swiss Pharma in the
amount of $104,000 for the final services invoice. The remainder of the award
was expensed in 2008.  On January 22, 2009, we received notice that
Swiss Pharma submitted a petition to the Supreme Court of the State of New York,
County of New York seeking to confirm and to enter a judgment on the Arbitration
Award.  On February 17, 2009, we filed an answer to Swiss Pharma's
petition.  A hearing has not yet been scheduled.  We will
continue to accrue interest at the rate of 5% per annum on the $371,000 until
such amount has been settled.  We do not have sufficient cash or other
current available assets to satisfy the arbitrator's award.




Item
1A.  Risk Factors




We have
not had material changes to our risk factor disclosure in our Annual Report on
Form 10-K for the year ended December 31, 2008 under the caption “Risk Factors”
following Item 1 of such report.




Item
6.  Exhibits




Exhibit No.
                
                Description31.1
                
                Certification
      of Chief Executive Officer31.2
                
                Certification
      of Chief Financial Officer32.1
                
                Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.


33


SIGNATURES





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





MANHATTAN
      PHARMACEUTICALS, INC.Date:
      May 15, 2009
                      By:
                      /s/  Douglas
  AbelDouglas
      AbelPresident
      and Chief Executive OfficerDate:
      May 15, 2009
                      By:
                      /s/ Michael G.
McGuinnessMichael
      G. McGuinnessChief
      Operating and Financial
Officer




34


Index to Exhibits Filed with
this Report




Exhibit
      No.
                Description31.1
                Certification
      of Principal Executive Officer.31.2
                Certification
      of Principal Financial Officer.32.1
                Certifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




35