**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
                1934For
                the quarterly period ended September 30, 2008ORo
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                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
o





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 filero
            Accelerated
                filero
            Non-accelerated
                filero
            Smaller
                reporting companyx





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





As
      of
      November 1, 2008 there were 70,624,232 shares of the issuer’s common stock,
      $.001 par value, outstanding.


1


**INDEX**




Page**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Unaudited
                Condensed Consolidated Balance Sheets
            4Unaudited
                Condensed Consolidated Statements of Operations
            5Unaudited
                Condensed Consolidated Statement of Stockholders’ Equity
                (Deficiency)
            6Unaudited
                Condensed Consolidated Statements of Cash Flows
            8Notes
                to Unaudited Condensed Consolidated Financial Statements
            9Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            23Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            40Item
                4.
            Controls
                and Procedures
            40**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            41Item
                1A.
            Risk
                Factors
            41Item
                6.
            Exhibits
            41Signatures
            42





2


**Forward-Looking
      Statements**




This
      quarterly report on Form 10-Q contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended, or the
      Securities Act, and Section 21E of the Securities and Exchange Act of 1934.
      Any statements about our expectations, beliefs, plans, objectives, assumptions
      or future events or performance are not historical facts and may be
      forward-looking. These statements are often, but not always, made through the
      use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,”
“expect,” “may,” “intend” and similar words or phrases. Accordingly, these
      statements involve estimates, assumptions and uncertainties that could cause
      actual results to differ materially from those expressed in them. These
      statements are therefore subject to risks and uncertainties, known and unknown,
      which could cause actual results and developments to differ materially from
      those expressed or implied in such statements. Such risks and uncertainties
      relate to, among other factors:




·
            the
                development of our drug candidates;


·
            the
                regulatory approval of our drug
                candidates;


·
            our
                use of clinical research centers and other
                contractors;


·
            our
                ability to find collaborative partners for research, development
                and
                commercialization of potential
                products;


·
            acceptance
                of our products by doctors, patients or
                payers;


·
            our
                ability to market any of our
                products;


·
            our
                history of operating losses;


·
            our
                ability to compete against other companies and research
                institutions;


·
            our
                ability to secure adequate protection for our intellectual
                property;


·
            our
                ability to attract and retain key
                personnel;


·
            availability
                of reimbursement for our product
                candidates;


·
            the
                effect of potential strategic transactions on our
                business;


·
            our
                ability to obtain adequate financing;
                and


·
            the
                volatility of our stock price.




Further,
      any forward-looking statement speaks only as of the date on which it is made,
      and we undertake no obligation to update any forward-looking statement or
      statements to reflect events or circumstances after the date on which such
      statement is made or to reflect the occurrence of unanticipated events. New
      factors emerge from time to time, and it is not possible for us to predict
      which
      factors will arise. In addition, we cannot assess the impact of each factor
      on
      our business or the extent to which any factor, or combination of factors,
      may
      cause actual results to differ materially from those contained in any
      forward-looking statements.


3


**Part
      I - Financial Information**


**Item
      1. Unaudited Condensed Consolidated Financial Statements**





**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)


Condensed
      Consolidated Balance Sheets




**September
                30,**
              **2008**
            
            **December
                31,**
              **2007****Assets**
            
            (Unaudited)
            
            (See
                Note 1)Current
                assets:Cash
                and cash equivalents
            
            $
            35,664
            
            $
            649,686Prepaid
                expenses and other current assets
            
            
            75,422
            
            
            215,852Total
                current assets
            
            
            111,086
            
            
            865,538Investment
                in Hedrin JV
            
            
            2,269
            
            
            -Property
                and equipment, net
            
            
            11,920
            
            
            44,533Other
                assets
            
            
            79,625
            
            
            70,506Total
                assets
            
            $
            204,900
            
            $
            980,577**Liabilities
                and Stockholders’ Deficiency**Current
                liabilities:Secured
                10% notes payable
            
            $
            70,000
            
            $
            -Accounts
                payable
            
            
            705,323
            
            
            1,279,485Accrued
                expenses
            
            
            1,238,303
            
            
            592,177Total
                current liabilities
            
            
            2,013,626
            
            
            1,871,662Exchange
                obligation
            
            
            2,949,176
            
            
            -Total
                liabilities
            
            
            4,962,802
            
            
            1,871,662Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, $.001 par value. Authorized 1,500,000 shares; no shares
                issuedand
                outstanding at September 30, 2008 and December 31, 2007Common
                stock, $.001 par value. Authorized 300,000,000 shares; 70,624,232shares
                issued and outstanding at September 30, 2008 and December 31,
                2007
            
            
            70,624
            
            
            70,624Additional
                paid-in capital
            
            
            54,566,421
            
            
            54,037,361Deficit
                accumulated during the development stage
            
            
            (59,394,947
            )
            
            (54,999,070
            )Total
                stockholders’ deficiency
            
            
            (4,757,902
            )
            
            (891,085
            )Total
                liabilities and stockholders' deficiency
            
            $
            204,900
            
            $
            980,577





See
                accompanying notes to condensed consolidated financial
                statements.


4




**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)


Condensed
      Consolidated Statements of Operations


(Unaudited)




**Three
                  months ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,**
              
              **Cumulative
                  period from August 6, 2001 (inception) to September
                  30****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **2008**Costs
                  and expenses:Research
                  and development
              
              $
              498,853
              
              $
              1,808,958
              
              $
              1,864,652
              
              $
              7,360,040
              
              $
              28,353,695General
                  and administrative
              
              
              884,705
              
              
              898,063
              
              
              2,600,303
              
              
              2,865,161
              
              
              16,452,666In-process
                  research and development charge
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              11,887,807Impairment
                  of intangible assets
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,248,230Loss
                  on disposition of intangible assets
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,213,878Total
                  operating expenses
              
              
              1,383,558
              
              
              2,707,021
              
              
              4,464,955
              
              
              10,225,201
              
              
              59,156,276Operating
                  loss
              
              
              (1,383,558
              )
              
              (2,707,021
              )
              
              (4,464,955
              )
              
              (10,225,201
              )
              
              (59,156,276
              )Other
                  (income) expense:Equity
                  in loss of Hedrin JV
              
              
              140,138
              
              
              —
              
              
              247,731
              
              
              —
              
              
              247,731Interest
                  and other income
              
              
              (148,184
              )
              
              (37,600
              )
              
              (335,613
              )
              
              (97,598
              )
              
              (1,157,510
              )Interest
                  expense
              
              
              18,804
              
              
              —
              
              
              18,804
              
              
              475
              
              
              44,838Realized
                  gain on sale of marketable equity securities
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (76,032
              )Total
                  other (income) expense
              
              
              10,758
              
              
              (37,600
              )
              
              (69,078
              )
              
              (97,123
              )
              
              (940,973
              )Net
                  loss
              
              
              (1,394,316
              )
              
              (2,669,421
              )
              
              (4,395,877
              )
              
              (10,128,078
              )
              
              (58,215,303
              )Preferred
                  stock dividends (including imputed amounts)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,179,644
              )Net
                  loss applicable to common shares
              
              $
              (1,394,316
              )
              $
              (2,669,421
              )
              $
              (4,395,877
              )
              $
              (10,128,078
              )
              $
              (59,394,947
              )Net
                  loss per common share:Basic
                  and diluted
              
              $
              (0.02
              )
              $
              (0.04
              )
              $
              (0.06
              )
              $
              (0.15
              )Weighted
                  average shares of common stock outstanding:Basic
                  and diluted
              
              
              70,624,232
              
              
              70,591,623
              
              
              70,624,232
              
              
              67,134,882


See
      accompanying notes to unaudited condensed consolidated financial
      statements.


5


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)


Condensed
      Consolidated Statement of Stockholders’ Equity (Deficiency)


(Unaudited)




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


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)


Consolidated
      Statement of Stockholders’ Equity (Deficiency)


(Unaudited)




**Series
                  A convertible preferred stock**
              
              **Series
                  A convertible preferred stock**
              
              **Common
                  stock**
              
              **Common
                  stock**
              
              **Additional
                  paid-in capital**
              
              **Subscription
                  receivable**
              
              **Deficit
                  accumulated during development stage**
              
              **Dividends
                  payable in Series A preferred stock**
              
              **Accumulated
                  other comprehensive income (loss)**
              
              **Unearned
                  consulting services**
              
              **Total
                  stockholders’ equity (deficiency)****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Amount**
              
              **Amount**
              
              **Amount**
              
              **Amount**
              
              **Amount**
              
              **Amount**
              
              **Amount**Common
                  stock issued at $1.11 and $1.15, net of expenses
              
              
              —
              
              
              —
              
              
              11,917,680
              
              
              11,918
              
              
              12,238,291
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              12,250,209Common
                  stock issued to vendor at $1.11 per share in satisfaction of accounts
                  payable
              
              
              —
              
              
              —
              
              
              675,675
              
              
              676
              
              
              749,324
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              750,000Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              32,400
              
              
              33
              
              
              32,367
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              32,400Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              279,845
              
              
              279
              
              
              68,212
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              68,491Preferred
                  stock dividend accrued
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (175,663
              )
              
              175,663
              
              
              —
              
              
              —
              
              
              —Preferred
                  stock dividends paid by issuance of shares
              
              
              41,781
              
              
              42
              
              
              —
              
              
              —
              
              
              477,736
              
              
              —
              
              
              —
              
              
              (479,074
              )
              
              —
              
              
              —
              
              
              (1,296
              )Conversion
                  of preferred stock to common stock at $1.10 per share
              
              
              (896,154
              )
              
              (896
              )
              
              8,146,858
              
              
              8,147
              
              
              (7,251
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Share-based
                  compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              66,971
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              20,168
              
              
              87,139Reversal
                  of unrealized gain on short-term investments
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (12,250
              )
              
              —
              
              
              (12,250
              )Stock
                  issued in connection with acquisition of Tarpan Therapeutics,
                  Inc.
              
              
              —
              
              
              —
              
              
              10,731,052
              
              
              10,731
              
              
              11,042,253
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              11,052,984Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (19,140,997
              )
              
              —
              
              
              —
              
              
              —
              
              
              (19,140,997
              )Balance
                  at December 31, 2005
              
              
              —
              
              
              —
              
              
              60,092,697
              
              
              60,093
              
              
              42,751,111
              
              
              —
              
              
              (33,271,695
              )
              
              —
              
              
              987
              
              
              —
              
              
              9,540,496Cashless
                  exercise of warrants
              
              
              —
              
              
              —
              
              
              27,341
              
              
              27
              
              
              (27
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Share-based
                  compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,675,499
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,675,499Unrealized
                  loss on short-term investments
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (987
              )
              
              —
              
              
              (987
              )Costs
                  associated with private placement
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (15,257
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (15,257
              )Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (9,695,123
              )
              
              —
              
              
              —
              
              
              —
              
              
              (9,695,123
              )Balance
                  at December 31, 2006
              
              
              —
              
              
              —
              
              
              60,120,038
              
              
              60,120
              
              $
              44,411,326
              
              
              —
              
              
              (42,966,818
              )
              
              —
              
              
              —
              
              
              —
              
              
              1,504,628Common
                  stock issued at $0.84 and $0.90 per shares, net of
                  expenses
              
              
              —
              
              
              —
              
              
              10,185,502
              
              
              10,186
              
              
              7,841,999
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              7,852,185Common
                  stock issued to directors at $0.72 per share in satisfaction of
                  accounts
                  payable
              
              
              —
              
              
              —
              
              
              27,776
              
              
              28
              
              
              19,972
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              20,000Common
                  stock issued to in connection with in-licensing agreement at $0.90
                  per
                  share
              
              
              —
              
              
              —
              
              
              125,000
              
              
              125
              
              
              112,375
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              112,500Common
                  stock issued to in connection with in-licensing agreement at $0.80
                  per
                  share
              
              
              —
              
              
              —
              
              
              150,000
              
              
              150
              
              
              119,850
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              120,000Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              10,327
              
              
              15
              
              
              7,219
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              7,234Cashless
                  exercise of warrants
              
              
              —
              
              
              —
              
              
              5,589
              
              
              —
              
              
              (6
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (6
              )Share-based
                  compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,440,956
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,440,956Warrants
                  issued for consulting
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              83,670
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              83,670Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (12,032,252
              )
              
              —
              
              
              —
              
              
              —
              
              
              (12,032,252
              )Balance
                  at December 31, 2007
              
              
              —
              
              
              —
              
              
              70,624,232
              
              
              70,624
              
              
              54,037,361
              
              
              —
              
              
              (54,999,070
              )
              
              —
              
              
              —
              
              
              —
              
              
              (891,085
              )Sale
                  of warrant
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              150,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              150,000Share-based
                  compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              379,060
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              379,060Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              -
              
              
              —
              
              
              (4,395,877)
              )
              
              —
              
              
              —
              
              
              —
              
              
              (4,395,877)
              )Balance
                  at September 30, 2008
              
              
              —
              
              $
              —
              
              
              70,624,232
              
              $
              70,624
              
              $
              54,566,421
              
              $
              —
              
              $
              (59,394,947)
              )
              $
              —
              
              $
              —
              
              $
              —
              
              $
              (4,757,902)
              )
  See
        accompanying notes to unaudited condensed
        consolidated financial statements.


7


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


(A
      Development Stage Company)


Condensed
      Consolidated Statements of Cash Flows


(Unaudited)


**Nine
                  months ended**
                **September
                  30,**
              
              **Cumulative
                  period from August 6, 2001**
                **(inception)
                  to**
                **September
                  30, 2008**Cash
                    flows from operating activities:
              
              **2008**
              
              **2007**Net
                  loss
              
              $
              (4,395,877
              )
              $
              (10,128,078
              )
              $
              (58,215,303
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Equity
                  in loss of Hedrin JV
              
              
              247,731
              
              
              —
              
              
              247,731Share-based
                  compensation
              
              
              379,060
              
              
              1,078,185
              
              
              3,744,043Shares
                  issued in connection with in-licensing agreement
              
              
              —
              
              
              232,500
              
              
              232,500Warrants
                  issued to consultant
              
              
              —
              
              
              —
              
              
              83,670Amortization
                  of intangible assets
              
              
              —
              
              
              —
              
              
              145,162Gain
                  on sale of marketable equity securities
              
              
              —
              
              
              
              
              
              (76,032
              )Depreciation
              
              
              23,258
              
              
              40,406
              
              
              219,083Non
                  cash portion of in-process research and development charge
              
              
              —
              
              
              —
              
              
              11,721,623Loss
                  on impairment and disposition of intangible assets
              
              
              —
              
              
              —
              
              
              2,462,108Loss
                  on sale of fixed assets
              
              
              18,327
              
              
              —
              
              
              23,917Changes
                  in operating assets and liabilities, net of acquisitions:(Increase)/decrease
                  in prepaid expenses and other current assets
              
              
              140,430
              
              
              62,425
              
              
              (17,177
              )Increase
                  in other assets
              
              
              (9,119
              )
              
              -
              
              
              (79,625
              )Increase
                  /(decrease) in accounts payable
              
              
              (574,162
              )
              
              (520,806
              )
              
              1,125,536Increase
                  in accrued expenses
              
              
              646,126
              
              
              388,627
              
              
              697,982Net
                  cash used in operating activities
              
              
              (3,524,226
              )
              
              (8,846,741
              )
              
              (37,684,782
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (8,972
              )
              
              (9,135
              )
              
              (239,607
              )Cash
                  paid in connection with acquisitions
              
              
              —
              
              
              —
              
              
              (26,031
              )Net
                  cash provided from the purchase and sale of short-term investments,
                  net
              
              
              —
              
              
              —
              
              
              435,938Proceeds
                  from the sale of license
              
              
              —
              
              
              —
              
              
              200,001Net
                  cash (used in) provided by investing activities
              
              
              (8,972
              )
              
              (9,135
              )
              
              370,301Cash
                  flows from financing activities:Repayments
                  of notes payable to stockholders
              
              
              —
              
              
              —
              
              
              (884,902
              )Proceeds
                  related to sale of common stock, net
              
              
              —
              
              
              7,852,185
              
              
              25,896,262Proceeds
                  from sale of preferred stock, net
              
              
              —
              
              
              —
              
              
              9,046,176Proceeds
                  from exercise of warrants and stock options
              
              
              —
              
              
              7,228
              
              
              138,219Proceeds
                  from the Hedrin JV Agreement, net
              
              
              2,699,176
              
              
              —
              
              
              2,699,176Sale
                  of warrant
              
              
              150,000
              
              
              —
              
              
              150,000Proceeds
                  from sale of 10% Secured Notes
              
              
              70,000
              
              
              —
              
              
              70,000Other,
                  net
              
              
              —
              
              
              —
              
              
              235,214Net
                  cash provided by financing activities
              
              
              2,919,176
              
              
              7,859,413
              
              
              37,350,145Net
                  (decrease) increase in cash and cash equivalents
              
              
              (614,022
              )
              
              (996,463
              )
              
              35,664Cash
                  and cash equivalents at beginning of period
              
              
              649,686
              
              
              3,029,118
              
              
              —Cash
                  and cash equivalents at end of period
              
              $
              35,664
              
              $
              2,032,655
              
              $
              35,664
 Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              —
              
              $
              475
              
              $
              26,033Supplemental
                  disclosure of noncash investing and financing activities:Common
                  stock issued in satisfaction of accounts payable
              
              $
              —
              
              $
              20,000
              
              $
              750,000Imputed
                  preferred stock dividend
              
              
              —
              
              
              —
              
              
              418,182Preferred
                  stock dividends accrued
              
              
              —
              
              
              —
              
              
              761,462Preferred
                  stock dividends paid by issuance of shares
              
              
              —
              
              
              —
              
              
              9,046,176Conversion
                  of preferred stock to common stock
              
              
              —
              
              
              —
              
              
              759,134Issuance
                  of common stock for acquisitions
              
              
              —
              
              
              —
              
              
              13,389,226Issuance
                  of common stock in connection with in-licensing agreement
              
              
              —
              
              
              232,500
              
              
              232,500Marketable
                  equity securities received in connection with sale of
                  license
              
              
              —
              
              
              —
              
              
              359,907Warrants
                  issued to consultant
              
              
              —
              
              
              —
              
              
              83,670Net
                  liabilities assumed over assets acquired in business
                  combination
              
              
              —
              
              
              —
              
              
              (675,416
              )Investment
                  in Hedrin JV
              
              
              250,000
              
              
              —
              
              
              250,000Cashless
                  exercise of warrants
              
              
              —
              
              
              6
              
              
              33Issuance
                  of warrants to holders of 10% secured notes
              
              
              —
              
              
              —
              
              
              —
  See
                  accompanying notes to condensed consolidated financial
                  statements. 8


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**1.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation**





The
      accompanying unaudited condensed consolidated financial statements of Manhattan
      Pharmaceuticals, Inc. and its subsidiaries (“Manhattan” or the “Company”) have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America for interim financial information and the rules and
      regulations of the Securities and Exchange Commission. Accordingly, the
      unaudited condensed consolidated financial statements do not include all
      information and footnotes required by accounting principles generally accepted
      in the United States of America for complete annual financial statements. In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements reflect all adjustments, consisting of only normal
      recurring adjustments, considered necessary for a fair presentation. Interim
      operating results are not necessarily indicative of results that may be expected
      for the year ending December 31, 2008 or for any other interim period.
      These unaudited condensed consolidated financial statements should be read
      in
      conjunction with the Company’s audited consolidated financial statements as of
      and for the year ended December 31, 2007, which are included in the
      Company’s Annual Report on Form 10-K for such year. The condensed balance sheet
      as of December 31, 2007 has been derived from the audited financial statements
      included in the Form 10-K for that year.





As
      of
      December 31, 2006 all of the Company’s subsidiaries had either been dissolved or
      merged into Manhattan. As a result, the Company had no subsidiaries during
      the
      nine month periods ended September 30, 2008 and 2007.





As
      of
      September 30, 2008, 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 consolidated 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 8) 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.





9


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**New
      Accounting Pronouncements**





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




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





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” ("SFAS 162"). SFAS 162 identifies the sources of
      accounting principles and the framework for selecting the principles used in
      the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles in the
      United States. SFAS shall be effective 60 days following the SEC's approval
      of
      the Public Company Accounting Oversight Board amendments to AU Section 411,
      The
      Meaning of Present Fairly in Conformity with General Accepted Accounting
      Principles. We have not yet assessed the impact of adopting SFAS
      162.




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




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


10
 **MANHATTAN
          PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
          development Stage Company)**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**2.**  **LIQUIDITY**





The
      Company incurred a net loss of $4,395,877 and negative cash flows from operating
      activities of $3,524,226 for the nine month period ended September 30, 2008.
      The
      net loss applicable to common shares from date of inception, August 6, 2001,
      to
      September 30, 2008 amounts to $59,394,947.





The
      Company received approximately $7.9 million net of expenses from a private
      placement of common stock and warrants in March 2007. This private placement
      is
      more fully described in Note 6.





The
      Company received approximately $2.0 million in February 2008 and approximately
      $1.0 million in June 2008 from a joint venture agreement. This joint venture
      agreement is more fully described in Note 8. The Company also received $70,000
      in Secured Promissory Notes in September 2008. These notes are more fully
      described in Note 10.





Management
      believes that the Company will continue to incur net losses through at least
      September 30, 2009 and for the foreseeable future thereafter. Based on the
      resources of the Company available at September 30, 2008 including the net
      proceeds received from the February 2008 joint venture agreement, and the
      September 2008 sale of 10% Secured Promissory Notes, as more fully described
      in
      note 10, and taking into consideration the net proceeds from the November 2008
      12% Secured Promissory Notes, as more fully described in note 11, management
      believes that the Company has sufficient capital to fund its operations until
      the middle of 2009. Management believes that the Company has a need for capital
      in order to sustain its operations and will need additional equity or debt
      financing or will need to generate revenues through licensing of its products
      or
      entering into strategic alliances to be able to sustain its operations through
      2009. Furthermore, we will need additional financing thereafter to complete
      development and commercialization of our products. There can be no assurances
      that we can successfully complete development and commercialization of our
      products.





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





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.





**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 the assumed exercise
      of
      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 of diluted net
      loss per share were 19,500,189 and 18,634,521 as of September 30, 2008 and
      2007,
      respectively. These amounts do not include the shares issuable in connection
      with the Hedrin JV (see Note 8); the 26,785,714 shares of common stock issuable
      upon exercise of the put or call rights; the up to 8,928,572 additional shares
      which may become issuable upon exercise of a conditionally issuable put or
      call
      rights and the 7,142,857 shares of common stock issuable upon exercise of a
      conditionally issuable warrant.




11


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**4.**  **SHARE-BASED
      COMPENSATION**





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123(R), “Share-Based Payment,” (“Statement 123(R)”) for employee options
      using the modified prospective transition method. Statement 123(R) revised
      Statement 123 “Accounting for Stock-based Compensation” 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
      nine month periods ending September 30, 2008 and 2007 based on the grant date
      fair value estimated in accordance with Statement 123(R). This 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. 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. The Company recognized share-based
      compensation cost of $83,396 and $371,636
      for the three month periods ended September 30, 2008 and 2007 respectively,
      and
      $379,060 and $1,078,185 for the nine month periods ended September 30, 2008
      and
      2007, 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 Emerging Issues Task Force (“EITF”) No. 96-18 "Accounting for Equity
      Instruments That Are Issued to Other than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services", and Financial Accounting Standards
      Board Interpretation No 28 “Accounting for Stock Appreciation Rights and Other
      Variable Option or Award Plans”. Accordingly, such options are recorded at
      fair value at the date of grant and subsequently adjusted to fair value at
      the end of each reporting period until such options vest, and the fair
      value of the options, as adjusted, is amortized to consulting expense over
      the related vesting period. As a result of adjusting consultant and other
      non-employee options to fair value, the Company recognized share-based
      compensation (credit) / cost of $347 and $606, respectively, for the three-and
      nine months ended September 30, 2008 and $(8,767) and $(15,762), respectively
      for the three-and nine months ended September 30, 2007.


12


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company has allocated share-based compensation costs and credits to general
      and
      administrative and research and development expenses as follows:




**Three
                months ended**
              **September
                30,**
            
            
            **Nine
                months ended**
              **September
                30,****2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**General
              and administrative expense:Share-based
                employee compensation cost
            
            $
            64,071
            
            $
            254,870
            
            $
            279,476
            
            $
            726,414Share-based
                consultant and non-employee (credit) cost
            
            
            —
            
            
            —
            
            
            —
            
            
            10,550$
            64,071
            
            $
            254,870
            
            $
            279,476
            
            $
            736,964Research
                and development expense:Share-based
                employee compensation cost
            
            $
            18,978
            
            $
            125,533
            
            $
            98,978
            
            $
            356,983Share-based
                consultant and non-employee (credit) cost
            
            
            347
            
            
            (8,767
            )
            
            606
            
            
            (15,762
            )$
            19,325
            
            $
            116,766
            
            $
            99,584
            
            $
            341,221Total
                share-based cost
            
            $
            83,396
            
            $
            371,636
            
            $
            379,060
            
            $
            1,078,185





To
      compute compensation expense in 2008 and 2007, the Company estimated the fair
      value of each option award on the date of grant using the Black-Scholes model.
      The Company based the expected volatility assumption on a volatility index
      of
      peer companies as the Company did not have a sufficient number of years of
      historical volatility data related to 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 permitted by the
      Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 and 110.
      The expected forfeiture rates are based on the historical forfeiture
      experiences. To determine the risk-free interest rate, the Company utilized
      the
      U.S. Treasury yield curve in effect at the time of grant with a term consistent
      with the expected term of the Company’s awards. The Company has not declared a
      dividend on its common stock since its inception and has no intentions of
      declaring a dividend in the foreseeable future and therefore used a dividend
      yield of zero.





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





**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Expected
                Volatility
            
            
            92.3
            %
            
            79.7
                - 93.2
            %
            
            92.3
            %
            
            79.7
                - 93.2
            %Dividend
                yield
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expected
                term (in years)
            
            
            6
            
            
            6
                - 8
            
            
            6
            
            
            6
                - 8Risk-free
                interest rate
            
            
            2.81
            %
            
            4.56%
                - 4.96
            %
            
            2.81
            %
            
            4.56%
                - 4.96
            %




13


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




The
      Company has shareholder-approved stock incentive 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 common stock. The Company increased the
      number of shares of common stock reserved for issuance under the 2003 Plan
      in
      August 2005 by 2,000,000 shares and in May 2007 by 3,000,000 shares. At
      September 30, 2008, under the 2003 Plan, 10,400,000 shares of common stock
      were
      authorized for issuance. At September 30, 2008, under the 2003 Plan, options
      to
      purchase 9,539,096 shares of common stock were outstanding. At September 30,
      2008, there were 860,904 shares reserved for future grants under the 2003 Plan.
      The options have a maximum term of 10 years and vest over a period determined
      by
      the Company’s Board of Directors (generally three years) and are issued at an
      exercise price equal to or greater than the fair market value of the shares
      at
      the date of grant. The 2003 Plan expires on December 10, 2013 or when all
      options have been granted, whichever is sooner. Under the 2003 Plan, the Company
      granted options to purchase an aggregate of 2,967,500 shares of common stock
      during the nine months ended September 30, 2008 at an exercise price of $0.17
      per share. In addition, 27,776 shares of common stock were issued during 2007
      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 shares reserved
      for
      stock option grants. In September 2005, the 1995 Plan expired and no further
      options can be granted. As of September 30, 2008, options to purchase 1,137,240
      shares were outstanding under the 1995 Plan and no shares were reserved for
      future stock option grants.





A
      summary
      of the status of the Company’s outstanding stock options as of September 30,
      2008 and changes during the nine months then ended is presented
      below:





**Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Term (years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                at December 31, 2007
            
            
            8,033,808
            
            $
            1.25Granted:Officers
            
            
            2,400,000Directors
            
            
            375,000Employees
            
            
            192,500Total
                granted
            
            
            2,967,500
            
            
            0.17Exercised
            
            
            -Cancelled
            
            
            (324,972
            )
            
            0.17Outstanding
                at September 30, 2008
            
            
            10,676,336
            
            $
            0.94
            
            
            7.19
            
            $
            -Exercisable
                at September 30, 2008
            
            
            8,093,025
            
            $
            1.12
            
            
            6.56Weighted
                average fair value of options granted during the nine months ended
                September 30, 2008
            
            $
            0.13





14


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


As
      of
      September 30, 2008, the total compensation cost related to non-vested option
      awards not yet recognized is $510,555. The weighted average period over which
      it
      is expected to be recognized is approximately 1.4 years.




**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 $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
      the Company 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.





The
      Company had previously recognized a liability to Swiss Pharma in the amount
      of
      $104,000 for the final services invoice. The remainder of the award, $542,000,
      has been expensed in September 2008. The Company has recognized research and
      development expense of $267,000, general and administrative expense of $257,000
      and interest expense of $18,000 during the quarter ended September 30, 2008.
      The
      Company will continue to accrue interest at the rate of 5% per annum on the
      $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.





**Contentions
      of a Former Employee**





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


15


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


**(A
      development Stage Company)**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**Employment
      Agreements**





The
      Company has employment agreements with two employees for the payment of
      aggregate annual base salaries of $675,000 as well as performance based bonuses.
      These agreements have a remaining term of six months for one of the employees,
      and nine months for the second employee, and have a total remaining obligation
      under these agreements of $419,589 as of September 30, 2008.





**6.**  **PRIVATE
      PLACEMENT OF COMMON SHARES**





On
      March
      30, 2007, the Company entered into a series of subscription agreements with
      various institutional and other accredited investors for the issuance and sale
      in a private placement of an aggregate of 10,185,502 shares of its common stock
      for total net proceeds of approximately $7.85 million, after deducting
      commissions and other costs of the transaction. Of the total amount of shares
      issued, 10,129,947 were sold at a per share price of $0.84, and an additional
      55,555 shares were sold to an entity affiliated with a director of the Company,
      at a per share price of $0.90, the closing sale price of the common stock on
      March 29, 2007. Pursuant to the subscription agreements, the Company also issued
      to the investors 5-year warrants to purchase an aggregate of 3,564,897 shares
      of
      common stock at an exercise price of $1.00 per share. The warrants are
      exercisable during the period commencing June 30, 2008 and ending March 30,
      2012. Gross and net proceeds from the private placement were $8,559,155 and
      $7,852,185, respectively.





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





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





**7.**  **IN-LICENSING
      TRANSACTIONS**





**Altoderm
      License Agreement**





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




16


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**Altolyn
      License Agreement**





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





**Hedrin
      License Agreement**





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





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





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




17


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**8.**  **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
      $2,058,683. The exchange obligation represents the Company’s obligation to
      Nordic to issue the Company’s common stock in exchange for all or a portion of
      Nordic’s equity interest in the Hedrin JV upon the exercise by Nordic of the put
      issued to Nordic in the Hedrin JV Agreement transaction. The put is described
      below.





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





In
      June
      2008 the Hedrin JV Agreement was amended (the "Hedrin JV Amended Agreement").
      Under the amended terms Nordic invested an additional $1.0 million, for a total
      of $3.5 million, in the Hedrin JV and made an advance of $250,000 to the Hedrin
      JV and the Hedrin JV made an additional $1.0 million payment, for a total of
      $3.0 million, to the Company. The Hedrin JV also distributed additional
      ownership equity sufficient for each of the Company and Nordic to maintain
      their
      ownership interest at 50%. Under the amended terms, upon classification of
      Hedrin by the FDA as a Class II or Class III medical device Nordic is obligated
      to invest an additional $1.25 million, for a total investment of $5 million,
      into the Hedrin JV, the Hedrin JV is obligated to pay an additional $0.5
      million, for a total of $3.5 million, to the Company, the $250,000 that Nordic
      advanced to the Hedrin JV in June becomes an equity investment in the Hedrin
      JV
      by Nordic and the Hedrin JV is obligated to issue to the Company and Nordic
      additional ownership interest in the Hedrin JV, thereby maintaining each of
      the
      Company’s and Nordic’s 50% ownership interest in the Hedrin JV. The Company’s
      exchange obligation increased by $894,546 as a result of the June 2008 closing.
      The $894,546 represents the gross amount paid in June 2008 by the Hedrin JV
      to
      the Company of $1,000,000 offset by the costs of the Hedrin JV Agreement
      transaction recognized by the Company subsequent to the February
      closing.





During
      the nine months ended September 30, 2008 the Company recognized $247,731 of
      equity in the loss of the Hedrin JV. At September 30, 2008, the Company’s
      investment in the Hedrin JV is $2,269 and the Company’s exchange obligation is
      $2,949,176.





18


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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 $0.14, 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 $0.14. Nordic can refuse the
      Company’s call by either paying the Company up to $1.5 million or forfeiting all
      or a portion of their put, calculated on a pro rata basis for the percentage
      of
      the Nordic equity interest called by the Company.





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





The
      Hedrin JV has engaged the Company to provide management services to the Limited
      Partnership in exchange for a management fee, which for 2008, on an annualized
      basis, is $527,000. As of September 30, 2008, the Company has recognized
      $315,036 of other income from management fees earned from the Hedrin JV which
      is
      included in the Company’s Condensed Consolidated Statement of Operations for the
      nine months ended September 30, 2008 as a component of interest and other
      income.





Nordic
      paid to the Company a non-refundable fee of $150,000 at the closing for the
      right to receive a warrant covering 7.1 million shares of the Company’s common
      stock, exercisable for $0.14 per share. 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 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.





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.





19


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





After
      the
      closing, at Nordic's request, the Company will nominate a person identified
      by
      Nordic to serve on the Company’s Board of Directors.





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





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





**9.**  **AMERICAN
      STOCK EXCHANGE**





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





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





20


**MANHATTAN
        PHARMACEUTICALS, INC. and SUBSIDIARIES**
 **(A
        development Stage Company)**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


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





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





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





**10.**  **10%
      PROMISSORY NOTES**





In
      September 2008, Manhattan entered into a series of 10% secured promissory notes
      (the “10% Notes”) with certain of our directors, officers and an employee (the
“10% Note Holders”) for aggregate of $70,000. Principal and interest on the
      Notes shall be paid in cash on March 10, 2009 unless paid earlier by us.
      Pursuant to the secured promissory notes, we also issued to the Note Holders
      5-year warrants to purchase an aggregate of 140,000 of our common stock at
      an
      exercise price of $0.20 per share. Manhattan granted to the 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 September 30, 2008 accrued an unpaid interest on the 10%
      Notes amounted to $351 and is reflected in the accompanying Balance Sheet as
      of
      September 30, 2008 as a component of accrued expenses.


21


**MANHATTAN
      PHARMACEUTICALS, INC. and SUBSIDIARIES**


**(A
      development Stage Company)**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**11.**  **SUBSEQUENT
      EVENT - 12% PROMISSORY NOTES**





On
      November 19,, 2008 the Company completed the first closing on a financing
      transaction. The Company sold $1 million of 12% senior secured notes (the 12%
      Notes) and issued warrants to the investors to purchase 33 million shares of
      the
      Company’s common stock at $0.09 per share. The warrants expire on December 31,
      2013. The Company realized net proceeds from the financing of $0.8
      million.


The
      financing transaction has a $1,000,000 minimum amount, which has been met,
      a
      $2,500,000 maximum amount and an overallotment of $1,000,000 for a total of
      $3,500,000. The financing transaction is still active and there maybe additional
      closings.





National
      Securities Corporation (“National”) was the placement agent for the transaction.
      National’s compensation for acting is placement agent is a cash fee of 10% of
      the gross proceeds received, a non-accountable expense allowance of 1.5% of
      the
      gross proceeds 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. At the first closing the Company paid $0.1 million in placement
      agent
      fees and a non-accountable expense allowance, and issued a warrant to purchase
      5
      million shares of the Company’s common stock at $0.09 per share. The warrant
      expires on December 13, 2013.


The
      12%
      Notes mature two years after issuance. Interest on the 12% Notes is compounded
      quarterly and payable at maturity. The 12% Notes are secured by a pledge of
      certain of the Company’s assets.


The
      net
      proceeds of this first closing are to be paid out in monthly installments of
      $0.1 million. The monthly installments are to be paid as of the first of every
      month retroactive to October 1, 2008.





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 the exercise of Nordic’s Put**
            
            **Additional
                Shares Issuable upon the exercise of Nordic’s Put, if certain conditions
                are met**
            
            **Shares
                Issuable upon the exercise of Nordic’s Warrant**
            
            **Total
                Shares Issuable upon the exercise of Nordic’s Put and
                Warrant**Before
                the financing
            
            
            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 financing
            
            
            41,666,667
            
            
            13,888,889
            
            
            11,111,111
            
            
            66,666,667




22





**Item
      2.**  **Management’s
      Discussion and Analysis 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, 2007 (the “Annual Report”) and our financial statements as of
      and for the three and nine month period ended September 30, 2008 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.




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 20% of our then outstanding common shares. This
      transaction was accounted for as a purchase of Tarpan by the
      Company.




We
      are a
      development stage biopharmaceutical company focused on developing and
      commercializing innovative pharmaceutical therapies 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. We currently have four product candidates:




·
            Hedrin,
                a novel, non-insecticide treatment for head lice, which we are developing
                through Hedrin Pharmaceuticals K/S, a joint venture between the Company
                and Nordic Biotech Fund II K/S ;


·
            Topical
                PTH (1-34) for the treatment of
                psoriasis;


·
            Altoderm,
                a proprietary formulation of topical cromolyn sodium for the treatment
                of
                atopic dermatitis;


·
            and
                Altolyn, a proprietary site specific tablet formulation of oral cromolyn
                sodium for the treatment of
                mastocytosis.





We
      do not
      currently have sufficient funding for further development of PTH (1-34),
      Altoderm and Altolyn. We are in discussion with T&R regarding next steps for
      Altoderm and Altolyn.




We
      have
      not received regulatory approval for, or generated commercial revenues from
      marketing or selling any drugs.




In
      July
      2007 we are discontinued development of two product candidates, oral
      Oleoyl-estrone (“OE”) and Propofol Lingual Spray.




You
      should read the following discussion of our results of operations and financial
      condition in conjunction with the condensed consolidated financial statements
      and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
      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. You 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 on Form
      10-K, and should not unduly rely on these forward-looking
      statements.




23





**RESULTS
      OF OPERATIONS**




NINE-MONTH
      PERIOD ENDED SEPTEMBER 30, 2008 VS 2007




**Nine
                Months ended September 30,****2008**
            
            **2007**
            
            **Increase**
              **(decrease)**
            
            **%
                Increase**
              **(decrease)****COSTS
                AND EXPENSES*****Research
                and development***Share-based
                compensation
            
            $
            100,000
            
            $
            341,000
            
            
            ($241,000
            )
            
            (71
            )%Other
                research and development expense
            
            $
            1,765,000
            
            $
            7,019,000
            
            
            ($5,254,000
            )
            
            (75
            )%Total
                research and development expense
            
            $
            1,865,000
            
            $
            7,360,000
            
            
            ($5,495,000
            )
            
            (75
            )%***General
                and administrative***Share-based
                compensation
            
            $
            279,000
            
            $
            737,000
            
            
            ($458,000
            )
            
            (62
            )%Other
                general and administrative expense
            
            $
            2,321,000
            
            $
            2,128,000
            
            $
            193,000
            
            
            9
            %Total
                general and administrative expense
            
            $
            2,600,000
            
            $
            2,865,000
            
            
            ($265,000
            )
            
            (9
            )%**Other
                (income) expense**
            
            
            ($69,000
            )
            
            ($97,000
            )
            
            ($28,000
            )
            
            (29
            )%**NET
                LOSS**
            
            $
            4,396,000
            
            $
            10,128,000
            
            
            ($5,732,000
            )
            
            (57
            )%




During
      each of the nine months ended September 30, 2008 and 2007 we did not recognize
      any revenues. We are considered a development stage company, and do not expect
      to have revenues relating to our technologies prior to September 30, 2009,
      if at
      all.




For
      the
      nine months ended September 30, 2008 total research and development expense
      was
      $1,865,000 as compared to $7,360,000 for the nine months ended September 30,
      2007. The decrease of $5,495,000, or 75%, is attributable to decreases of
      $2,632,000 in development projects discontinued during 2007 (OE and Propofol),
      of $799,000 for Hedrin, of $800,000 for Altoderm, of $620,000 for Altolyn and
      of
      $402,000 for PTH (1-34). The costs incurred during the nine months ended
      September 30, 2008 for OE and Propofol were $267,000 associated with the Swiss
      Pharma arbitration award. During the nine months ended September 30, 2007 the
      majority of the development costs incurred for Altoderm, Altolyn and Hedrin
      relate to in-licensing costs.




For
      the
      nine months ended September 30, 2008 total general and administrative expense
      was $2,600,000 as compared to $2,865,000 for the nine months ended September
      30,
      2007. The decrease of $265,000, or 9%, is primarily attributable to decreases
      of
      $458,000 in share-based compensation, of $52,000 in the costs associated with
      being a public company, of $46,000 in personnel costs and $202,000 of business
      development costs offset by the costs associated with the Swiss Pharma
      arbitration of $493,000.




For
      the
      nine months ended September 30, 2008, other income was $69,000 as compared
      to
      $97,000 for the nine months ended September 30, 2007. The decrease of $28,000,
      or 29%, is due primarily to $315,000 of management fees received in accordance
      with the services agreement from the Nordic JV, offset by the equity in loss
      of
      the Hedrin JV of $248,000 and a decrease in interest income which resulted
      from
      lower average balances in interest bearing cash and short-term investment
      accounts.


24


Net
      loss
      for the nine months ended September 30, 2008 was $4,396,000 as compared to
      $10,128,000 for the nine months ended September 30, 2007. The decrease of
      $5,732,000, or 57%, in net loss is principally attributable to decreases in
      research and development expense of $5,495,000 and in general and administrative
      expense of $265,000 and a decrease in other income of $28,000.




QUARTER
      ENDED SEPTEMBER 30, 2008 VS 2007




**Quarter
                ended September 30,****2008**
            
            **2007**
            
            **Increase**
              **(decrease)**
            
            **%
                Increase**
              **(decrease)****COSTS
                AND EXPENSES*****Research
                and development***Share-based
                compensation
            
            $
            19,000
            
            $
            117,000
            
            
            ($98,000
            )
            
            (84
            )%Other
                research and development expense
            
            $
            480,000
            
            $
            1,692,000
            
            
            ($1,212,000
            )
            
            (72
            )%Total
                research and development expense
            
            $
            499,000
            
            $
            1,809,000
            
            
            ($1,310,000
            )
            
            (72
            )%***General
                and administrative***Share-based
                compensation
            
            $
            64,000
            
            $
            255,000
            
            
            ($191,000
            )
            
            (75
            )%Other
                general and administrative expense
            
            $
            821,000
            
            $
            643,000
            
            $
            178,000
            
            
            28
            %Total
                general and administrative expense
            
            $
            885,000
            
            $
            898,000
            
            $
            (13,000
            )
            
            (1
            )%**Other
                (income) expense**
            
            $
            11,000
            
            
            ($38,000
            )
            $
            49,000
            
            
            129
            %**NET
                LOSS**
            
            $
            1,395,000
            
            $
            2,669,000
            
            
            ($1,274,000
            )
            
            (48
            )%







During
      each of the quarters ended September 30, 2008 and 2007 we did not recognize
      any
      revenues. We are considered a development stage company, and do not expect
      to
      have revenues relating to our technologies prior to September 30, 2009, if
      at
      all.




For
      the quarter ended September 30, 2008 total research and development expense
      was
      $499,000 as compared to $1,809,000 for the quarter ended September 30, 2007.
      The
      decrease of $1,310,000, or 72%, is attributable to decreases of $248,000 in
      development projects discontinued during 2007 (OE and Propofol), of $50,000
      for
      Hedrin, of $171,000 for Altoderm, of $87,000 for Altolyn and of $657,000 for
      PTH
      (1-34). The costs during the three months ended September 30, 2008 for OE and
      Propofol were $267,000 associated with the Swiss Pharma arbitration
      award.




For
      the
      quarter ended September 30, 2008 total general and administrative expense was
      $885,000 as compared to $898,000 for the quarter ended September 30, 2007.
      The
      decrease of $13,000, or 1%, is primarily attributable to decreases of $191,000
      in stock-based compensation, of $74,000 in the costs associated with being
      a
      public company and of $81,000 of business development costs offset by an
      increase in personnel costs of $35,000 and the costs associated with the Swiss
      Pharma arbitration of $301,000.




For
      the
      quarter ended September 30, 2008, other expense was $11,000 as compared to
      other
      income of $38,000 for the quarter ended September 30, 2007. The increase of
      $49,000, or 129%, is due primarily to $183,000 of management fees received
      in
      accordance with the services agreement from the Nordic JV offset by the equity
      in loss of the Hedrin JV of $140,000.




25





Net
      loss
      for the quarter ended September 30, 2008 was $1,395,000 as compared to
      $2,669,000 for the quarter ended September 30, 2007. The decrease of $1,274,000,
      or 48%, in net loss is principally attributable to decreases in research and
      development expense of $1,310,000 and $13,000 in general and administrative
      expense offset by an increase in other expense of $48,000.




**LIQUIDITY
      AND CAPITAL RESOURCES**




From
      inception to September 30, 2008, we incurred a deficit during the development
      stage of $59 million primarily as a result of our net losses and preferred
      stock
      dividends. We expect to continue to incur additional losses through at least
      September 30, 2009 and for the foreseeable future thereafter. 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.




Management
      believes that the Company will continue to incur net losses through at least
      September 30, 2009 and for the foreseeable future thereafter. Based on the
      resources of the Company available at September 30, 2008 including the net
      proceeds received from the February 2008 joint venture agreement, and the
      September 2008 sale of 10% Secured Promissory Notes and taking into
      consideration the net proceeds from the sale of the November 2008 12% Secured
      Promissory Notes management believes that the Company has sufficient capital
      to
      fund its operations until the middle of 2009. Management believes that the
      Company has a need for capital in order to sustain its operations and will
      need
      additional equity or debt financing or will need to generate revenues through
      licensing of its products or entering into strategic alliances to be able to
      sustain its operations through 2009. Furthermore, we will need additional
      financing thereafter to complete development and commercialization of our
      products. There can be no assurances that we can successfully complete
      development and commercialization of our products.





We
      have
      financed our operations since inception primarily through equity financing.
      During the nine months ended September 30, 2008, we had a net decrease in cash
      and cash equivalents of $614,000. This decrease resulted principally from the
      net cash used in operating activities of $3.5 million, partially offset by
      the
      net proceeds from the Hedrin JV Agreement of $2.8 million. Total liquid
      resources as of September 30, 2008 were $0.03 million compared to $0.60 million
      at December 31, 2007.




**Liquidity**




As
      of
      September 30, 2008, we had a working capital deficit of $1.9 million as compared
      to a working capital deficit of $1.0 million at December 31, 2007. This $0.9
      million increase in the working capital deficit is primarily due to decreases
      in
      cash of $614,000 and prepaid expenses and other current assets of $140,000,
      the
      issuance of $70,000 of secured notes payable and an increase in accounts payable
      and accrued expenses of $72,000




On
      November 12, 2008 the Company completed the first closing on a financing
      transaction. The Company sold $1 million of 12% senior secured notes (the 12%
      Notes). The Company realized net proceeds from the financing of $0.8
      million.





The
      financing transaction has a $1,000,000 minimum amount, a $2,500,000 maximum
      amount and an overallotment of $1,000,000 for a total of $3,500,000. The Company
      expects that there will be another closing but does not yet know how much that
      closing will be for.




26





***March
      2007 Private Placement***




On
      March
      30, 2007, we entered into a series of subscription agreements with various
      institutional and other accredited investors for the issuance and sale in a
      private placement of an aggregate of 10,185,502 shares of our common stock
      for
      net proceeds of approximately $7.9 million. Of the total amount of shares
      issued, 10,129,947 were sold at a per share price of $0.84, and an additional
      55,555 shares were sold to an entity affiliated with a director of the Company,
      at a per share price of $0.90, the closing sale price of the common stock on
      March 29, 2007. Pursuant to the subscription agreements, we also issued to
      the
      investors 5-year warrants to purchase an aggregate of 3,564,897 shares of our
      common stock at an exercise price of $1.00 per share. The warrants are
      exercisable during the period commencing September 30, 2008 and ending March
      30,
      2012.




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




The
      Company engaged Paramount BioCapital, Inc. (“Paramount”), a related party, as
      its placement agent in connection with the private placement. In consideration
      for its services, we paid aggregate cash commissions of approximately $600,000
      and issued to Paramount a 5-year warrant to purchase an aggregate of 509,275
      shares at an exercise price of $1.00 per share.




**JOINT
      VENTURE AGREEMENT**




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.





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
      to
      the Company an additional $2.5 million in equity in the Hedrin JV, thereby
      maintaining the Company’s 50% ownership interest in the Hedrin JV. These terms
      have been amended as described below.





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




27





As
      of
      September 30, 2008, the Company has included the total $3.0 million cash
      payments received to date in exchange obligation in the attached condensed
      consolidated financial statements, as described below.





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 $0.14, 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 $0.14. Nordic can refuse the
      Company’s call by either paying the Company up to $1.5 million or forfeiting all
      or a portion of their put, calculated on a pro rata basis for the percentage
      of
      the Nordic equity interest called by the Company.





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





The
      Hedrin JV has engaged the Company to provide management services to the Limited
      Partnership in exchange for a management fee, which for 2008, on an annualized
      basis, is $527,000. As of September 30, 2008, the Company has recognized
      $315,036 of other income from management fees earned from the Hedrin JV which
      is
      included in the Company’s Condensed Consolidated Statement of Operations for the
      nine months ended September 30, 2008 as a component of interest and other
      income.





Nordic
      paid to the Company a non-refundable fee of $150,000 at the closing for the
      right to receive a warrant covering 7.1 million shares of the Company’s common
      stock, exercisable for $0.14 per share. The warrant is issuable 90 days from
      closing, provided Nordic has not exercised all or a part of its put, as
      described above. The Company issued the warrant to Nordic on April 30, 2008.
      The
      per share exercise price of the warrant was 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.




28





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.





At
      Nordic's request, the Company will nominate a person identified by Nordic to
      serve on the Company’s Board of Directors.





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





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





**American
      Stock Exchange**




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




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




29





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




Accordingly,
      to maintain our financial viability, on February 28, 2008, we announced that
      we
      had formally notified AMEX that we intended to voluntarily delist our common
      stock from AMEX. The delisting became effective on March 26, 2008.




Our
      common stock now trades on the Over the Counter Bulletin Board under the symbol
      “MHAN”. We intend to maintain corporate governance, disclosure and reporting
      procedures consistent with applicable law.




**Commitments**




***General***




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




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




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 $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
      the Company 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.





The
      Company had previously recognized a liability to Swiss Pharma in the amount
      of
      $104,000 for the final services invoice. The remainder of the award, $542,000,
      has been expensed in September. The Company has recognized research and
      development expense of $267,000, general and administrative expense of $257,000
      and interest expense of $18,000 during the quarter ended September 30, 2008.
      The
      Company will continue to accrue interest at the rate of 5% per annum on the
      $371,000 until such amount has been settled.




30





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





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




***Development
      Commitments***




**Hedrin**




On
      June
      26, 2007, we entered into an exclusive license agreement for Hedrin (the “Hedrin
      License Agreement”) with Thornton & Ross Ltd, or T&R, and Kerris, S.A.,
      or Kerris (jointly, the “Licensor”). Pursuant to the Hedrin License Agreement,
      we acquired an exclusive North American license to certain patent rights and
      other intellectual property relating to Hedrin TM a
      non-insecticide product candidate for the treatment of pediculosis (head lice).
      In addition, on June 26, 2007, we entered into a supply agreement with T&R
      pursuant to which T&R will be our exclusive supplier of Hedrin product (the
“Hedrin Supply Agreement”).




In
      consideration for the license, we issued to Licensor 150,000 shares of our
      common stock valued at $120,000. In addition, we also made a cash payment to
      the
      Licensor of $600,000. These amounts are included in research and development
      expense.




Further,
      we agreed to make future milestone payments to the Licensor comprised of various
      combinations of cash and common stock in respective aggregate amounts of
      $2,500,000 upon the achievement of various clinical and regulatory milestones
      as
      follows: $250,000 upon acceptance by the U. S. Food and Drug Administration,
      or
      the FDA, of an Investigational New Drug application, or an IND; $1,000,000
      upon
      the achievement of a successful outcome of a Phase 3 clinical trial; $700,000
      upon the final approval of an NDA by the FDA; $300,000 upon the issuance of
      a
      U.S. patent on Hedrin: and $250,000 upon receipt of marketing authorization
      in
      Canada.





We
      also
      agreed to pay royalties of 8% (or, under certain circumstances, 4%) on net
      sales
      of licensed products. Our exclusivity under the Hedrin License Agreement is
      subject to an annual minimum royalty payment of $1,000,000 (or, under certain
      circumstances, $500,000) in each of the third through seventh years following
      the first commercial sale of Hedrin. We may sublicense our rights under the
      Hedrin License Agreement with the consent of the Licensor and the proceeds
      resulting from such sublicenses will be shared with the Licensor.




31





In
      February 2008, we entered into the Hedrin JV Agreement. The Hedrin JV is now
      responsible for all obligations to T&R under the Hedrin License and Supply
      Agreements. As of the date of the Hedrin JV Agreement, none
      of
      the milestones had been reached and sales had not commenced, therefore, we
      have
      no obligations to T&R for any such milestones or royalties.




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




**Topical
      PTH (1-34)**




Through
      our April 2005 acquisition of Tarpan Therapeutics, Inc., or Tarpan, we acquired
      a sublicense agreement with IGI, Inc. dated April 14, 2004. Under the IGI
      sublicense agreement we hold the exclusive, world-wide, royalty bearing
      sublicense to develop and commercialize the licensed technology. Under the
      terms
      of the IGI sublicense agreement, we are responsible for the cost of the
      nonclinical and clinical development of the project, including research and
      development, manufacturing, laboratory and clinical testing and trials and
      marketing of licensed products.




The
      IGI
      sublicense agreement requires us to make certain milestone payments as follows:
      $300,000 payable upon the commencement of a Phase 2 clinical trial; $500,000
      upon the commencement of a Phase 3 clinical trial; $1,500,000 upon the
      acceptance of an NDA application by the FDA; $2,400,000 upon the approval of
      an
      NDA by the FDA; $500,000 upon the commencement of a Phase 3 clinical trial
      for
      an indication other than psoriasis; $1,500,000 upon the acceptance of and NDA
      application for an indication other than psoriasis by the FDA; and $2,400,000
      upon the approval of an NDA for an indication other than psoriasis by the
      FDA.




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




In
      addition, we are obligated to pay IGI, Inc. an annual royalty of 6% on annual
      net sales up to $200,000,000. In any calendar year in which net sales exceed
      $200,000,000, we are obligated to pay IGI, Inc. an annual royalty of 9% on
      such
      excess. Through September 30, 2008, sales have not commenced, therefore, we
      have
      not paid any such royalties.




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




In
      July
      2008, the Company announced top-line results from its Phase 2a clinical study
      of
      topical PTH (1-34) for the treatment of psoriasis. This multi-center,
      randomized, double-blind, vehicle-controlled, parallel group study was designed
      to assess the safety and preliminary efficacy of two dose levels of topical
      PTH
      (1-34) for the treatment of mild to moderate plaque psoriasis. While the study
      did achieve the primary safety objective, the data did not demonstrate a
      statistically significant improvement in the overall disease severity of
      treatment lesions or signs and symptoms of psoriasis (redness, scaling, plaque
      thickness, and itch) as compared to the vehicle (placebo) gel. Topical PTH
      (1-34) appeared to be well tolerated with no serious adverse events reported.
      The Company intends to further analyze and assess these data in order to
      determine appropriate next steps for the program.





32




**Altoderm**




On
      April
      3, 2007, we entered into a license agreement for “Altoderm,” with T&R.
      Pursuant to the Altoderm license agreement, we acquired an exclusive North
      American license to certain patent rights and other intellectual property
      relating to Altoderm, a topical skin lotion product candidate with the active
      ingredient cromolyn sodium (also known as sodium cromoglicate) for the treatment
      of atopic dermatitis. In accordance with the terms of the Altoderm license
      agreement, we issued 125,000 shares of our common stock, valued at $112,500,
      and
      made a cash payment of $475,000 to T&R upon the execution of the agreement.
      These amounts have been included in research and development
      expense.




Further,
      we agreed to make future milestone payments to T&R comprised of various
      combinations of cash and common stock in respective aggregate amounts of
      $5,675,000 and 875,000 shares of our common stock upon the achievement of
      various clinical and regulatory milestones as follows: $450,000 upon acceptance
      by the FDA of an IND; 125,000 shares of our common stock upon the first dosing
      of a patient in the first Phase 2 clinical trial; 250,000 shares of our common
      stock and $625,000 upon the first dosing of a patient in the first Phase 3
      clinical trial; $1,000,000 upon the achievement of a successful outcome of
      a
      Phase 3 clinical trial; $1,100,000 upon the acceptance for filing of an NDA
      application by the FDA; 500,000 shares of our common stock and $2,000,000 upon
      the final approval of an NDA by the FDA; and $500,000 upon receipt of marketing
      authorization in Canada.




In
      addition, we are obligated to pay T&R an annual royalty of 10% on annual net
      sales of up to $100,000,000; 15% of the amount of annual net sales in excess
      of
      $100,000,000 and 20% of annual net sales in excess of $200,000,000. There is
      a
      minimum royalty of $1,000,000 per year. There is a one-time success fee of
      $10,000,000 upon the achievement of cumulative net sales of $100,000,000.
      Through September 30, 2008, none of the milestones have been reached and sales
      have not commenced, therefore, we have not paid any such milestones or
      royalties.




**Altolyn**




On
      April
      3, 2007, we and T&R also entered into a license agreement for Altolyn.
      Pursuant to the Altolyn license agreement, we acquired an exclusive North
      American license to certain patent rights and other intellectual property
      relating to Altolyn, an oral formulation product candidate using cromolyn sodium
      for the treatment of mastocytosis, food allergies, and inflammatory bowel
      disorder. In accordance with the terms of the Altolyn license agreement, we
      made
      a cash payment of $475,000 to T&R upon the execution of the agreement. This
      amount is included in research and development expense.




Further,
      we agreed to make future milestone payments to T&R comprised of various
      combinations of cash and common stock in respective aggregate amounts of
      $5,675,000 upon the achievement of various clinical and regulatory milestones.
      as follows: $450,000 upon acceptance for filing by the FDA of an IND; $625,000
      upon the first dosing of a patient in the first Phase 3 clinical trial;
      $1,000,000 upon the achievement of a successful outcome of a Phase 3 clinical
      trial; $1,100,000 upon the acceptance for filing of an NDA application by the
      FDA; $2,000,000 upon the final approval of an NDA by the FDA; and $500,000
      upon
      receipt of marketing authorization in Canada.




33





In
      addition, we are obligated to pay T&R an annual royalty of 10% on annual net
      sales of up to $100,000,000; 15% of the amount of annual net sales in excess
      of
      $100,000,000 and 20% of annual net sales in excess of $200,000,000. There is
      a
      minimum royalty of $1,000,000 per year. There is a one-time success fee of
      $10,000,000 upon the achievement of cumulative net sales of
      $100,000,000.




Through
      September 30, 2008, none of the milestones have been reached and sales have
      not
      commenced, therefore, we have not paid any such milestones or
      royalties.




**Summary
      of Contractual Commitments**




***Employment
      Agreements***




The
      Company has employment agreements with two employees for the payment of
      aggregate annual base salaries of $675,000 as well as performance based bonuses.
      These agreements have a remaining term of nine months for one of the employees,
      and six months for the second employee, and have a total remaining obligation
      under these agreements of $419,589 as of September 30, 2008.





***Capital
      Resources***




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




Our
      continued operations will depend on whether we are able to raise additional
      funds through various potential sources, such as equity and debt financing,
      other collaborative agreements, strategic alliances, and our ability to realize
      the full potential of our technology in development. Such additional funds
      may
      not become available on acceptable terms and there can be no assurance
      that any additional funding that we do obtain will be sufficient to meet our
      needs in the long term. Through
      September 30, 2008, substantially all of our financing has been through private
      placements of common stock, preferred stock and warrants to purchase common
      stock. Until our operations generate significant revenues and cash flows from
      operating activities, we will continue to fund operations from cash on hand
      and
      through the similar sources of capital previously described. We can give no
      assurances that any additional capital that we are able to obtain will be
      sufficient to meet our needs. Management
      believes that we will continue to incur net losses and negative cash flows
      from
      operating activities for the foreseeable future.




Based
      on
      the resources of the Company available at September 30, 2008 including the
      net
      proceeds received from the February 2008 joint venture agreement, and the
      September 2008 sale of 10% Secured Promissory Notes and taking into
      consideration the net proceeds from the sale of the November 2008 12% Secured
      Promissory Notes management believes that the Company has sufficient capital
      to
      fund its operations until the middle of 2009. Management believes that the
      Company has a need for capital in order to sustain its operations and will
      need
      additional equity or debt financing or will need to generate revenues through
      licensing of its products or entering into strategic alliances to be able to
      sustain its operations through 2009. Furthermore, we will need additional
      financing thereafter to complete development and commercialization of our
      products. There can be no assurances that we can successfully complete
      development and commercialization of our products.




34




**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.




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 United Kingdom.
      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 United Kingdom
      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.




In
      February 2008, we entered into the Hedrin JV Agreement. The Hedrin JV is now
      responsible for all obligations to T&R under the Hedrin License and Supply
      Agreements. In the United States, the Hedrin JV is pursuing the development
      of
      Hedrin as a medical device. We expect that the FDA will require at least one
      clinical trial for the approval of this product candidate.




As
      of
      September 30, 2008, we have incurred $1,083,000 of project costs for the
      development of Hedrin. $12,000 of such costs were incurred during the nine
      months ended September 30, 2008. We do not expect to incur any other costs
      for
      the development of Hedrin as the Hedrin JV is now responsible for the
      development of Hedrin.




In
      September 2008, the FDA directed Hedrin to the Center for Devices and
      Radiological Health (CDRH) division of the U.S. Food and Drug Administration
      (FDA) for review as a device.





35




***Topical
      PTH (1-34).***




We
      are
      developing Topical PTH (1-34) as a topical treatment for psoriasis. In August
      2003, researchers, led by Michael Holick, Ph.D., MD, Professor of Medicine,
      Physiology, and Biophysics at Boston University Medical Center, reported
      positive results from a US Phase 1/2 clinical trial evaluating the safety and
      efficacy of Topical PTH (1-34) as a topical treatment for psoriasis. This
      double-blind, placebo controlled trial in 15 patients compared Topical PTH
      (1-34) formulated in the Novasome® Technology versus the Novasome® vehicle
      alone. Following 8 weeks of treatment, the topical application of Topical PTH
      (1-34) resulted in complete clearing of the treated lesion in 60% of patients
      and partial clearing in 85% of patients. Additionally, there was a statistically
      significant improvement in the global severity score. Ten patients continued
      into an open label extension study in which the Psoriasis Area and Severity
      Index, or PASI, was measured; PASI improvement across all 10 patients achieved
      statistically significant improvement compared to baseline. This study showed
      Topical PTH (1-34) to be a safe and effective treatment for plaque psoriasis
      with no patients experiencing any clinically significant adverse
      events.




Due
      to
      the high response rate seen in patients in the initial trial with Topical PTH
      (1-34) we believe that it may have an important clinical advantage over current
      topical psoriasis treatments. A follow on physician IND Phase 2a trial involving
      Topical PTH (1-34) was initiated in December 2005 under the auspices of Boston
      University. In April 2006, we reported a delay in its planned Phase 2a clinical
      study of Topical PTH (1-34) due to a formulation issue. We believe that we
      have
      resolved this issue through a new gel formulation of Topical PTH (1-34) and
      have
      filed new patent applications in the U.S. for this new proprietary
      formulation.




In
      September 2007, the U.S. FDA accepted our corporate 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
      is designed to evaluate safety and preliminary efficacy of Topical PTH (1-34)
      for the treatment of psoriasis. 61 subjects have been enrolled and randomized
      to
      receive one of two dose levels of Topical PTH (1-34), or vehicle, for an 8
      week
      treatment period. In this study the vehicle is the topical formulation without
      the active ingredient, PTH (1-34).




As
      of
      September 30, 2008, we have incurred $6,566,000 of project costs related to
      our
      development of Topical PTH (1-34). These project costs have been incurred since
      April 1, 2005, the date of the Tarpan Therapeutics acquisition. During the
      nine
      months ended September 30, 2008, we incurred $1,355,000 of these
      costs.




As
      with
      the development of our other product candidates, we do not currently have
      sufficient capital to fund our planned development activities of Topical PTH
      (1-34) beyond the ongoing phase 2a trial. We will, therefore, need to raise
      additional capital in order to complete our planned R&D activities for
      Topical PTH (1-34) . To the extent additional capital is not available when
      we
      need it, we may be forced to sublicense our rights to Topical PTH (1-34) or
      abandon our development efforts altogether, either of which would have a
      material adverse effect on the prospects of our business.




Since
      PTH
      (1-34) is already available in the injectable form, we should be able to utilize
      much of the data that is publicly available in planning our future studies.
      However, since PTH (1-34) will be used topically, bridging studies will need
      to
      be performed and we are not able to realistically predict the size and the
      design of those studies at this time.




36




In
      July
      2008, the Company announced top-line results from its Phase 2a clinical study
      of
      topical PTH (1-34) for the treatment of psoriasis. This multi-center,
      randomized, double-blind, vehicle-controlled, parallel group study was designed
      to assess the safety and preliminary efficacy of two dose levels of topical
      PTH
      (1-34) for the treatment of mild to moderate plaque psoriasis. While the study
      did achieve the primary safety objective, the data did not demonstrate a
      statistically significant improvement in the overall disease severity of
      treatment lesions or signs and symptoms of psoriasis (redness, scaling, plaque
      thickness, and itch) as compared to the vehicle (placebo) gel. Topical PTH
      (1-34) appeared to be well tolerated with no serious adverse events reported.
      The Company intends to further analyze and assess these data in order to
      determine appropriate next steps for the program.





***Altoderm***




We
      are
      developing Altoderm for the pruritis (itch) associated with dermatologic
      conditions including atopic dermatitis. In a Phase 3, randomized, double-blind,
      placebo-controlled, parallel-group, clinical study (conducted in Europe by
      T&R.) the compound was administered for 12 weeks to 114 subjects with
      moderately severe atopic dermatitis. The placebo (vehicle) used in this study
      was the Altoderm product without the active ingredient. In the study results,
      published in the British Journal of Dermatology in February 2005, Altoderm
      demonstrated a statistically significant reduction (36%) in atopic dermatitis
      symptoms. During the study, subjects were permitted to continue with their
      existing treatment, in most cases this consisted of emollients and topical
      steroids. A positive secondary outcome of the study was a 35% reduction in
      the
      use of topical steroids for the Altoderm treated subjects. Further analysis
      of
      the clinical data, performed by us showed that Altoderm treated subjects also
      experienced a 57% reduction in pruritis.




Altoderm
      is currently being tested in a second, ongoing Phase 3, randomized,
      double-blind, vehicle-controlled clinical study (also conducted in Europe by
      T&R). Analysis of the preliminary data from the initial 12 week, blinded
      portion of this clinical trial has been completed. The vehicle used in this
      study was the Altoderm product without the active ingredient, cromolyn sodium.
      The preliminary data indicate Altoderm was safe and well tolerated, and showed
      a
      trend toward improvement in pruritis, but the efficacy results were
      inconclusive. Altoderm treated subjects and vehicle only treated subjects
      experienced a similar improvement (each greater than 30%), and therefore, the
      study did not achieve statistical significance. We believe these outcomes were
      due to suboptimal study design where subjects were unrestricted in their use
      of
      concomitant therapies such as topical steroids and immunomodulators. The placebo
      (vehicle) used in this study was the Altoderm product without the active
      ingredient, cromolyn sodium. Analysis of the preliminary open label data
      beginning at week 13 of the study, show vehicle treated subjects demonstrating
      further improvement when switched to Altoderm. Given the promising clinical
      data
      obtained from the first European Phase 3 study, and the symptom improvements
      reported in the ongoing European Phase 3 study, both we and Thornton & Ross
      Limited believe there is significant potential for Altoderm and will continue
      development of this product candidate.




On
      March
      6, 2008, we announced we had successfully completed a pre-IND meeting with
      the
      FDA. Based on a review of the submitted package for Altoderm, including data
      from the two previously reported Phase 3 clinical studies, the FDA determined
      that following completion of certain nonclinical studies, and the acceptance
      of
      an IND, Phase 2 clinical studies may be initiated in the U.S. The FDA also
      concurred that the proposed indication of pruritis associated with dermatologic
      conditions including atopic dermatitis can be pursued. We do not currently
      have
      sufficient funding for further development of Altoderm and are in discussions
      with T&R regarding next steps.




37




As
      of
      September 30, 2008, we have incurred $1,098,000 for the development of Altoderm.
      We incurred $86,000 of such costs during the nine months ended September 30,
      2008.




***Altolyn***




We
      are
      developing Altolyn for the treatment of mastocytosis. On March 6, 2008, we
      announced we had successfully completed a pre-IND meeting with the FDA. Based
      on
      a review of the submitted package for Altolyn, the FDA concurred that the
      proposed indication of mastocytosis can be pursued and that the 505(b)(2) NDA
      would be an acceptable approach provided a clinical bridge is established
      between Altolyn and Gastrocrom ® ,
      the
      oral liquid formulation of cromolyn sodium currently approved in the U.S. to
      treat mastocytosis. The FDA also affirmed that a single, Phase 3 study
      demonstrating the efficacy of Altolyn over placebo, may be sufficient to support
      a product approval in the U.S. In addition, the FDA also concurs that no
      additional nonclinical studies will be required to support an IND application.
      We are working with T&R and the current United Kingdom manufacturer of
      Altolyn to develop a GMP compliant manufacturing process.




Early
      clinical experience with Altolyn in the United Kingdom. suggests promising
      activity in patients with various allergic disorders, including food allergy
      and
      inflammatory bowel conditions. We may pursue these as additional indications.
      We
      do not currently have sufficient funding for further development of Altolyn
      and
      are in discussions with T&R regarding next steps.




As
      of
      September 30, 2008, we have incurred $826,000 for the development of Altolyn.
      We
      incurred $36,000 of such costs during the nine months ended September 30,
      2008.




**Off-Balance
      Sheet Arrangements**




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




**New
      Accounting Pronouncements**




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




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





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
      accounting principles and the framework for selecting the principles used in
      the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles in the
      United States. SFAS shall be effective 60 days following the SEC's approval
      of
      the Public Company Accounting Oversight Board amendments to AU Section 411,
      The
      Meaning of Present Fairly in Conformity with General Accepted Accounting
      Principles. We have not yet assessed the impact of adopting SFAS
      162.





38




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




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


39


**Item
      3.  Quantitative and Qualitative Disclosure About Market
      Risk**




Our
      exposure to market risk is confined to our cash and cash equivalents. We have
      attempted to minimize risk by investing in high-quality financial instruments,
      primarily money market funds with no security having an effective duration
      longer than 90 days. If the market interest rate decreases by 100 basis points
      or 1%, the fair value of our cash and cash equivalents portfolio would have
      minimal to no impact on the carrying value of our portfolio. We did not hold
      any
      derivative instruments as of September 30, 2008, and we have never held such
      instruments in the past.





**Item** **4.
      Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      September 30, 2008, we carried out an evaluation, under the supervision and
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934, as amended). Based upon that evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures 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 September 30, 2008, 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.


40


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




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 $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
      the Company 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.





The
      Company had previously recognized a liability to Swiss Pharma in the amount
      of
      $104,000 for the final services invoice. The remainder of the award, $542,000,
      has been expensed in September 2008. The Company has recognized research and
      development expense of $267,000, general and administrative expense of $258,000
      and interest expense of $18,000 during the quarter ended September 30, 2008.
      The
      Company will continue to accrue interest at the rate of 5% per annum on the
      $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.




**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, 2007 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.




41


**SIGNATURES**





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


MANHATTAN
                  PHARMACEUTICALS, INC.Date:
                  November 19, 2008
              
              By:
              /s/
                  Douglas AbelDouglas
                  AbelPresident
                  and Chief Executive OfficerDate:
                  November 19, 2008
              
              By:
              /s/
                  Michael G. McGuinnessMichael
                  G. McGuinnessChief
                  Operating and Financial
                  Officer




42


**Index
      to Exhibits Filed with this 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.




43