UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





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


For the
quarterly period ended September 30, 2009





OR





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


For the
transition period from _______ to _______





Commission
file number 001-32639





Manhattan
Pharmaceuticals, Inc.


(Exact
Name of Registrant as Specified in Its Charter)





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





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   xNo   ̈




Indicate
by check mark whether the registrant has submitted and posted on its corporate
Web site, if any, every Interactive Data File  required to be
submitted and posted to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).  Yes   ̈No    ̈





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





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





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes   oNo  x





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





INDEX




PagePART
      I
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements:Unaudited
      Condensed Balance Sheets
              4Unaudited
      Condensed Statements of Operations
              5Unaudited
      Condensed Statement of Stockholders’ Equity (Deficiency)
              6Unaudited
      Condensed Statements of Cash Flows
              8Notes
      to Unaudited Condensed  Financial Statements
              10Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23Item
      3.
              Quantitative
      and Qualitative Disclosure About Market Risk
              36Item
      4T.
              Controls
      and Procedures
              36PART
      II
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              37Item
      1A.
              Risk
      Factors
              37Item
      6.
              Exhibits
              37Signatures
              38


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 product
candidates;


·
            the
      regulatory approval of our product
candidates;


·
            our
      use of clinical research centers and other
  contractors;


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


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


·
            our
      ability to market any of our
products;


·
            our
      history of operating losses;


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


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


·
            our
      ability to attract and retain key
personnel;


·
            availability
      of reimbursement for our product
candidates;


·
            the
      effect of potential strategic transactions on our
  business;


·
            our
      ability to obtain adequate financing;
and


·
            the
      volatility of our stock price.




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





3




Part
I – Financial Information


Item
1. Unaudited Condensed Financial Statements




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Balance Sheets





September 30,
                                                          
                                                          
                                                          December 31,2009
                                                          
                                                          
                                                          2008(Unaudited)
                                                          
                                                          
                                                          (See Note 1)AssetsCurrent
      assets:Cash
      and cash equivalents
                                                          
                                                          $
                                                          153,641
                                                          
                                                          
                                                          $
                                                          106,023Restricted
      cash
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          730,499Other
      current assets
                                                          
                                                          
                                                          86,609
                                                          
                                                          
                                                          
                                                          37,718Total
      current assets
                                                          
                                                          
                                                          240,250
                                                          
                                                          
                                                          
                                                          874,240Investment
      in Hedrin JV
                                                          
                                                          
                                                          162,952
                                                          
                                                          
                                                          
                                                          -Property
      and equipment, net
                                                          
                                                          
                                                          4,775
                                                          
                                                          
                                                          
                                                          9,072Secured
      12% notes payable issue costs
                                                          
                                                          
                                                          253,209
                                                          
                                                          
                                                          
                                                          330,756Other
      assets
                                                          
                                                          
                                                          21,370
                                                          
                                                          
                                                          
                                                          34,895Total
      assets
                                                          
                                                          $
                                                          682,556
                                                          
                                                          
                                                          $
                                                          1,248,963Liabilities
      and Stockholders' DeficiencyCurrent
      Liabilities:Secured
      10% notes payable
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          70,000Accounts
      payable
                                                          
                                                          
                                                          143,065
                                                          
                                                          
                                                          
                                                          542,296Accrued
      expenses
                                                          
                                                          
                                                          774,320
                                                          
                                                          
                                                          
                                                          874,072Derivative
      liability
                                                          
                                                          
                                                          681,111
                                                          
                                                          
                                                          
                                                          -Total
      current liabilities
                                                          
                                                          
                                                          1,598,496
                                                          
                                                          
                                                          
                                                          1,486,368Secured
      12% notes payable, net
                                                          
                                                          
                                                          1,607,610
                                                          
                                                          
                                                          
                                                          1,174,107Interest
      payable on secured 12% notes payable
                                                          
                                                          
                                                          171,674
                                                          
                                                          
                                                          
                                                          15,237Exchange
      obligation
                                                          
                                                          
                                                          3,949,176
                                                          
                                                          
                                                          
                                                          2,949,176Total
      liabilities
                                                          
                                                          
                                                          7,326,956
                                                          
                                                          
                                                          
                                                          5,624,888Commitments
      and contingenciesStockholders’
      deficiency:Preferred
      stock, $.001 par value. Authorized 1,500,000 shares; no
    sharesissued
      and outstanding at September 30, 2009 and December 31,
2008
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Common
      stock, $.001 par value. Authorized 300,000,000 shares;70,624,232
      shares issued and outstanding at September 30, 2009and
      December 31, 2008
                                                          
                                                          
                                                          70,624
                                                          
                                                          
                                                          
                                                          70,624Additional
      paid-in capital
                                                          
                                                          
                                                          54,995,498
                                                          
                                                          
                                                          
                                                          54,821,379Deficit
      accumulated during the development stage
                                                          
                                                          
                                                          (61,710,522
                                                          )
                                                          
                                                          
                                                          (59,267,928
                                                          )Total
      stockholders’ deficiency
                                                          
                                                          
                                                          (6,644,400
                                                          )
                                                          
                                                          
                                                          (4,375,925
                                                          )Total
      liabilities and stockholders' deficiency
                                                          
                                                          $
                                                          682,556
                                                          
                                                          
                                                          $
                                                          1,248,963





See
accompanying notes to financial statements.


4




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Operations


(Unaudited)





Three months ended
                  September 30,
                
                
                Nine months ended
                  September 30,
                
                
                Cumulative
                  period from
                  August 6, 2001
                  (inception) to
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009Revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Costs
      and expenses:Research
      and development
                
                
                5,574
                
                
                
                498,853
                
                
                
                57,154
                
                
                
                1,864,652
                
                
                
                28,348,989General
      and administrative
                
                
                390,066
                
                
                
                884,705
                
                
                
                1,373,083
                
                
                
                2,600,303
                
                
                
                17,835,356In-process
      research and development charge
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,887,807Impairment
      of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,248,230Loss
      on disposition of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,213,878Total
      operating expenses
                
                
                395,640
                
                
                
                1,383,558
                
                
                
                1,430,237
                
                
                
                4,464,955
                
                
                
                60,534,260Operating
      loss
                
                
                (395,640
                )
                
                
                (1,383,558
                )
                
                
                (1,430,237
                )
                
                
                (4,464,955
                )
                
                
                (60,534,260
                )Other
      (income) expense:Equity
      in losses of Hedrin JV
                
                
                105,362
                
                
                
                140,138
                
                
                
                337,048
                
                
                
                247,731
                
                
                
                587,048Change
      in fair value of derivative
                
                
                (157,778
                )
                
                
                -
                
                
                
                658,889
                
                
                
                -
                
                
                
                531,111Interest
      and other income
                
                
                (63,873
                )
                
                
                (148,184
                )
                
                
                (252,500
                )
                
                
                (335,613
                )
                
                
                (1,533,031
                )Interest
      expense
                
                
                136,738
                
                
                
                18,804
                
                
                
                396,698
                
                
                
                18,804
                
                
                
                487,522Realized
      gain on sale of marketable equity securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (76,032
                )Total
      other (income) expense
                
                
                20,449
                
                
                
                10,758
                
                
                
                1,140,135
                
                
                
                (69,078
                )
                
                
                (3,382
                )Net
      loss
                
                
                (416,089
                )
                
                
                (1,394,316
                )
                
                
                (2,570,372
                )
                
                
                (4,395,877
                )
                
                
                (60,530,878
                )Preferred
      stock dividends (including imputed amounts)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,179,644
                )Net
      loss applicable to common shares
                
                $
                (416,089
                )
                
                $
                (1,394,316
                )
                
                $
                (2,570,372
                )
                
                $
                (4,395,877
                )
                
                $
                (61,710,522
                )Net
      loss per common share:Basic
      and diluted
                
                $
                (0.01
                )
                
                $
                (0.02
                )
                
                $
                (0.04
                )
                
                $
                (0.06
                )Weighted
      average shares of common stock outstanding:Basic
      and diluted
                
                
                70,624,232
                
                
                
                70,624,232
                
                
                
                70,624,232
                
                
                
                70,624,232





See
accompanying notes to financial statements.


5





MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statement of Stockholders' Equity (Deficiency)


(Unaudited)





Common
                              stock
                              shares
                            
                            
                            Common
                              stock
                              amount
                            
                            
                            Additional
                              paid-in
                              capital
                            
                            
                            Deficit
                              accumulated
                              during
                              development
                              stage
                            
                            
                            Other
                            
                            
                            Total
                              stockholders’
                              equity
                              (deficiency)Stock
      issued at $0.0004 per share for subscription receivable
                            
                            
                            10,167,741
                            
                            
                            $
                            10,168
                            
                            
                            $
                            (6,168
                            )
                            
                            $
                            -
                            
                            
                            $
                            (4,000
                            )
                            
                            $
                            -Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (56,796
                            )
                            
                            
                            -
                            
                            
                            
                            (56,796
                            )Balance
      at December 31, 2001
                            
                            
                            10,167,741
                            
                            
                            
                            10,168
                            
                            
                            
                            (6,168
                            )
                            
                            
                            (56,796
                            )
                            
                            
                            (4,000
                            )
                            
                            
                            (56,796
                            )Proceeds
      from subscription receivable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,000
                            
                            
                            
                            4,000Stock
      issued at $0.0004 per share for license rights
                            
                            
                            2,541,935
                            
                            
                            
                            2,542
                            
                            
                            
                            (1,542
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            1,000Stock
      options issued for consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            60,589
                            
                            
                            
                            -
                            
                            
                            
                            (60,589
                            )
                            
                            
                            -Amortization
      of unearned consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            22,721
                            
                            
                            
                            22,721Common
      stock issued at $0.63 per share, net of expenses
                            
                            
                            3,043,332
                            
                            
                            
                            3,043
                            
                            
                            
                            1,701,275
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,704,318Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            (1,037,320
                            )
                            
                            
                            
                            
                            
                            
                            (1,037,320
                            )Balance
      at December 31, 2002
                            
                            
                            15,753,008
                            
                            
                            
                            15,753
                            
                            
                            
                            1,754,154
                            
                            
                            
                            (1,094,116
                            )
                            
                            
                            (37,868
                            )
                            
                            
                            637,923Common
      stock issued at $0.63 per share, net of expenses
                            
                            
                            1,321,806
                            
                            
                            
                            1,322
                            
                            
                            
                            742,369
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            743,691Effect
      of reverse acquisition
                            
                            
                            6,287,582
                            
                            
                            
                            6,287
                            
                            
                            
                            2,329,954
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            2,336,241Amortization
      of unearned consulting costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            37,868
                            
                            
                            
                            37,868Unrealized
      loss on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (7,760
                            )
                            
                            
                            (7,760
                            )Payment
      for fractional shares for stock combination
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (300
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            (300
                            )Preferred
      stock issued at $10 per share, net of expenses
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9,045,176
                            
                            
                            
                            -
                            
                            
                            
                            1,000
                            
                            
                            
                            9,046,176Imputed
      preferred stock dividend
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            418,182
                            
                            
                            
                            (418,182
                            )
                            
                            
                            
                            
                            
                            
                            -Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,960,907
                            )
                            
                            
                            
                            
                            
                            
                            (5,960,907
                            )Balance
      at December 31, 2003
                            
                            
                            23,362,396
                            
                            
                            
                            23,362
                            
                            
                            
                            14,289,535
                            
                            
                            
                            (7,473,205
                            )
                            
                            
                            (6,760
                            )
                            
                            
                            6,832,932Exercise
      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
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            281,073
                            
                            
                            
                            -
                            
                            
                            
                            (282,363
                            )
                            
                            
                            (1,290
                            )Conversion
      of preferred stock to common stock at $1.10 per share
                            
                            
                            1,550,239
                            
                            
                            
                            1,551
                            
                            
                            
                            (1,380
                            )
                            
                            
                            -
                            
                            
                            
                            (171
                            )
                            
                            
                            -Warrants
      issued for consulting services
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            125,558
                            
                            
                            
                            -
                            
                            
                            
                            (120,968
                            )
                            
                            
                            4,590Amortization
      of unearned consulting costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            100,800
                            
                            
                            
                            100,800Unrealized
      gain on short-term investments and reversal of unrealized loss on
      short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            20,997
                            
                            
                            
                            20,997Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (5,896,031
                            )
                            
                            
                            -
                            
                            
                            
                            (5,896,031
                            )Balance
      at December 31, 2004
                            
                            
                            28,309,187
                            
                            
                            
                            28,309
                            
                            
                            
                            18,083,208
                            
                            
                            
                            (13,955,035
                            )
                            
                            
                            297,334
                            
                            
                            
                            4,453,816Common
      stock issued at $1.11 and $1.15, net of expenses
                            
                            
                            11,917,680
                            
                            
                            
                            11,918
                            
                            
                            
                            12,238,291
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12,250,209Common
      stock issued to vendor at $1.11 per share in satisfaction of accounts
      payable
                            
                            
                            675,675
                            
                            
                            
                            676
                            
                            
                            
                            749,324
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            750,000Exercise
      of stock options
                            
                            
                            32,400
                            
                            
                            
                            33
                            
                            
                            
                            32,367
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            32,400Exercise
      of warrants
                            
                            
                            279,845
                            
                            
                            
                            279
                            
                            
                            
                            68,212
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            68,491Preferred
      stock dividend  accrued
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (175,663
                            )
                            
                            
                            175,663
                            
                            
                            
                            -Preferred
      stock dividends paid by issuance of shares
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            477,736
                            
                            
                            
                            -
                            
                            
                            
                            (479,032
                            )
                            
                            
                            (1,296
                            )Conversion
      of preferred stock to common stock at $1.10 per share
                            
                            
                            8,146,858
                            
                            
                            
                            8,147
                            
                            
                            
                            (7,251
                            )
                            
                            
                            -
                            
                            
                            
                            (896
                            )
                            
                            
                            -Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            66,971
                            
                            
                            
                            -
                            
                            
                            
                            20,168
                            
                            
                            
                            87,139Reversal
      of unrealized gain on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (12,250
                            )
                            
                            
                            (12,250
                            )Stock
      issued in connection with acquisition of Tarpan Therapeutics,
      Inc.
                            
                            
                            10,731,052
                            
                            
                            
                            10,731
                            
                            
                            
                            11,042,253
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            11,052,984Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (19,140,997
                            )
                            
                            
                            
                            
                            
                            
                            (19,140,997
                            )Balance
      at December 31, 2005
                            
                            
                            60,092,697
                            
                            
                            
                            60,093
                            
                            
                            
                            42,751,111
                            
                            
                            
                            (33,271,695
                            )
                            
                            
                            987
                            
                            
                            
                            9,540,496Cashless
      exercise of warrants
                            
                            
                            27,341
                            
                            
                            
                            27
                            
                            
                            
                            (27
                            )
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -Share-based
      compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,675,499
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            1,675,499Unrealized
      loss on short-term investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (987
                            )
                            
                            
                            (987
                            )Costs
      associated with private placement
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (15,257
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (15,257
                            )Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (9,695,123
                            )
                            
                            
                            -
                            
                            
                            
                            (9,695,123
                            )Balance
      at December 31, 2006
                            
                            
                            60,120,038
                            
                            
                            
                            60,120
                            
                            
                            
                            44,411,326
                            
                            
                            
                            (42,966,818
                            )
                            
                            
                            -
                            
                            
                            
                            1,504,628


6





MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statement of Stockholders' Equity (Deficiency)


(Unaudited)





Common stock
                                                          shares
                                                        
                                                        
                                                        Common stock
                                                          amount
                                                        
                                                        
                                                        Additional paid-
                                                          incapital
                                                        
                                                        
                                                        Deficit
                                                          accumulated
                                                          during
                                                          development
                                                          stage
                                                        
                                                        
                                                        Other
                                                        
                                                        
                                                        Total
                                                          stockholders’
                                                          equity
                                                          (deficiency)Common
      stock issued at $0.84 and $0.90 per shares, net of
expenses
                                                        
                                                        
                                                        10,185,502
                                                        
                                                        
                                                        $
                                                        10,186
                                                        
                                                        
                                                        $
                                                        7,841,999
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        7,852,185Common
      stock issued to directors at $0.72 per share in satisfaction of accounts
      payable
                                                        
                                                        
                                                        27,776
                                                        
                                                        
                                                        
                                                        28
                                                        
                                                        
                                                        
                                                        19,972
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        20,000Common
      stock issued to in connection with in-licensing agreement at $0.90 per
      share
                                                        
                                                        
                                                        125,000
                                                        
                                                        
                                                        
                                                        125
                                                        
                                                        
                                                        
                                                        112,375
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        112,500Common
      stock issued to in connection with in-licensing agreement at $0.80 per
      share
                                                        
                                                        
                                                        150,000
                                                        
                                                        
                                                        
                                                        150
                                                        
                                                        
                                                        
                                                        119,850
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        120,000Exercise
      of warrants
                                                        
                                                        
                                                        10,327
                                                        
                                                        
                                                        
                                                        15
                                                        
                                                        
                                                        
                                                        7,219
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        7,234Cashless
      exercise of warrants
                                                        
                                                        
                                                        5,589
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (6
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (6
                                                        )Share-based
      compensation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,440,956
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,440,956Warrants
      issued for consulting
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        83,670
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        83,670Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (12,032,252
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (12,032,252
                                                        )Balance
      at December 31, 2007
                                                        
                                                        
                                                        70,624,232
                                                        
                                                        
                                                        
                                                        70,624
                                                        
                                                        
                                                        
                                                        54,037,361
                                                        
                                                        
                                                        
                                                        (54,999,070
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (891,085
                                                        )Sale
      of warrant
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        150,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        150,000Share-based
      compensation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        463,890
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        463,890Warrants
      issued with secured 12% notes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        170,128
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        170,128Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,268,858
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,268,858
                                                        )Balance
      at December 31, 2008
                                                        
                                                        
                                                        70,624,232
                                                        
                                                        
                                                        
                                                        70,624
                                                        
                                                        
                                                        
                                                        54,821,379
                                                        
                                                        
                                                        
                                                        (59,267,928
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,375,925
                                                        )Cumulative
      effect of a change in accounting principle
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (150,000
                                                        )
                                                        
                                                        
                                                        127,778
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (22,222
                                                        )Balance
      at January 1, 2009, as adjusted
                                                        
                                                        
                                                        70,624,232
                                                        
                                                        
                                                        
                                                        70,624
                                                        
                                                        
                                                        
                                                        54,671,379
                                                        
                                                        
                                                        
                                                        (59,140,150
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (4,398,147
                                                        )Share-based
      compensation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        271,075
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        271,075Warrants
      issued with secured 12% notes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        46,125
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        46,125Warrant
      issued to placement agent
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,919
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,919Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,570,372
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,570,372
                                                        )Balance
      at September 30, 2009
                                                        
                                                        
                                                        70,624,232
                                                        
                                                        
                                                        $
                                                        70,624
                                                        
                                                        
                                                        $
                                                        54,995,498
                                                        
                                                        
                                                        $
                                                        (61,710,522
                                                        )
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        (6,644,400
                                                        )See
      accompanying notes to financial statements.


7


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Cash Flows


(Unaudited)





Nine months ended September
                    30,
                  
                  
                  Cumulative period
                    from August 6,
                    2001 (inception) to
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (2,570,372
                  )
                  
                  $
                  (4,395,877
                  )
                  
                  $
                  (60,530,878
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Equity
      in losses of Hedrin JV
                  
                  
                  337,048
                  
                  
                  
                  247,731
                  
                  
                  
                  587,048Share-based
      compensation
                  
                  
                  271,075
                  
                  
                  
                  379,060
                  
                  
                  
                  4,099,948Amortization
      of OID and issue costs on Secured 12% Notes
                  
                  
                  380,261
                  
                  
                  
                  -
                  
                  
                  
                  418,835Change
      in fair value of derivative
                  
                  
                  658,889
                  
                  
                  
                  -
                  
                  
                  
                  531,111Shares
      issued in connection with in-licensing agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  232,500Warrants
      issued to consultant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,670Amortization
      of intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  145,162Gain
      on sale of marketable equity securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (76,032
                  )Depreciation
                  
                  
                  4,297
                  
                  
                  
                  23,258
                  
                  
                  
                  226,228Non
      cash portion of in-process research and development charge
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,721,623Loss
      on impairment and disposition of intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,462,108Other
                  
                  
                  -
                  
                  
                  
                  18,327
                  
                  
                  
                  23,917Changes
      in operating assets and liabilities, net of acquisitions:
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -Decrease
      in restricted cash
                  
                  
                  730,499
                  
                  
                  
                  -
                  
                  
                  
                  -Decrease/(increase)
      in prepaid expenses and other current assets
                  
                  
                  (48,891
                  )
                  
                  
                  140,430
                  
                  
                  
                  (28,364
                  )Decrease/(increase)
      in other assets
                  
                  
                  13,525
                  
                  
                  
                  (9,119
                  )
                  
                  
                  (36,370
                  )Increase/(decrease)
      in accounts payable
                  
                  
                  (399,231
                  )
                  
                  
                  (574,162
                  )
                  
                  
                  563,278Increase/(decrease)
      in accrued expenses
                  
                  
                  (99,752
                  )
                  
                  
                  646,126
                  
                  
                  
                  233,999Net
      cash used in operating activities
                  
                  
                  (722,652
                  )
                  
                  
                  (3,524,226
                  )
                  
                  
                  (39,342,217
                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  -
                  
                  
                  
                  (8,972
                  )
                  
                  
                  (239,608
                  )Cash
      paid in connection with acquisitions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (26,031
                  )Net
      cash provided from the purchase and sale of short-term
      investments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  435,938Proceeds
      from sale of license
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200,001Net
      cash (used in) provided by investing activities
                  
                  
                  -
                  
                  
                  
                  (8,972
                  )
                  
                  
                  370,300Cash
      flows from financing activities:Proceeds
      from the Hedrin JV agreement
                  
                  
                  500,000
                  
                  
                  
                  2,699,176
                  
                  
                  
                  3,199,176Sale
      of warrant
                  
                  
                  -
                  
                  
                  
                  150,000
                  
                  
                  
                  150,000Proceeds
      from sale of Secured 10% Notes
                  
                  
                  -
                  
                  
                  
                  70,000
                  
                  
                  
                  -Repayment
      of Secured 10% Notes
                  
                  
                  (70,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from sale of Secured 12% Notes
                  
                  
                  340,270
                  
                  
                  
                  -
                  
                  
                  
                  1,345,413Repayments
      of notes payable to stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (884,902
                  )Proceeds
      related to sale of common stock, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  25,896,262Proceeds
      from sale of preferred stock, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,046,176Proceeds
      from exercise of warrants and stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  138,219Other,
      net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  235,214Net
      cash provided by financing activities
                  
                  
                  770,270
                  
                  
                  
                  2,919,176
                  
                  
                  
                  39,125,558Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  47,618
                  
                  
                  
                  (614,022
                  )
                  
                  
                  153,641Cash
      and cash equivalents at beginning of period
                  
                  
                  106,023
                  
                  
                  
                  649,686
                  
                  
                  
                  -Cash
      and cash equivalents at end of period
                  
                  $
                  153,641
                  
                  
                  $
                  35,664
                  
                  
                  $
                  153,641





8


MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


Condensed
Statements of Cash Flows


(Unaudited)





Nine months ended September 30,
                  
                  
                  Cumulative
                    period from
                    August 6, 2001
                    (inception) to
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  26,033Supplemental
      disclosure of noncash investing and financing activities:Investment
      in Hedrin JV
                  
                  $
                  500,000
                  
                  
                  $
                  250,000
                  
                  
                  $
                  750,000Warrants
      issued with Secured 12% Notes
                  
                  
                  53,044
                  
                  
                  
                  -
                  
                  
                  
                  223,172Common
      stock issued in satisfaction of accounts payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  770,000Imputed
      and accrued preferred stock dividend
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,179,644Conversion
      of preferred stock to common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,067Preferred
      stock dividends paid by issuance of shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  759,134Issuance
      of common stock for acquisitions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,389,226Issuance
      of common stock in connection with in-licensing agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  232,500Marketable
      equity securities received in connection with sale of
    license
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  359,907Warrants
      issued to consultant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,670Net
      liabilities assumed over assets acquired in business
      combination
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (675,416
                  )Cashless
      exercise of warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  33





See
accompanying notes to financial statements.


9




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS


1.            SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Presentation





The
accompanying unaudited condensed financial statements of Manhattan
Pharmaceuticals, Inc. (“Manhattan” or the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the rules and regulations of the
Securities and Exchange Commission.  Accordingly, the unaudited
condensed financial statements do not include all information and footnotes
required by accounting principles generally accepted in the United States of
America for complete annual financial statements.  In the opinion of
management, the accompanying unaudited condensed financial statements reflect
all adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation.  Interim operating results are not
necessarily indicative of results that may be expected for the year ending
December 31, 2009 or for any other interim period.  These
unaudited condensed financial statements should be read in conjunction with the
Company’s audited financial statements as of and for the year ended
December 31, 2008, which are included in the Company’s Annual Report on
Form 10-K  for such year.  The condensed balance sheet as of
December 31, 2008 has been derived from the audited financial statements
included in the Form 10-K for that year.





As of
September 30, 2009, the Company has not generated any revenues from the
development of its products and is therefore still considered to be a
development stage company.





Segment
Reporting





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





Income
Taxes





The
Company has no unrecognized tax benefits.  The
Company’s policy is to recognize interest and penalties related to income tax
matters in income tax expense.





Equity
in Joint Venture





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





Financial Instruments





At December 31, 2008 and September 30,
2009, the fair value of cash and cash equivalents and accounts payable
approximate their carrying values due to the short-term nature of these
instruments.  At December 31, 2008, the fair values of the secured
notes payable approximate their carrying values due to the recent issuance of
the notes.





New
Accounting Pronouncements





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
FASB Accounting Standards Codification (“Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Codification will supersede all existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. The FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, the FASB will issue Accounting Standards Updates, which will serve only
to: (a) update the Codification; (b) provide background information
about the guidance; and (c) provide the bases for conclusions on the change(s)
in the Codification.


10


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


In December 2007, the FASB issued a
statement that requires all entities to report noncontrolling (minority)
interests in subsidiaries as equity in the consolidated financial statements.
This statement establishes a single method of accounting for changes in a
parent's ownership interest in a subsidiary that do not result in
deconsolidation and expands disclosures in the consolidated financial
statements. This statement was effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The adoption of
this statement did not have any impact on the Company’s financial
statements.




In
February 2008, the FASB issued two Staff  Positions as well as other
accounting pronouncements that address fair value measurements on lease
classification. The adoption of these pronouncements did not have a material
impact on the Company’s financial statements.




In March
2008, the FASB issued a pronouncement which requires expanded disclosures about
an entity's derivative instruments and hedging activities. This pronouncement
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. This pronouncement was effective
for the Company as of January 1, 2009, and its adoption did not have any impact
on the Company’s financial statements.




In June
2008, the FASB ratified a pronouncement which provides that an entity should use
a two step approach to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. It also clarifies
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. This statement
was effective for fiscal years beginning after December 15, 2008. The adoption
of this statement had a significant impact on the Company’s financial statements
(see Note 10 to our financial statements for the period ended September 30,
2009).





In
April 2009, the FASB issued a pronouncement which provides guidance on
determining when there has been a significant decrease in the volume and level
of activity for an asset or liability, when a transaction is not orderly, and
how that information must be incorporated into a fair value measurement. This
pronouncement also requires expanded disclosures on valuation techniques and
inputs and specifies the level of aggregation required for all quantitative
disclosures.  The provisions of this pronouncement were effective for
the Company’s quarter ending June 30, 2009. The adoption of this pronouncement
did not have any impact on the Company’s financial statements.





In
April 2009, the FASB issued several pronouncements which makes the guidance
on other-than-temporary impairments of debt securities more operational and
requires additional disclosures when a company records an other-than-temporary
impairment. These pronouncements were effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted these principles in
the second quarter of 2009, which did not have any impact on the Company’s
financial statements.





In
April 2009, the FASB issued several statements which require companies to
disclose in interim financial statements the fair value of financial
instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. In addition, the companies are
required to disclose the method or methods and significant assumptions used to
estimate the fair value of financial instruments and a discussion of changes, if
any, in the method or methods and significant assumptions during the period.
This statement shall be applied prospectively and was effective for interim and
annual periods ending after June 15, 2009. To the extent relevant, the
Company adopted the disclosure requirements of this pronouncement for the
quarter ended June 30, 2009.  The adoption of these statements
did not have a material impact on the Company’s financial
statements.


11


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


In
May 2009, the FASB issued a statement which sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This
statement was effective for interim or annual periods ending after June 15,
2009, and the Company adopted the provisions of this statement for the quarter
ended June 30, 2009. The adoption of this statement did not have a material
impact on the Company’s financial statements.  The Company has
evaluated all events or transactions that occurred after September 30, 2009 up
through November 16, 2009, the date we issued these financial statements, and
there have been no events or transactions that have a material impact on the
Company’s financial statements.





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





2. LIQUIDITY





The
Company incurred a net loss of $2,570,372 and negative cash flows from operating
activities of $722,652 for the nine month period ended September 30, 2009 and 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, 2009 amounts to $61,710,521.





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




Management
believes that the Company will continue to incur net losses through at least
September 30, 2010 and for the foreseeable future thereafter.  Based
on the resources of the Company available at September 30, 2009, management
believes that the Company has sufficient capital to fund its operations through
the end of 2009.  Management believes that the Company will need
additional equity or debt financing or will need to generate positive cash flow
from a joint venture agreement, see Note 6, or generate revenues through
licensing of its products or entering into strategic alliances to be able to
sustain its operations into 2010.  Furthermore, the Company will need
additional financing thereafter to complete development and commercialization of
our products.  There can be no assurances that we can successfully
complete development and commercialization of our products.




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




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


12


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


3.
              COMPUTATION
      OF NET LOSS PER COMMON SHARE





Basic net
loss per common share is calculated by dividing net loss applicable to common
shares by the weighted-average number of common shares outstanding for the
period.  Diluted net loss per common share is the same as basic net
loss per common share, since potentially dilutive securities from stock options
and stock warrants would have an antidilutive effect because the Company
incurred a net loss during each period presented.  The amounts of
potentially dilutive securities excluded from the calculation were 92,184,443
and 19,500,189 shares at September 30, 2009 and 2008,
respectively.  These amounts do not include the 55,555,555 shares
issuable upon the exercise of the put or call rights issued in connection with
the Hedrin JV (see Note 6) which were subject to anti-dilution rights upon the
issuance of warrants with the Secured 12% Notes (see Note 8).





4.
            SHARE-BASED
      COMPENSATION





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 $78,605 and $83,396 for the three month periods
ended September 30, 2009 and 2008, respectively, and $271,075 and $379,060 for
the nine month periods ended September 30, 2009 and 2008,
respectively.  The Company did not capitalize any share-based
compensation cost.





Options
granted to consultants and other non-employees are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period. As a result of adjusting consultant and other non-employee
options to fair value, the Company recognized share-based compensation cost of
$382 and $1,151, respectively, for the three-and nine months ended September 30,
2009 and $347 and $606, respectively for the three-and nine months ended
September 30, 2008. The Company has allocated share-based compensation
costs to general and administrative and research and development expenses as
follows:





Three months ended
                          September30,
                        
                        
                        Nine months ended
                          September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008General
      and administrative expense:Share-based
      employee compensation cost
                        
                        $
                        78,223
                        
                        
                        $
                        64,071
                        
                        
                        $
                        269,924
                        
                        
                        $
                        279,476Share-based
      consultant and non-employee cost
                        
                        
                        38
                        
                        
                        
                        -
                        
                        
                        
                        115
                        
                        
                        
                        -78,261
                        
                        
                        
                        64,071
                        
                        
                        
                        270,039
                        
                        
                        
                        279,476Research
      and development expense:Share-based
      employee compensation cost
                        
                        
                        -
                        
                        
                        
                        18,978
                        
                        
                        
                        -
                        
                        
                        
                        98,978Share-based
      consultant and non-employee cost
                        
                        
                        344
                        
                        
                        
                        347
                        
                        
                        
                        1,036
                        
                        
                        
                        606344
                        
                        
                        
                        19,325
                        
                        
                        
                        1,036
                        
                        
                        
                        99,584Total
      share-based cost
                        
                        $
                        78,605
                        
                        
                        $
                        83,396
                        
                        
                        $
                        271,075
                        
                        
                        $
                        379,060




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


13




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




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




Nine months ended
                      September 30,2009
                    
                    
                    2008Expected
      volatility
                    
                    
                    94
                    %
                    
                    
                    92.3
                    %Dividend
      yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      term (in years)
                    
                    
                    6
                    
                    
                    
                    6Risk-free
      interest rate
                    
                    
                    2.08
                    
                    
                    
                    2.81




The
Company has shareholder-approved incentive stock option plans for employees
under which it has granted non-qualified and incentive stock
options.  In December 2003, the Company established the 2003 Stock
Option Plan (the “2003 Plan”), which provided for the granting of up to
5,400,000 options to officers, directors, employees and consultants for the
purchase of stock.  In August 2005, the Company increased the number
of shares of common stock reserved for issuance under the 2003 Plan by 2,000,000
shares.  In May 2007, the Company increased the number of shares of
common stock reserved for issuance under the 2003 Plan by 3,000,000
shares.  At September 30, 2009, 10,400,000 shares were authorized for
issuance.  The options have a maximum term of 10 years and vest over a
period determined by the Company’s Board of Directors (generally 3 years) and
are issued at an exercise price equal to or greater than the fair market value
of the shares at the date of grant.  The 2003 Plan expires on December
10, 2013 or when all options have been granted, whichever is sooner. At
September 30, 2009, options to purchase 6,322,696 shares were outstanding,
27,776 shares of common stock were issued and there were 4,049,528 shares
reserved for future grants under the 2003 Plan.




In July
1995, the Company established the 1995 Stock Option Plan (the “1995 Plan”),
which provided for the granting of options to purchase up to 130,000 shares of
the Company’s common stock to officers, directors, employees and
consultants.  The 1995 Plan was amended several times to increase the
number of shares reserved for stock option grants.  In June 2005 the
1995 Plan expired and no further options can be granted.   At
September 30, 2009, options to purchase 1,137,240 shares were outstanding and no
shares were reserved for future stock option grants under the 1995
Plan.


14




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




A summary
of the status of the Company’s stock options as of September 30, 2009 and
changes during the period then ended is presented below:




Shares
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term(years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2008
                  
                  
                  10,633,836
                  
                  
                  $
                  0.938Granted
                  
                  
                  -Exercised
                  
                  
                  -Canceled
                  
                  
                  3,007,234
                  
                  
                  $
                  1.485Forfeited
                  
                  
                  166,666
                  
                  
                  $
                  0.950Outstanding
      at September 30, 2009
                  
                  
                  7,459,936
                  
                  
                  $
                  0.718
                  
                  
                  
                  6.410
                  
                  
                  $
                  -Exercisable
      at September 30, 2009
                  
                  
                  6,734,110
                  
                  
                  $
                  0.757
                  
                  
                  
                  6.220
                  
                  
                  $
                  -Weighted-average
      fair value of options granted during the nine month period ended September
      30, 2009
                  
                  None
      issued




As of
September 30, 2009, the total compensation cost related to nonvested option
awards not yet recognized is $97,942.  The weighted average period
over which it is expected to be recognized is approximately 0.5
years.




5.
            COMMITMENTS
      AND CONTINGENCIES




Swiss
Pharma





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




The
Company had previously recognized a liability to Swiss Pharma in the amount of
approximately $104,000 for the final services invoice.  The remainder
of the award, approximately $542,000, was expensed in September
2008.    The Company will continue to accrue interest at 5%
per annum on the approximate $371,000 until such amount has been
settled.  The Company and Swiss Pharma reached a settlement subsequent
to September 30, 2009 (see Note 11).


15


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


6.
            JOINT
      VENTURE




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




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




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




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




In
February 2009, the Company’s exchange obligation increased by $1,000,000 and the
Company’s investment in the Hedrin JV increased by $500,000 as a result of the
investment by Nordic of an additional $1.25 million into the Hedrin JV, the
reclassification of the advance made by Nordic in June 2008 to the Hedrin JV of
$250,000 into an equity interest and the payment of $500,000 by the Hedrin JV to
the Company. At September 30, 2009, the Company’s exchange obligation is
$3,949,176.




During
the nine month periods ended September 30, 2009 and 2008, the Company recognized
$337,048 and $247,731, respectively, of equity in the losses of the Hedrin
JV.  This reduced the carrying value of its investment in the Hedrin
JV to $162,952 at September 30, 2009.  As of September 30, 2009, the
Company’s share of the losses is $587,048; equity in losses of Hedrin JV
previously recognized was $250,000 leaving a $337,048 share of the cumulative
losses of the Hedrin JV that was recognized by the Company at September 30,
2009.




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


16


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


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




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




The
Hedrin JV has engaged the Company to provide management services to the Limited
Partnership in exchange for a management fee.  For the nine month
periods ended September 30, 2009 and 2008, the Company has recognized $258,845
and $183,266, respectively, of other income from management fees earned from the
Hedrin JV which is included in the Company’s condensed statements of operations
for the nine month periods ended September 30, 2009 and 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 11.1 million shares of the Company’s common
stock, as adjusted due to the 12% Notes Transaction, see Note 8, exercisable for
$0.09 per share, as adjusted due to the 12% Notes Transaction, see Note
8.  The warrant is issuable 90 days from closing, provided Nordic has
not exercised all or a part of its put, as described below.  The
Company issued the warrant to Nordic on April 30, 2008.  The per share
exercise price of the warrant was initially based on the volume weighted average
price of the Company’s common stock for the period prior to the signing of the
Hedrin JV Agreement and has been subsequently adjusted due to the 12% Notes
Transaction, see Note 8.




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




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




The
Company granted Nordic registration rights for the shares to be issued upon
exercise of the warrant, the put or the call.  The Company filed an initial
registration statement on May 1, 2008.  The registration statement was
declared effective on October 15, 2008.  On June 2, 2009, the Company
filed an additional Registration Statement registering the additional 28,769,841
shares of Common Stock that may be issued to Nordic upon exercise of a put
right held by Nordic as a result of Nordic’s additional investment of $1,250,000
in Hedrin JV pursuant to the terms of the Partnership
Agreement and as adjusted pursuant to the anti-dilution provisions of the
put right (the "Put Shares") and the additional 3,968,254 shares issuable
upon exercise of an outstanding warrant held by Nordic.    The
Securities and Exchange Commission (“SEC”) has informed the Company that the
Company may not register the Put Shares for resale until Nordic exercises its
put right and such shares of Common Stock are outstanding.  The Company
believes that it has used commercially reasonable efforts to cause the
registration statement to be declared effective and has satisfied its
obligations under the registration rights agreement with respect to the
registration of the Put Shares.  The Company is awaiting input from Nordic
as to whether Nordic would like the Company to continue to pursue registration
of the additional 3,968,254 shares issuable upon exercise of an outstanding
warrant held by Nordic which were included within the June 2009
registration statement.


17


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


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 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 6% 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 12% royalty on Hedrin sales, then
profits will be shared by the Company and Nordic in accordance with their
respective equity interests in the Limited Partnership.  However, in
the event of a liquidation of the Limited Partnership, Nordic’s distribution in
liquidation will be at least equal to the amount Nordic invested in the Hedrin
JV ($5 million) plus 10% per year, less the cumulative distributions received by
Nordic from the Hedrin JV.  If the Hedrin JV’s assets in liquidation
exceed the Nordic liquidation preference amount, then any excess shall be
distributed to the Company until its distribution and the Nordic liquidation
preference amount are in the same ratio as the respective equity interests in
the Hedrin JV and the remainder, if any, shall be distributed to Nordic and the
Company in the same ratio as the respective equity
interests.  Further, in no event shall Nordic’s distribution in
liquidation be greater than assets available for distribution in
liquidation.





7.           SECURED
10% NOTES PAYABLE





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





8.
            SECURED
      12% NOTES PAYABLE





On
November 19, 2008, December 23, 2008 and February 3, 2009, the Company completed
the first, second and final closings on a financing transaction (the “12% Notes
Transaction”).  The Company sold $1,725,000 of 12% senior secured
notes (the “Secured 12% Notes”) and issued warrants to the investors to purchase
57.5 million shares of the Company’s common stock at $0.09 per
share.  The warrants expire on December 31, 2013.  Net
proceeds of $1.4 million were realized from the three closings.  In
addition, $78,000 of issuance costs were paid outside of the
closings.   Per the terms of the 12% Notes Transaction the net
proceeds were paid into a deposit account  (the “Deposit Account”) and
are to be paid out to the Company in monthly installments of $113,300
retroactive to October 1, 2008 and a one-time payment of
$200,000.  Per the terms of the 12% Notes Transaction the monthly
installments are to be used exclusively to fund the current operating expenses
of the Company and the one-time payment was to be used for trade payables
incurred prior to October 1, 2008.  The Company received $876,700 of
such monthly installments and the one time payment of $200,000 during the nine
month period ended September 30,  2009.  There was no
remaining balance in the Deposit Account at September 30, 2009 as is reflected
in the accompanying balance sheets as of September 30, 2009 as restricted
cash.


18




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




National
Securities Corporation (“National”) was the placement agent for the 12% Notes
Transaction. National’s compensation for acting as placement agent is a cash fee
of 10% of the gross proceeds received, a non-accountable expense allowance of
1.5% of the gross proceeds, reimbursement of certain expenses and a warrant to
purchase such number of shares of the Company’s common stock equal to 15% of the
shares underlying the warrants issued to the investors.  The Company
paid National a total of $202,000 in placement agent fees, a non-accountable
expense allowance and reimbursement of certain expenses, of which $47,000 was
paid during the nine month period ended September 30, 2009.  In
addition, the Company issued warrants to purchase 8.6 million shares of the
Company’s common stock at $0.09 per share.  These warrants were valued
at $29,110 and are a component of Secured 12% notes payable issue
costs.  The warrants expire on December 31, 2013.




The
Secured 12% Notes mature two years after issuance.  Interest on
the  Secured 12% Notes is compounded quarterly and payable at
maturity.  At September 30, 2009, accrued and unpaid interest on the
Secured 12% Notes amounted to approximately $172,000 and is reflected in the
accompanying balance sheet at September 30, 2009 as interest payable on secured
12% notes payable. The Secured 12% Notes are secured by a pledge of all of the
Company’s assets except for its investment in the Hedrin JV.  The
asset pledge includes the cash balance in the Deposit Account.  In
addition, to provide additional security for the Company’s obligations under the
notes, the Company entered into a default agreement, which provides that upon an
event of default under the notes, the Company shall, at the request of the
holders of the notes, use reasonable commercial efforts to either (i) sell a
part or all of the Company’s interests in the Hedrin joint venture or (ii)
transfer all or part of the Company’s interest in the Hedrin JV to the holders
of the notes, as necessary, in order to fulfill the Company’s obligations under
the notes, to the extent required and to the extent permitted by the applicable
Hedrin joint venture agreements.





In
connection with the private placement, the Company, the placement agent and the
investors entered into a registration rights agreement.  Pursuant to
the registration rights agreement, we agreed to file a registration statement to
register the resale of the shares of our common stock issuable upon exercise of
the warrants issued to the investors in the private placement, within 20 days of
the final closing date and to cause the registration statement to be declared
effective within 90 days (or 120 days upon full review by the Securities and
Exchange Commission). During the nine month period ended September 30, 2009 we
filed the registration statement, received a comment letter from the SEC and
responded to the comment letter from the SEC.  The registration
statement was declared effective on April 17, 2009.





The 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.




SharesIssuable
                    UponExerciseof
                    Nordic'sPut
                  
                  
                  SharesIssuable
                    UponExerciseof
                    Nordic'sWarrant
                  
                  
                  TotalShares
                    IssuableUpon
                    ExerciseofNordic's
                    PutandWarrantBefore
      the 12% Notes Transaction
                  
                  
                  35,714,287
                  
                  
                  
                  7,142,857
                  
                  
                  
                  42,857,144Antidilution
      shares
                  
                  
                  19,841,269
                  
                  
                  
                  3,968,254
                  
                  
                  
                  23,809,523After
      the 12% Notes Transaction
                  
                  
                  55,555,556
                  
                  
                  
                  11,111,111
                  
                  
                  
                  66,666,667




The
Company incurred a total of approximately $424,000 of costs in the issuance of
the $1,725,000 of Secured 12% Notes sold in 2008.  These costs were
capitalized and are being amortized over the life of the Secured 12% Notes into
interest expense.  During the nine month period ended September 30,
2009, the amount amortized into interest expense was approximately
$154,000.  The remaining unamortized balance of approximately $253,000
is reflected in the accompanying balance sheet as of September 30, 2009 as a
non-current asset, Secured 12% Notes payable issue costs.


19


MANHATTAN
PHARMACEUTICALS, INC.
 (A
Development Stage Company)
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
  The
Company recognized an original issue discount (the “OID”) of approximately
$194,000 on the issuance of the Secured 12% Notes sold for the value of the
warrants issued to the investors.  The OID is being amortized over the
life of the Secured 12% Notes into interest expense.  During the nine
month period ended September 30, 2009 the amount amortized into interest expense
was approximately $69,000.  The remaining unamortized balance of
approximately $117,000 has been netted against the face amount of the Secured
12% Notes in the accompanying balance sheet as of September 30,
2009.  As per the terms of the 12% Notes Transaction the Company’s
officers agreed to certain modifications of their employment
agreements.




9.
            LICENSE
      AGREEMENTS




Altoderm
License Agreement





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




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




Altolyn
License Agreement





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




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




IGI
Agreement for PTH (1-34)




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




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





10.
            DERIVATIVE
      LIABILITY




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


20


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


In
accordance with this pronouncement, the Company, estimated the fair value of
these warrants as of January 1, 2009 to be $22,222 by recording a reduction
in paid in capital of $150,000 and a decrease in deficit accumulated during the
development stage of $127,778. The effect of this adjustment is recorded as a
cumulative effect of change in accounting principles in our condensed statements
of stockholder’s equity (deficiency).  As of September 30, 2009, the
fair value of this derivative was $681,111. The change of $658,889 in fair value
during the nine month period ended September 30, 2009 is reported as a non-cash
charge in our condensed statement of operations as a component of other (income)
expense.





11.
            SUBSEQUENT
      EVENTS





Swiss
Pharma Contract LLC Settlement


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




In
conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma
described above, on October 28, 2009, the Company entered into a Subscription
Agreement (the “Subscription Agreement”) pursuant to which it sold a 12%
Original Issue Discount Senior Subordinated Convertible Debenture with a stated
value of $400,000 (the “Debenture”) and a warrant (the “Warrant” and, together
with the Debenture, the “Securities”) to purchase 2,222,222 shares of the
Company’s common stock, par value $.001 per share (“Common Stock”) for a
purchase price of $200,000.  The Debenture is convertible into shares
of Common Stock at an initial conversion price of $0.09 per share, subject to
adjustment, or, in the event the Company issues new securities in connection
with a financing, the Debenture may be converted into such new securities at a
conversion price equal to the purchase price paid by the purchasers of such new
securities.  The Company may also, in its sole discretion, elect to
pay interest due under the Debenture quarterly in shares of the Company’s common
stock provided such shares are subject to an effective registration
statement.  The Debenture is subordinated to the Company’s outstanding
12% Senior Secured Promissory Notes in the principal amount of
$1,725,000.  The Warrant is exercisable at an exercise price of $0.11
per share, subject to adjustment, prior to October 28, 2014.





In
connection with the issuance of the Securities, the Company issued warrants to
purchase an aggregate of 222,222 shares of Common Stock at an exercise price of
$0.11 per share to the placement agent and certain of its
designees.





Potential
Acquisition of Ariston Pharmaceuticals, Inc.


Manhattan
entered into a non-binding letter of intent with Ariston Pharmaceuticals, Inc.
("Ariston") to acquire Ariston through a merger with a to-be-formed,
wholly-owned subsidiary of Manhattan (such transaction, the "Ariston
Merger").





Manhattan
and Ariston contemplate the following, as set forth in the non-binding letter of
intent:





 ̈
            After
      the Ariston Merger, Manhattan would own 100% of the outstanding capital
      stock of Ariston.





 ̈
            As
      consideration for the Ariston Merger, Manhattan would pay to the
      holders of Ariston capital stock, in the aggregate, shares of
      Manhattan common stock as follows:


o
            at
      the closing of the Ariston Merger, 7,062,423 shares of Manhattan
      common stock (a number which represents 10% of the shares of Manhattan
      common stock which were issued and outstanding as of September 10, 2009,
      which was the date of the non-binding letter of intent);
    and


o
            the
      right to receive additional contingent share consideration after
      the closing as follows:


 ̈
            7,062,423 additional
      shares of Manhattan common stock upon acceptance by the US Food and
      Drug Administration (“ FDA ”) of
      Ariston’s filing of the first New Drug Application for Ariston's
      AST-726 product candidate; and


21




MANHATTAN
PHARMACEUTICALS, INC.


(A
Development Stage Company)


NOTES
TO CONDENSED FINANCIAL STATEMENTS




 ̈
            8,828,029 additional
      shares of Manhattan common stock upon Ariston receiving FDA approval to
      market Ariston's AST-726 product candidate in the United States;
      and


 ̈
            8,828,029 additional
      shares of Manhattan common stock if there is demonstration of clinical
      activity and safety with the AST-914 metabolite in the current National
      Institutes of Health study in essential tremor patients resulting in a
      decision by our Board of Directors, within 12 months following
      the closing, to further develop the product internally or to seek a
      corporate partnership based on the
program


 ̈
            Ariston
      would cause the holders of all outstanding Ariston convertible
      promissory notes to convert their notes into convertible new
      promissory notes to be issued by Ariston at the closing of the
      Ariston Merger.  The principal amount of the new notes
      will be equal to the lesser of the principal amount of the currently
      outstanding notes plus accrued and unpaid interest thereon through the
      date of the closing of the Ariston Merger or $15.5
      million.  The new notes would have the following
      terms:


o
            interest
      rate of 5% per annum compounding
annually;


o
            interest
      and principal are to be repaid from the net cash flow from AST-726 and AST
      914 programs, 50% of this net cash flow will be used to repay the interest
      and principal. (subject to adjustment if the notes include a conversion
      feature and are converted.)


o
            the
      holders of the new notes will have no recourse to Manhattan or
      any entity other than Ariston with respect to the payment of any amount
      under the new notes or any indebtedness which had been converted
      into new notes.


o
            the new notes may
      include a conversion feature such that the new notes would be
      convertible at the option of the holder thereof into Manhattan common
      stock at a conversion price currently anticipated to be $.40 per share
      (the “ Conversion
      Price ”) if a sufficient number of authorized common stock is
      available.





At the
Closing, two persons chosen by Ariston will join our Board of
Directors.


22


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




You
should read the following discussion of our results of operations and financial
condition in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2008 (the “Annual Report”) and our financial statements for the
nine month period ended September 30, 2009 included elsewhere in this
report.




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




During
2005 we merged with Tarpan Therapeutics, Inc. (“Tarpan”).  Tarpan was
a privately held New York based biopharmaceutical company developing
dermatological therapeutics.  Through the merger, we acquired Tarpan’s
primary product candidate, Topical PTH (1-34) for the treatment of
psoriasis.  In consideration for their shares of Tarpan’s capital
stock, the stockholders of Tarpan received an aggregate of approximately
10,731,000 shares of our common stock, representing approximately 20% of our
then outstanding common shares.  This transaction was accounted for as
a purchase of Tarpan by the Company.




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




This
discussion includes “forward-looking” statements that reflect our current views
with respect to future events and financial performance.  We use words
such as we “expect,” “anticipate,” “believe,” and “intend” and similar
expressions to identify forward-looking statements.  Investors should
be aware that actual results may differ materially from our expressed
expectations because of risks and uncertainties inherent in future events,
particularly those risks identified under the heading “Risk Factors” following
Item 1 in the Annual Report, and should not unduly rely on these forward looking
statements.


23


Results
Of Operations




Nine-month
Period ended September 30, 2009 vs 2008





NineMonthsended
                    September30,
                  
                  
                  Increase
                  
                  
                  % Increase2009
                  
                  
                  2008
                  
                  
                  (decrease)
                  
                  
                  (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                  
                  $
                  1,000
                  
                  
                  $
                  100,000
                  
                  
                  $
                  (99,000
                  )
                  
                  
                  -99.00
                  %Other
      research and development expenses
                  
                  
                  56,000
                  
                  
                  
                  1,765,000
                  
                  
                  
                  (1,709,000
                  )
                  
                  
                  -96.83
                  %Total
      research and development expenses
                  
                  
                  57,000
                  
                  
                  
                  1,865,000
                  
                  
                  
                  (1,808,000
                  )
                  
                  
                  -96.94
                  %General
      and administrative:Share-based
      compensation
                  
                  
                  270,000
                  
                  
                  
                  279,000
                  
                  
                  
                  (9,000
                  )
                  
                  
                  -3.23
                  %Other
      general and administrative expenses
                  
                  
                  1,103,000
                  
                  
                  
                  2,321,000
                  
                  
                  
                  (1,218,000
                  )
                  
                  
                  -52.48
                  %Total
      general and administrative expenses
                  
                  
                  1,373,000
                  
                  
                  
                  2,600,000
                  
                  
                  
                  (1,227,000
                  )
                  
                  
                  -47.19
                  %Other
      income/(expense)Equity
      in lossess of Hedrin JV
                  
                  
                  (337,000
                  )
                  
                  
                  (248,000
                  )
                  
                  
                  (89,000
                  )
                  
                  
                  35.89
                  %Change
      in fair value of derivative
                  
                  
                  (659,000
                  )
                  
                  
                  -
                  
                  
                  
                  (659,000
                  )
                  
                  
                  N/AInterest
      expense
                  
                  
                  (397,000
                  )
                  
                  
                  (19,000
                  )
                  
                  
                  (378,000
                  )
                  
                  
                  N/AInterest
      and other income
                  
                  
                  253,000
                  
                  
                  
                  336,000
                  
                  
                  
                  (83,000
                  )
                  
                  
                  -24.70
                  %Total
      other income/(expense)
                  
                  
                  (1,140,000
                  )
                  
                  
                  69,000
                  
                  
                  
                  (1,209,000
                  )
                  
                  
                  -1752.17
                  %Net
      loss
                  
                  $
                  2,570,000
                  
                  
                  $
                  4,396,000
                  
                  
                  $
                  (1,826,000
                  )
                  
                  
                  -41.54
                  %





During
each of the nine month periods ended September 30, 2009 and 2008, we did not
recognize any revenues.  We are considered a development stage company
and do not expect to have revenues relating to our products candidates prior to
September 30, 2010, if at all.




For the
nine months ended September 30, 2009 research and development expense was
$57,000 as compared to $1,865,000 for the nine months ended September 30,
2008.  This decrease of $1,808,000, or 97%, is primarily due to there
being no active product development projects during the 2009 period, as the
Hedrin product is being developed by the Hedrin JV and as we have ceased
development of all other products due to lack of funds and other
factors.




For the
nine months ended September 30, 2009 general and administrative expense was
$1,373,000 as compared to $2,600,000 for the nine months ended September 30,
2008.  This decrease of $1,227,000, or 47%, is primarily comprised of
a decrease in other general and administrative expenses of $1,218,000 due to an
overall decrease in operations and a decrease in share-based compensation of
$9,000.




For the
nine months ended September 30, 2009 other income/(expense) was $(1,140,000) as
compared to $69,000 for the quarter ended September 30, 2008.  This
change of $(1,209,000), or 1,752%, is primarily due to increases in equity in
losses of from the Hedrin JV of $89,000, a change in fair value of a derivative
of $659,000 and interest expense of $378,000.




Net loss
for the nine months ended September 30, 2009 was $2,570,000 as compared to
$4,396,000 for the nine months ended September 30, 2008.  This
decrease of $1,826,000, or 42%, is primarily due to decreases in research and
development expenses of $1,808,000 and in general and administrative expenses of
$1,227,000 offset by a change in other income/(expense) of
$(1,209,000).


24





Quarter
ended September 30, 2009 vs 2008




Quarter ended September 30,
                          
                          
                          Increase
                          
                          
                          % Increase2009
                          
                          
                          2008
                          
                          
                          (decrease)
                          
                          
                          (decrease)Costs
      and expenses:Research
      and development:Share-based
      compensation
                          
                          $
                          -
                          
                          
                          $
                          19,000
                          
                          
                          $
                          (19,000
                          )
                          
                          
                          -100.00
                          %Other
      research and development expenses
                          
                          
                          6,000
                          
                          
                          
                          480,000
                          
                          
                          
                          (474,000
                          )
                          
                          
                          -98.75
                          %Total
      research and development expenses
                          
                          
                          6,000
                          
                          
                          
                          499,000
                          
                          
                          
                          (493,000
                          )
                          
                          
                          -98.80
                          %General
      and administrative:Share-based
      compensation
                          
                          
                          78,000
                          
                          
                          
                          64,000
                          
                          
                          
                          14,000
                          
                          
                          
                          21.88
                          %Other
      general and administrative expenses
                          
                          
                          312,000
                          
                          
                          
                          821,000
                          
                          
                          
                          (509,000
                          )
                          
                          
                          -62.00
                          %Total
      general and administrative expenses
                          
                          
                          390,000
                          
                          
                          
                          885,000
                          
                          
                          
                          (495,000
                          )
                          
                          
                          -55.93
                          %Other
      income/(expense)Equity
      in lossess of Hedrin JV
                          
                          
                          (105,000
                          )
                          
                          
                          (140,000
                          )
                          
                          
                          35,000
                          
                          
                          
                          -25.00
                          %Change
      in fair value of derivative
                          
                          
                          158,000
                          
                          
                          
                          -
                          
                          
                          
                          158,000
                          
                          
                          
                          N/AInterest
      expense
                          
                          
                          (137,000
                          )
                          
                          
                          (19,000
                          )
                          
                          
                          (118,000
                          )
                          
                          
                          N/AInterest
      and other income
                          
                          
                          64,000
                          
                          
                          
                          148,000
                          
                          
                          
                          (84,000
                          )
                          
                          
                          -56.76
                          %Total
      other income/(expense)
                          
                          
                          (20,000
                          )
                          
                          
                          (11,000
                          )
                          
                          
                          9,000
                          
                          
                          
                          -81.82
                          %Net
      loss
                          
                          $
                          (416,000
                          )
                          
                          $
                          (1,395,000
                          )
                          
                          $
                          979,000
                          
                          
                          
                          -70.18
                          %




During
each of the three month periods ended September 30, 2009 and 2008, we did not
recognize any revenues.  We are considered a development stage company
and do not expect to have revenues relating to our products candidates prior to
September 30, 2010, if at all.




For the
quarter ended September 30, 2009 research and development expense was $6,000 as
compared to $499,000 for the quarter ended September 30, 2008.  This
decrease of $493,000, or 99%, is primarily due to there being no active product
development projects during the 2009 period, as the Hedrin product is being
developed by the Hedrin JV and as we have ceased development of all other
products due to lack of funds and other factors.




For the
quarter ended September 30, 2009 general and administrative expense was $390,000
as compared to $885,000 for the quarter ended September 30,
2008.  This decrease of $495,000, or 56%, is primarily comprised of a
decrease in other general and administrative expenses of $509,000 due to an
overall decrease in operations offset by an increase in share-based compensation
of $14,000 due to the immediate vesting of options.




For the
quarter ended September 30, 2009 other income/(expense) was $(20,000) as
compared to $(11,000) for the quarter ended September 30, 2008.  This
change of $(9,000), or 82%, is primarily due to a decrease in equity in losses
of Hedrin JV of $35,000, a change in fair value of a derivative of $158,000, an
increase in interest expense of $(118,000) and a decrease in interest and other
income of $(84,000).




Net loss
for the quarter ended September 30, 2009 was $416,000 as compared to $1,395,000
for the quarter ended September 30, 2008.  This decrease of $979,000,
or 70%, is primarily due to decreases in research and development expenses of
$493,000 and in general and administrative expenses of $495,000 offset by a
change in other income/(expense) of $(9,000).


25




Liquidity
and Capital Resources




From
inception to September 30, 2009, we incurred a deficit during the development
stage of $61,711,000 primarily as a result of our net losses, and we expect to
continue to incur additional losses through at least September 30, 2010 and for
the foreseeable future.  These losses have been incurred through a
combination of research and development activities related to the various
technologies under our control and expenses supporting those
activities.




We have
financed our operations since inception primarily through equity and debt
financings and a joint venture transaction.  During the nine months
ended September 30, 2009, we had a net increase in cash and cash equivalents of
$48,000.  This increase resulted largely from net cash provided by
financing activities of $770,000 partially offset by net cash used in operating
activities of $722,000.  Total liquid resources as of September 30,
2009 were $154,000 compared to $106,000 at December 31, 2008.




Our
current liabilities as of September 30, 2009 were $1,598,000 compared to
$1,486,000 at December 31, 2008, an increase of $112,000.  As of
September 30, 2009, we had working capital deficit of $1,358,000 compared to
working capital deficit of $612,000 at December 31, 2008.




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




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




Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing,
other collaborative agreements, strategic alliances, and our ability to realize
the full potential of our technology in development.  Such additional
funds may not become available on acceptable terms and there can be no assurance
that any additional funding that we do obtain will be sufficient to meet our
needs in the long term.  Through September 30, 2009, a significant
portion of our financing has been through private placements of common stock and
warrants.  Unless our operations generate significant revenues and
cash flows from operating activities, we will continue to fund operations from
cash on hand and through the similar sources of capital previously
described.  We can give no assurances that any additional capital that
we are able to obtain will be sufficient to meet our needs.  We
believe that we will continue to incur net losses and negative cash flows from
operating activities for the foreseeable future.




Based on
the resources of the Company available at September 30, 2009, management
believes that the Company has sufficient capital to fund its operations through
the end of 2009.  Management believes that the Company will need
additional equity or debt financing or will need to generate positive cash flow
from the Hedrin joint venture, or generate revenues through licensing of its
products or entering into strategic alliances to be able to sustain its
operations into 2010.  Furthermore, the Company will need additional
financing thereafter to complete development and commercialization of its
products.  There can be no assurances that we can successfully
complete development and commercialization of our products.




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


26




We have
reported net losses of $2,570,000 and $4,396,000 for the nine month periods
ended September 30, 2009 and 2008, respectively.  The net loss
attributable to common shares from date of inception, including preferred stock
dividends, August 6, 2001 to September 30, 2009, amounts to
$61,711,000.  Management believes that we will continue to incur net
losses through at least September 30, 2010.




Joint
Venture Agreement




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





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





The
Hedrin JV is responsible for the development and commercialization of Hedrin for
the North American market and all associated costs including clinical trials, if
required, regulatory costs, patent costs, and future milestone payments owed to
Thornton & Ross Ltd., or T&R, the licensor of Hedrin.  The
Hedrin JV has engaged us to provide management services to the Hedrin JV in
exchange for an annualized management fee, which for the nine month periods
ended September 30, 2009 and 2008 was approximately $259,000 and $183,000,
respectively.




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




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


27





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





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





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





We
granted Nordic registration rights for the shares to be issued upon exercise of
the warrant, the put or the call.  We filed an initial registration
statement on May 1, 2008.  The registration statement was declared
effective on October 15, 2008.  On June 2, 2009, we filed an
additional Registration Statement registering the additional 28,769,841 shares
of Common Stock that may be issued to Nordic upon exercise of a put right
held by Nordic as a result of Nordic’s additional investment of $1,250,000 in
Newco pursuant to the terms of the Partnership Agreement and as
adjusted pursuant to the anti-dilution provisions of the put right (the
"Put Shares") and the additional 3,968,254 shares issuable upon exercise of an
outstanding warrant held by Nordic.    The Securities and Exchange
Commission (“SEC”) has informed us that we may not register the Put Shares for
resale until Nordic exercises its put right and such shares of Common Stock are
outstanding.  We believe that we have used commercially reasonable efforts
to cause the registration statement to be declared effective and have satisfied
our obligations under the registration rights agreement with respect to the
registration of the Put Shares.  The Company is awaiting input from Nordic
as to whether Nordic would like us to continue to pursue registration of the
additional 3,968,254 shares issuable upon exercise of an outstanding warrant
held by Nordic which were included within the June 2009 registration
statement.


28




We are
required to file additional registration statements, if required, within 45 days
of the date we first knew that such additional registration statement was
required.  We are required to use commercially reasonable efforts to cause
the additional registration statements to be declared effective by the SEC
within 105 calendar days from the filing date (the "Effective Date").  If
we fail to file a registration statement on time or if a registration statement
is not declared effective by the SEC within 105 days of filing we 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 us exceed 9% of the
amount invested in the Hedrin JV by Nordic.





Secured
10% Notes Payable





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





Secured
12% Notes Payable




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





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





In
connection with the private placement, we, the placement agent and the investors
entered into a registration rights agreement.  Pursuant to the
registration rights agreement, we agreed to file a registration statement to
register the resale of the shares of our common stock issuable upon exercise of
the warrants issued to the investors in the private placement, within 20 days of
the final closing date and to cause the registration statement to be declared
effective within 90 days (or 120 days upon full review by the
SEC).   During the three month period ended September 30,
2009,  we filed the registration statement, received a comment letter
from the SEC, responded to the SEC comment letter and re-filed the registration
statement.  The registration statement was declared effective by the
SEC on April 17, 2009.


29


Subsequent
Events




SwissPharma
Contract LLC Settlement


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




In
conjunction with the Settlement Agreement and Mutual Release with Swiss Pharma
described above, on October 28, 2009, we entered into a Subscription Agreement
(the “Subscription Agreement”) pursuant to which we sold a 12% Original Issue
Discount Senior Subordinated Convertible Debenture with a stated value of
$400,000 (the “Debenture”) and a warrant (the “Warrant” and, together with the
Debenture, the “Securities”) to purchase 2,222,222 shares of our common stock,
par value $.001 per share (“Common Stock”) for a purchase price of
$200,000.  The Debenture is convertible into shares of Common Stock at
an initial conversion price of $0.09 per share, subject to adjustment or, in the
event that we issues new securities in connection with a financing, the
Debenture may be converted into such new securities at a conversion price equal
to the purchase price paid by the purchasers of such new
securities.  We may also, in our sole discretion, elect to pay
interest due under the Debenture quarterly in shares of our common stock
provided such shares are subject to an effective registration
statement.  The Debenture is subordinated to our outstanding 12%
Senior Secured Promissory Notes in the principal amount of
$1,725,000.  The Warrant is exercisable at an exercise price of $0.11
per share, subject to adjustment, prior to October 28, 2014.





In
connection with the issuance of the Securities, we issued warrants to purchase
an aggregate of 222,222 shares of Common Stock at an exercise price of $0.11 per
share to the placement agent and certain of its designees.





Potential Acquisition of Ariston
Pharmaceuticals, Inc.


We
entered into a non-binding letter of intent with Ariston Pharmaceuticals, Inc.
("Ariston") to acquire Ariston through a merger with a to-be-formed,
wholly-owned subsidiary of ours (such transaction, the "Ariston
Merger").





We and
Ariston contemplate the following, as set forth in the non-binding letter of
intent:





 ̈
            After
      the Ariston Merger, Manhattan would own 100% of the outstanding capital
      stock of Ariston.





 ̈
              As
      consideration for the Ariston Merger, Manhattan would pay to the
      holders of Ariston capital stock, in the aggregate, shares of
      Manhattan common stock as follows:o
              at
      the closing of the Ariston Merger, 7,062,423 shares of Manhattan
      common stock (a number which represents 10% of the shares of Manhattan
      common stock which were issued and outstanding as of September 10, 2009,
      which was the date of the non-binding letter of intent);
    ando
              the
      right to receive additional contingent share consideration after
      the closing as follows: ̈
              7,062,423 additional
      shares of Manhattan common stock upon acceptance by the US Food and
      Drug Administration (“ FDA”) of Ariston’s filing of the first New Drug Application
      for Ariston's AST-726 product candidate; and ̈
              8,828,029 additional
      shares of Manhattan common stock upon Ariston receiving FDA approval to
      market Ariston's AST-726 product candidate in the United States;
      and ̈
              8,828,029 additional
      shares of Manhattan common stock if there is demonstration of clinical
      activity and safety with the AST-914 metabolite in the current National
      Institutes of Health study in essential tremor patients resulting in a
      decision by our Board of Directors, within 12 months following
      the closing, to further develop the product internally or to seek a
      corporate partnership based on the program ̈
              Ariston
      would cause the holders of all outstanding Ariston convertible
      promissory notes to convert their notes into convertible new
      promissory notes to be issued by Ariston at the closing of the
      Ariston Merger.  The principal amount of the new notes
      will be equal to the lesser of the principal amount of the currently
      outstanding notes plus accrued and unpaid interest thereon through the
      date of the closing of the Ariston Merger or $15.5
      million.  The new notes would have the following
      terms:


30





o
              Interest
      rate of 5% per annum compounding annually;o
              interest
      and principal are to be repaid from the net cash flow from AST-726 and AST
      914 programs, 50% of this net cash flow will be used to repay the interest
      and principal. (subject to adjustment if the notes include a conversion
      feature and are converted.)o
              the
      holders of the new notes will have no recourse to Manhattan or
      any entity other than Ariston with respect to the payment of any amount
      under the new notes or any indebtedness which had been converted
      into new notes.o
              the new notes may
      include a conversion feature such that the new notes would be
      convertible at the option of the holder thereof into Manhattan common
      stock at a conversion price currently anticipated to be $.40 per share
      (the “ Conversion
      Price ”) if a sufficient number of authorized common stock is
      available.





At the
Closing, two persons chosen by Ariston will join our Board of
Directors.





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.




Development
Commitments




At
present the Company has no development commitments.




Research
and Development Projects




Hedrin




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




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




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


31




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




In the
U.S., Manhattan Pharmaceuticals, through the Hedrin JV, is pursuing the
development of Hedrin as a medical device.  In January 2009, the U.S.
Food and Drug Administration (“FDA”) Center for Devices and Radiological Health
(“CDRH”) notified H Pharmaceuticals that Hedrin had been classified as a Class
III medical device.  A Class III designation means that a Premarket
Approval (“PMA”) Application will need to be obtained before Hedrin can be
marketed in the U.S.  At a July 2009 meeting with the FDA, the FDA
requested that the confirmatory clinical trials consist of two parallel studies
of sixty patients each.




To date,
we have incurred $1,084,000 of project costs for the development of
Hedrin.  None of these costs were incurred during the nine month
period ended September 30, 2009.  We do not expect to incur any future
costs as the Hedrin JV is now responsible for all costs associated with
Hedrin.




Topical
PTH (1-34).




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




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




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




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




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


32


To date,
we have incurred $6,504,000 of project costs related to our development of
Topical PTH (1-34).  These project costs have been incurred since
April 1, 2005, the date of the Tarpan Therapeutics acquisition.  None
of these costs were incurred during the nine month period ended September 30,
2009.




Summary
of Contractual Commitments




Off-Balance
Sheet Arrangements




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




Critical
Accounting Policies




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




Use
of Estimates




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




Research
and Development Expenses




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




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




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




Share-Based
Compensation




We have
stockholder-approved stock incentive plans for employees, directors, officers
and consultants.  Prior to January 1, 2006, we accounted for the
employee, director and officer plans using the intrinsic value
method.  Effective January 1, 2006, the Company adopted the
Share-Based Payment approach for employee options using the modified prospective
transition method. This method eliminated the option to use the intrinsic value
method and required the Company to expense the fair value of all employee
options over the vesting period.  Under the modified prospective
transition method, the Company recognizes compensation cost for the nine month
periods ended September 30, 2009 and 2008 which includes a) period compensation
cost related to share-based payments granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of Statement 123; and b) period compensation cost
related to share-based payments granted on or after January 1, 2006, based on
the grant date fair value.  In accordance with the modified
prospective method, we have not restated prior period results.


33




New
Accounting Pronouncements




In
June 2009, the Financial Accounting Standards Board (“FASB”) issued the
FASB Accounting Standards Codification (“Codification”) as the single source of
authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. When effective, the Codification will supersede
all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. Following the Codification, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards
Updates, which will serve only to: (a) update the Codification;
(b) provide background information about the guidance; and (c) provide the
bases for conclusions on the change(s) in the Codification.





In December 2007, the FASB issued a
statement that requires all entities to report noncontrolling (minority)
interests in subsidiaries as equity in the consolidated financial statements.
This statement establishes a single method of accounting for changes in a
parent's ownership interest in a subsidiary that do not result in
deconsolidation and expands disclosures in the consolidated financial
statements. This statement was effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The adoption of
this statement did not have any impact on our financial statements.




In
February 2008, the FASB issued two Staff  Positions as well as other
accounting pronouncements that address fair value measurements on lease
classification. The adoption of these pronouncements did not have a material
impact on our financial statements.




In March
2008, the FASB issued a pronouncement which requires expanded disclosures about
an entity's derivative instruments and hedging activities. This pronouncement
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. This pronouncement was effective
for the Company as of January 1, 2009, and its adoption did not have any impact
on our financial statements.




In June
2008, the FASB ratified a pronouncement which provides that an entity should use
a two step approach to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. It also clarifies
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. This statement
was effective for fiscal years beginning after December 15, 2008. The adoption
of this statement had a significant impact on our financial statements (see Note
10 to our financial statements for the period ended September 30,
2009).





In
April 2009, the FASB issued a pronouncement which provides guidance on
determining when there has been a significant decrease in the volume and level
of activity for an asset or liability, when a transaction is not orderly, and
how that information must be incorporated into a fair value measurement. This
pronouncement also requires expanded disclosures on valuation techniques and
inputs and specifies the level of aggregation required for all quantitative
disclosures.  The provisions of this pronouncement were effective for
our financial statements for the quarter ending June 30, 2009. The adoption of
this pronouncement did not have any impact on our financial
statements.


34





In
April 2009, the FASB issued several pronouncements which make the guidance
on other-than-temporary impairments of debt securities more operational and
require additional disclosures when a company records an other-than-temporary
impairment. These pronouncements were effective for interim and annual reporting
periods ending after June 15, 2009. We adopted these principles in the
second quarter of 2009, which did not have any impact on our financial
statements.





In
April 2009, the FASB issued several statements which require companies to
disclose in interim financial statements the fair value of financial
instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. In addition, the companies are
required to disclose the method or methods and significant assumptions used to
estimate the fair value of financial instruments and a discussion of changes, if
any, in the method or methods and significant assumptions during the period.
This statement shall be applied prospectively and was effective for interim and
annual periods ending after June 15, 2009. To the extent relevant, we
adopted the disclosure requirements of this pronouncement for the quarter ended
June 30, 2009.  The adoption of these statements did not have a
material impact on our financial statements





In
May 2009, the FASB issued a statement which sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This
statement was effective for interim or annual periods ending after June 15,
2009, and we adopted the provisions of this statement for the quarter ended
June 30, 2009. The adoption of this statement did not have a material
impact on our financial statements.  We have evaluated all events or
transactions that occurred after September 30, 2009 up through November
16,  2009, the date we issued these financial statements, and there
have been no events or transactions that have a material impact on our financial
statements.





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


35


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, 2009, and we have never held such
instruments in the past.





Item
4T.  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of
September 30, 2009, we carried out an evaluation, under the supervision and with
the participation of our 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 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 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, 2009, there were no changes in internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting.


36





Part
II





Item
1.  Legal Proceedings





Swiss
Pharma Contract LTD, or Swiss Pharma, a clinical site that we used in one of our
obesity trials, gave notice to us that Swiss Pharma believed it was entitled to
receive an additional payment of $322,776 for services in connection with that
clinical trial.  The contract between us and Swiss Pharma provided for
arbitration in the event of a dispute, such as this claim for an additional
payment.  On March 10, 2008, Swiss Pharma filed for arbitration with
the Swiss Chamber of Commerce.  As we did not believe that Swiss
Pharma was entitled to additional payments, we defended our position in
arbitration.  On April 2, 2008, we filed our statement of defense and
counterclaim for recovery of costs incurred by us as a result of Swiss Pharma’s
failure to meet agreed upon deadlines under our contract.  On June 3,
2008, a hearing was held before the arbitrator under the auspices of the Swiss
Chamber of Commerce.  On September 5, 2008, the arbitrator rendered an
award in favor of Swiss Pharma, awarding to Swiss Pharma a total of $646,000
which amount includes a $323,000 contract penalty, a final services invoice of
$48,000, reimbursement of certain of Swiss Pharma’s legal and other expenses
incurred in the arbitration process of $245,000, reimbursement of arbitration
costs of $13,000 and interest through September 5, 2008 of
$17,000.  Further, the arbitrator ruled that we must pay interest at
the rate of 5% per annum on $371,000, the sum of the $323,000 contract penalty
and the final services invoice of $48,000, from October 12, 2007 until
paid.  We had previously recognized a liability to Swiss Pharma in the
amount of $104,000 for the final services invoice. The remainder of the award
was expensed in 2008.  On January 22, 2009, we received notice that
Swiss Pharma submitted a petition to the Supreme Court of the State of New York,
County of New York seeking to confirm and to enter a judgment on the Arbitration
Award.  On February 17, 2009, we filed an answer to Swiss Pharma's
petition, which the Company subsequently withdrew voluntarily in exchange for an
agreement by Swiss Pharma not to execute on any judgment entered by the Court
for a period of six weeks so as to allow an opportunity for settlement
discussions.  A form of judgment confirming the arbitration award was
presented to the Court by Swiss Pharma for entry on August 10,
2009.  The form of judgment provides that it may be executed upon
beginning six weeks from the date of its entry by the
Court.    The Company and Swiss Pharma reached a settlement
subsequent to September 30, 2009.




Item
1A.  Risk Factors




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




Item
6.  Exhibits




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


37


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 16, 2009
              By:
              /s/ Michael G.
McGuinnessMichael
      G. McGuinnessChief
      Operating and Financial
Officer





38


Index to Exhibits Filed with
this Report




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


39