UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549


FORM
10-Q





(Mark
      One)[X]
              Quarterly
      Report Pursuant To Section 13 Or 15(d) Of TheSecurities
      Exchange Act Of 1934For
      the quarterly period ended June 30, 2008OR[   ]
              Transition
      Report Pursuant To Section 13 Or 15(d) Of TheSecurities
      Exchange Act Of 1934For
      the transition period from _______________ to
    _______________





Commission
File Number: 0-23317













ORE
PHARMACEUTICALS INC.





(Exact
name of registrant as specified in its charter)










Delaware
                  (State or
      other jurisdiction of
                  incorporation
      or organization
                06-1411336
                  (I.R.S.
      Employer
                  Identification
      No.)
  610
      Professional Drive, Suite 101
                  Gaithersburg, Maryland 20879
                  (Address of
      principal executive offices)
                  (240) 361-4400
                  (Registrant's
      phone number, including area code)
  Indicate
by check mark whether the registrant (1) has 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 registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days:YESxNOo




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or 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 o
            Accelerated
      filer o
            Non-accelerated
      filer o
              (Do
      not check if smaller reporting company)
            Smaller
      reporting company x




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




The number
of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
5,501,644 as of July 31, 2008.















ORE PHARMACEUTICALS
      INC.TABLE
      OF CONTENTSPART 1
              FINANCIAL INFORMATIONItem
      1.
              Financial Statements
              3Consolidated Condensed Balance Sheets at June 30, 2008 and
      December 31, 2007
              3Consolidated Condensed Statements of Operations for the
      Three and Six Months Ended June 30, 2008 and 2007
              4Consolidated Condensed Statements of Cash Flows for the
      Six Months Ended June 30, 2008 and 2007
              5Notes to Consolidated Condensed Financial
      Statements
              6Item
      2.
              Management’s Discussion and Analysis of Results of
      Operations and Financial Condition
              10Item
      4.
              Controls and Procedures12PART
      II
              OTHER
      INFORMATION13Item 1.
              Legal ProceedingsItem 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              13Item 3.
              Defaults Upon Senior Securities
              13Item 4.
              Submission of Matters to a Vote of Security
      Holders
              13Item
      5.
              Other Information
              14Item
      6.
              Exhibits
              14Signatures
              
              15




2.







PART I
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      Statements






ORE
      PHARMACEUTICALS INC.CONSOLIDATED
      CONDENSED BALANCE SHEETS
                (in
      thousands, except share data)June
      30,
              
              
              December
      31,2008
              
              
              2007(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              13,792
              
              
              $
              26,323Marketable
      securities available-for-sale
              
              
              4,004
              
              
              
              6,477Accounts
      receivable
              
              
              208
              
              
              
              1,953Prepaid
      expenses
              
              
              568
              
              
              
              910Other
      current assets
              
              
              106
              
              
              
              1,185Total
      current assets
              
              
              18,678
              
              
              
              36,848Property
      and equipment, net
              
              
              1,755
              
              
              
              2,101Long-term
      investments
              
              
              2,964
              
              
              
              2,964Goodwill
              
              
              554
              
              
              
              554Other
      intangibles, net
              
              
              904
              
              
              
              836Other
      assets
              
              
              2,960
              
              
              
              2,676Total
      assets
              
              $
              27,815
              
              
              $
              45,979LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              521
              
              
              $
              1,120Accrued
      compensation and employee benefits
              
              
              1,554
              
              
              
              2,516Other
      accrued expenses
              
              
              2,182
              
              
              
              2,912Current
      portion of long-term debt
              
              
              503
              
              
              
              501Deferred
      revenue
              
              
              -
              
              
              
              1,500Total
      current liabilities
              
              
              4,760
              
              
              
              8,549Long-term
      debt, net of current portion
              
              
              14
              
              
              
              27Deferred
      rent
              
              
              8
              
              
              
              32Total
      liabilities
              
              
              4,782
              
              
              
              8,608Commitments
      and contingencies
              
              
              -
              
              
              
              -Stockholders'
      equity:Preferred
      stock, $.01 par value; 10,000,000 shares authorized; and no shares issued
      andoutstanding
      as of June 30, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; 60,000,000 shares authorized;  5,501,644
      and 6,449,070 sharesissued
      and outstanding as of June 30, 2008 and December 31, 2007,
      respectively
              
              
              55
              
              
              
              64Additional
      paid-in-capital
              
              
              384,969
              
              
              
              387,721Accumulated
      other comprehensive loss
              
              
              -
              
              
              
              (46
              )Accumulated
      deficit
              
              
              (361,991
              )
              
              
              (350,368
              )Total
      stockholders' equity
              
              
              23,033
              
              
              
              37,371Total
      liabilities and stockholders' equity
              
              $
              27,815
              
              
              $
              45,979




See accompanying
notes.






3.







ORE PHARMACEUTICALS INC.CONSOLIDATED
      CONDENSED STATEMENTS OF OPERATIONS
                (in
      thousands, except per share data)
                (unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue:Drug
      repositioning and development services
              
              $
              1,000
              
              
              $
              38
              
              
              $
              1,750
              
              
              $
              38Expenses:Research
      and development
              
              
              3,364
              
              
              
              2,675
              
              
              
              6,206
              
              
              
              5,053Selling,
      general and administrative
              
              
              2,505
              
              
              
              2,875
              
              
              
              7,669
              
              
              
              6,146Total
      expenses
              
              
              5,869
              
              
              
              5,550
              
              
              
              13,875
              
              
              
              11,199Loss
      from operations
              
              
              (4,869
              )
              
              
              (5,512
              )
              
              
              (12,125
              )
              
              
              (11,161
              )Interest
      (income), net
              
              
              (186
              )
              
              
              (517
              )
              
              
              (502
              )
              
              
              (1,132
              )Loss
      from continuing operations
              
              
              (4,683
              )
              
              
              (4,995
              )
              
              
              (11,623
              )
              
              
              (10,029
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (2,878
              )
              
              
              -
              
              
              
              (7,950
              )Net
      loss
              
              $
              (4,683
              )
              
              $
              (7,873
              )
              
              $
              (11,623
              )
              
              $
              (17,979
              )Basic
      and diluted net loss per share:Loss
      from continuing operations
              
              $
              (0.86
              )
              
              $
              (0.78
              )
              
              $
              (1.99
              )
              
              $
              (1.57
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (0.46
              )
              
              
              -
              
              
              
              (1.25
              )Net
      loss
              
              $
              (0.86
              )
              
              $
              (1.24
              )
              
              $
              (1.99
              )
              
              $
              (2.82
              )Shares
      used in computing basic and dilutednet
      loss per share
              
              
              5,477
              
              
              
              6,373
              
              
              
              5,841
              
              
              
              6,370




See
accompanying notes.




4.






ORE PHARMACEUTICALS INC.CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS
                (in
      thousands)
                (unaudited)Six
      Months EndedJune
      30,2008
              
              
              2007Cash
      flows from operating activities:Loss
      from continuing operations
              
              $
              (11,623
              )
              
              $
              (10,029
              )Adjustments
      to reconcile loss from continuing operations to net cash
    flowsfrom
      continuing operating activities:Depreciation
      and amortization
              
              
              593
              
              
              
              572Non-cash
      stock-based compensation expense
              
              
              229
              
              
              
              227Other
      non-cash items
              
              
              454
              
              
              
              -Changes
      in continuing operating assets and liabilities:Accounts
      receivable
              
              
              1,746
              
              
              
              2,761Prepaids
      and other assets
              
              
              207
              
              
              
              305Accounts
      payable
              
              
              (599
              )
              
              
              (1,470
              )Accrued
      expenses and deferred rent
              
              
              (1,716
              )
              
              
              264Accrued
      restructuring
              
              
              -
              
              
              
              (1,123
              )Deferred
      revenue
              
              
              (1,500
              )
              
              
              -Net
      cash flows from continuing operating activities
              
              
              (12,209
              )
              
              
              (8,493
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (7,950
              )Adjustments
      to reconcile loss from discontinued operations to net cash
      flowsfrom
      discontinued operating activities:Depreciation
      and amortization and other non-cash items
              
              
              -
              
              
              
              4,469Changes
      in discontinued operating assets and liabilities
              
              
              -
              
              
              
              938Net
      cash flows from discontinued operating activities
              
              
              -
              
              
              
              (2,543
              )Net
      cash flows from operating activities
              
              
              (12,209
              )
              
              
              (11,036
              )Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (152
              )
              
              
              (151
              )Purchases
      of licenses and patent costs
              
              
              (187
              )
              
              
              (204
              )Proceeds
      from sale of marketable securities available-for-sale
              
              
              6,522
              
              
              
              16,953Purchase
      of marketable securities available-for-sale
              
              
              (4,003
              )
              
              
              (8,343
              )Net
      proceeds received from sale of Genomics Assets
              
              
              501
              
              
              
              -Net
      proceeds received from sale of Preclinical Division
              
              
              272
              
              
              
              -Payment
      related to sale of Preclinical Divison
              
              
              -
              
              
              
              (1,174
              )Net
      investing activities of discontinued operations
              
              
              -
              
              
              
              (881
              )Net
      cash flows from investing activities
              
              
              2,953
              
              
              
              6,200Cash
      flows from financing activities:Purchase
      of common stock
              
              
              (3,263
              )
              
              
              8Repayments
      of an equipment loan
              
              
              (12
              )
              
              
              (24
              )Net
      cash flows from financing activities
              
              
              (3,275
              )
              
              
              (16
              )Net
      decrease in cash and cash equivalents
              
              
              (12,531
              )
              
              
              (4,852
              )Cash
      and cash equivalents, beginning of period
              
              
              26,323
              
              
              
              25,700Cash
      and cash equivalents, end of period
              
              $
              13,792
              
              
              $
              20,848Supplemental
      disclosure:Interest
      paid
              
              $
              1
              
              
              $
              3




See
accompanying notes.




5.







ORE PHARMACEUTICALS INC.





Notes
to Consolidated Condensed Financial Statements


June
30, 2008


(in
thousands, except share and per share data)


(unaudited)





Note
1 — Organization and summary of significant accounting policies





Description
of Business





Ore
Pharmaceuticals Inc., including its wholly owned subsidiary, DioGenix Inc. (its
molecular diagnostics business), (collectively, the “Company”), is a commercial
drug development company focused on advancing a pipeline of compounds for uses
identified by its proprietary indication seeking program.  Over the
past four years, the Company has identified new therapeutic indications for a
number of compounds using its indication seeking program, which provided an
efficient and cost-effective approach for systematically uncovering a compound’s
biological activity.  The Company believes that these compounds may be
introduced into Phase Ib or IIa of human clinical trial testing because they
have already been successfully tested for safety in Phase I clinical
trials.  The Company is pursuing clinical development of its compounds
in parallel with its efforts to establish out-licensing or partnering
arrangements to advance those compounds.  In June 2008, the Company
filed with the U.S. Food and Drug Administration an Investigational New Drug
Application for GL1001, its lead preclinical compound, for the treatment of
inflammatory bowel disease.





In
December 2007, the Company sold the assets of its Genomics Division (“Genomics
Assets”) (see Note 3).





Basis
of Presentation





The
accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with United States Generally Accepted Accounting
Principles (“GAAP”) for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X.  The consolidated
condensed balance sheet as of June 30, 2008, consolidated condensed statements
of operations for the three and six months ended June 30, 2008 and 2007 and the
consolidated condensed statements of cash flows for the six months ended June
30, 2008 and 2007 are unaudited, but include all adjustments (consisting of
normal recurring adjustments) that the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows,
respectively, for the periods presented.  Although the Company
believes that the disclosures in these financial statements are adequate to make
the information presented not misleading, certain information and footnote
information normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to the rules and regulations
of the United States Securities and Exchange Commission (“SEC”).  All
material intercompany accounts and transactions have been eliminated in
consolidation.





As a
result of the Company’s sale of its Genomics Assets and in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, the Company has classified the
results of operations of the Genomics Division (not including the business
associated with its molecular diagnostics business) as a discontinued operation
(see Note 3).





Results
for any interim period are not necessarily indicative of results for any future
interim period or for the entire year.  The accompanying unaudited
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.





Use
of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the 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 revenue and expenses during
the reporting period.  Actual results could differ from those
estimates.





Comprehensive
Loss





The
Company accounts for comprehensive loss as prescribed by SFAS No. 130,
“Reporting Comprehensive Income”.  Comprehensive income (loss) is the
total net income (loss) plus all changes in equity during the period except
those changes resulting from investment by and distribution to
owners.  Total comprehensive loss was $4,683 and $7,860 for the three
months ended June 30, 2008 and 2007, respectively, and $11,577 and $17,946 for
the six months ended June 30, 2008 and 2007, respectively.





New
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007.  In
February 2008, the FASB decided to issue a final Staff Position to allow a
one-year deferral of adoption of SFAS 157 for non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis.  The FASB also decided to amend
SFAS 157 to exclude FASB Statement No. 13 and its related interpretive
accounting pronouncements that address leasing transactions.  The
Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008
and the adoption had no impact on the Company’s financial position or results of
operations.


6.




SFAS
No. 157 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow) and the cost approach (cost to replace the service capacity of an
asset or replacement cost).  The statement utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels.  The following is a brief
description of those three levels:


·
            Level
      1:  Observable inputs such as quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.


·
            Level
      2:  Inputs other than quoted prices that are observable for the
      asset or liability, either directly or indirectly.  These
      include quoted prices for similar assets or liabilities in active markets
      and quoted prices for identical or similar assets or liabilities in
      markets that are not active.


·
            Level
      3:  Unobservable inputs that reflect the reporting entity’s own
      assumptions.




The
Company’s financial assets subject to fair value measurements and the necessary
disclosures are as follows:




Fair
      Value
              
              
              Fair
      Value Measurements at June 30, 2008as
      of
              
              
              Using
      Fair Value HierarchyJune
      30, 2008
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Cash
      and cash equivalents
              
              $
              13,792
              
              
              $
              13,792
              
              
              $
              -
              
              
              $
              -Marketable
      securities available-for-sale
              
              
              4,004
              
              
              
              4,004
              
              
              
              -
              
              
              
              -Total
              
              $
              17,796
              
              
              $
              17,796
              
              
              $
              -
              
              
              $
              -




In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R revises SFAS 141, “Business
Combinations”.  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e., the date
the acquirer obtains control).  Presently, an acquisition is valued as
of the date the parties agree upon the terms of the transaction.  SFAS
141R also modifies, among other things, the accounting for direct costs
associated with an acquisition, contingencies acquired and contingent
consideration.  The Company will adopt SFAS 141R for business
combinations for which the acquisition date occurs after January 1,
2009.





In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for
Collaborative Agreements” (“EITF 07-1”).  EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative
arrangements, as defined therein, which includes arrangements the Company has
entered into regarding development and commercialization of
products.  EITF 07-1 is effective for the Company as of
January 1, 2009.  The Company has not yet determined the effect
the adoption of this statement may have on its financial position, results of
operations and cash flows.





Note
2 — Stock-based compensation





At June
30, 2008, the Company has the following stock-based compensation plans: 1997
Equity Incentive Plan (the “Stock Plan”) and 1997 Non-Employee Directors’ Stock
Option Plan (the “Directors’ Plan”).





The
Company recorded stock-based compensation expense of $70 and $104 for the three
months ended June 30, 2008 and 2007, respectively, and $229 and $338 for the six
months ended June 30, 2008 and 2007, respectively.





Stock
Option Awards





The
Company determined the fair value of each option grant on the date of grant
using the Black-Scholes option pricing model for the indicated periods, with the
following assumptions:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Weighted
      average fair value of grants
              
              $0.96
              
              
              $4.10
              
              
              $0.97
              
              
              $3.90Expected
      volatility
              
              65%
              
              
              59%
              
              
              63%
              
              
              58%Risk-free
      interest rate
              
              2.53%
      to 2.57%
              
              
              4.51%
              
              
              2.53%
      to 3.04%
              
              
              4.47%
      to 4.51%Expected
      lives
              
              3
      years
              
              
              3
      years
              
              
              3
      years
              
              
              3
      yearsDividend
      rate
              
              0%
              
              
              0%
              
              
              0%
              
              
              0%




7.






The
following is a summary of option activity for the six months ended June 30,
2008:




Per
      ShareWeighted-
              
              
              AggregateNumber
      of
              
              
              Average
              
              
              IntrinsicShares
              
              
              Exercise
      Price
              
              
              ValueOutstanding
      at January 1, 2008
              
              
              904,856
              
              
              $
              28.60Options
      granted
              
              
              317,140
              
              
              $
              2.18Options
      exercised
              
              
              -
              
              
              $
              -Options
      cancelled
              
              
              (306,256
              )
              
              $
              26.38Outstanding
      at June 30, 2008
              
              
              915,740
              
              
              $
              20.19
              
              
              $
              -Exercisable
      at June 30, 2008
              
              
              544,479
              
              
              $
              31.21
              
              
              $
              -





The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on the last
trading day of the second quarter of 2008 and the exercise price, multiplied by
the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on June 30,
2008.  This amount is subject to change based on changes to the fair
market value of the Company’s Common Stock.





Restricted
Stock Awards





During
2007, the Committee approved grants for shares of restricted stock under the
Stock Plan subject to certain performance- or time-based vesting conditions
which, if not met, would result in forfeiture of the shares and the reversal of
any previously recognized related stock-based compensation expense.





The
following is a summary of restricted stock awards activity for the six months
ended June 30, 2008:




Per
      ShareWeighted-AverageNumber
      of
              
              
              Grant-DateShares
              
              
              Fair
      ValueOutstanding
      at January 1, 2008
              
              
              61,525
              
              
              $
              6.53Restricted
      stock granted
              
              
              -
              
              
              $
              -Restricted
      stock vested
              
              
              (10,000
              )
              
              $
              6.85Restricted
      stock forfeited
              
              
              (27,000
              )
              
              $
              5.30Outstanding
      at June 30, 2008
              
              
              24,525
              
              
              $
              7.76





Performance-based
non-vested restricted stock awards are recognized as compensation expense over
the expected vesting period based on the fair value at the date of grant and the
number of shares ultimately expected to vest.  As of June 30, 2008,
the remaining 24,525 outstanding shares of restricted stock will only vest if
certain performance milestones are achieved.  At June 30, 2008, the
Company believes that the achievement of the performance milestones is
probable.





As of June
30, 2008, $510 of total unrecognized compensation cost related to stock option
and restricted stock awards is expected to be recognized over a weighted-average
period of 1.7 years.  This estimate does not include the impact of
other possible stock-based awards that may be made during future
periods.





Note
3 — Discontinued operation





In
December 2007, the Company completed the sale of its Genomics Assets to Ocimum
Biosolutions Ltd. (“Ocimum”) for a sales price of $10,000, of which $7,000 was
received at closing, less transaction costs of $1,890, and the balance of the
sales price is payable pursuant to a $3,000 non-interest bearing promissory note
due 18 months from the date of closing.  The note has been recorded in
other assets, net of a discount of $207 as of June 30, 2008 due to imputed
interest.  In connection with the sale of its Genomics Assets, the
Company agreed to indemnify Ocimum in the event of a breach of its
representations and warranties to, and agreements with,
Ocimum.  Ocimum also assumed certain liabilities relating to the
Genomics Assets and the lease obligations for the Company’s former Genomics
laboratory and office facility, subject to the Company’s agreement to reimburse
Ocimum for 50% of such lease obligations for 2008.  In March 2008, the
Company relocated its corporate headquarters from the Ocimum space and as a
result recorded $470 of accelerated lease expense upon abandonment of such
space.In the
event of Ocimum’s default under the lease, which expires in February 2011, the
Company could be liable for amounts due under the lease totaling $2,474 at June
30, 2008 (not including the Company’s remaining lease obligations in
2008).  At June 30,2008, Ocimum had on
deposit in escrow $735 to partially secure both Ocimum’s performance under the
lease and payment of the $3,000 promissory note.  The Company retained
full rights in perpetuity to use the databases of its former Genomics business,
existing as of closing, for its commercial drug development
business.  The Company also retained certain assets associated with
its molecular diagnostic business and continues to explore strategic
alternatives for these assets.




8.






Due to the Company’s sale of its
Genomics Assets, the results of the former Genomics Division have been
classified as a discontinued operation. Summarized operating results for the
discontinued operation included in the Company’s Consolidated Condensed
Statements of Operations for the three and six months ended June 30, 2007,
respectively, are as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2007
              
              
              2007Revenue
      from discontinued operations
              
              $
              5,403
              
              
              $
              8,672Loss
      from discontinued operations
              
              $
              (2,878
              )
              
              $
              (7,950
              )




The sale of the Company’s
Genomics Assets was part of its transformation into a commercial drug
development company.  The Company continues to consider other
strategic opportunities and paths to enhance shareholder value, including but
not limited to, additional sources of funding and new strategic relationships
with pharmaceutical companies and other third parties.





Note
4 — Share purchase





On March
14, 2008, the Company entered into an agreement with a then member of its Board
of Directors to purchase 920,426 shares owned directly or indirectly by that
Director for $3,263 (the “Share Purchase”).  In addition, the Company
agreed to pay the director $126 for certain fees and expenses.  In
connection with the Share Purchase, the director resigned from the Company’s
Board of Directors and surrendered stock options for 6,000 shares of the
Company’s Common Stock.  Of the purchase price of $3,263, the Company
allocated $272 to the price paid in excess of the fair value of the shares,
which was recorded as a Selling, General and Administrative
expense.  The remaining $2,991 was recorded as a reduction to Common
Stock, based on the par value, and to Additional Paid-in Capital.  The
shares purchased were cancelled and returned to the status of authorized and
unissued shares.





Note
5 — Reverse stock split





On May 23,
2008, the Company’s stockholders of record as of April 17, 2008 approved a
one-for-five reverse stock split of the Company’s outstanding Common
Stock.  The number of authorized shares of Common Stock and Preferred
Stock of the Company was not affected and remains at 60,000,000 and 10,000,000,
respectively, but the number of shares of Common Stock outstanding was reduced
from 27,515,461 to 5,503,644.  The aggregate par value of the issued
Common Stock was reduced by reclassifying a portion of the par value amount of
the outstanding common shares from Common Stock to Additional Paid-in Capital
for all periods presented.  In addition, all per share and share
amounts, including stock options and restricted stock awards, have been
retroactively restated in the accompanying Consolidated Condensed Financial
Statements and Notes to Consolidated Condensed Financial Statements for all
periods presented to reflect the reverse stock split.





Note
6 — Segment information





Subsequent
to the sale of the Genomics Assets (see Note 3), the Company manages its
business as two operating segments: commercial drug development and molecular
diagnostics; however, because these operating segments meet the aggregation
criteria of SFAS 131 “Disclosures about Segments of an Enterprise and Related
Information”, the Company has aggregated its operating segments into one
reporting segment.  For the three and six months ended June 30, 2008,
two customers accounted for 10% or more of the Company’s revenue.  For
the three and six months ended June 30, 2007, one customer accounted for the
Company’s total revenue.




9.








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





This
Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements
regarding future events and the future results of Ore Pharmaceuticals Inc. (“Ore
Pharmaceuticals”) that are based on current expectations, estimates, forecasts
and projections about the industries in which Ore Pharmaceuticals operates and
the beliefs and assumptions of the management of Ore Pharmaceuticals. Words such
as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” variations of such words, and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are only predictions and are subject to risks,
uncertainties and assumptions. Therefore, actual results may differ materially
and adversely from those expressed in any forward-looking statements. Factors
that might cause or contribute to such differences include those discussed in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007
under the section entitled “Risk Factors” and in our subsequent filings with the
United States Securities and Exchange Commission (“SEC”). Ore Pharmaceuticals
undertakes no obligation to revise or update publicly any forward-looking
statements to reflect any change in management’s expectations with regard
thereto or any change in events, conditions, or circumstances on which any such
statements are based.





Unless the
context otherwise requires, references in this Form 10-Q to “Ore
Pharmaceuticals,” “DioGenix,” the “Company,” “we,” “us,” and “our” refer to Ore
Pharmaceuticals Inc. and its wholly owned subsidiary, DioGenix Inc.





Overview





We are a
commercial drug development company focused on advancing a pipeline of compounds
for uses identified by our proprietary indication seeking
program.  Our pipeline is unique in that all of the compounds
contained therein have been successfully tested for safety in
humans.  We believe that this gives our compounds a greater chance of
success.





Over the
past four years, we identified new therapeutic indications for a number of
compounds using our indication seeking program, which provided an efficient and
cost-effective approach for systematically uncovering a compound’s biological
activity.  We believe that these compounds may be introduced into
Phase Ib or IIa of human clinical trial testing because they have already been
successfully tested for safety in Phase I clinical trials.  We are
pursuing clinical development of our compounds in parallel with our efforts to
establish out-licensing or partnering arrangements to advance those
compounds.





In the
second quarter of 2008, we realigned our corporate resources to invest in the
clinical and business development of compounds in our pipeline.  As we
wind down our indication seeking program and eliminate certain administrative
activities, we expect our workforce will be reduced from 71 employees as of
December 31, 2007 to fewer than 20 by December 31, 2008.  As of June
30, 2008, we had 37 employees.





In June
2008, we filed with the U.S. Food and Drug Administration an Investigational New
Drug Application (“IND”) for GL1001, our lead preclinical compound, for the
treatment of inflammatory bowel disease.  Following approval of the
IND, we expect to initiate clinical testing later in 2008 while actively seeking
to out-license or partner the further clinical development and commercialization
of GL1001.





Previously,
we had drug repositioning and development partnership agreements with
pharmaceutical companies to find new therapeutic uses for compounds they had
assessed as safe in human clinical trials, but for which development had been
discontinued.  These agreements with Pfizer, Inc., F. Hoffmann-La
Roche Ltd, Eli Lilly and Co., NV Organon, Abbott Laboratories, H. Lundbeck,
Merck-Serono and Solvay provided us with compounds that we analyzed using our
indication seeking program to identify new therapeutic uses.  We
obtained or are in the process of obtaining most of our pipeline compounds under
these agreements pursuant to options to obtain development rights to those
compounds that our partners decided not to take back into
development.  Although we have on-going discussions with these
partners as to the development rights for some of these compounds, our
obligations to evaluate compounds under these agreements have now been completed
except for collecting some data and finalizing reports on work already
done.  For each compound we obtained from a partner, if we further
develop it, alone or with others, we are obligated to pay to the partner from
whom we obtained the compound success-based milestone payments and royalties on
sales.





In
December 2007, we completed the sale of the assets of our Genomics Division (the
“Genomics Assets”) to Ocimum Biosolutions Ltd. (“Ocimum”) for a sales price of
$10.0 million, of which $7.0 million was received at closing and the balance is
payable pursuant to a $3.0 million non-interest bearing promissory note due 18
months from the date of closing.  We agreed to indemnify Ocimum in the
event of a breach of our representations and warranties to, and agreements with,
Ocimum.  Ocimum also assumed certain liabilities relating to the
Genomics Assets and the lease obligations of our former Genomics laboratory and
office facility, subject to our agreement to reimburse Ocimum for 50% of the
lease obligations for 2008.  In the event of Ocimum’s default under
the lease, which expires in February 2011, we could be liable for the amounts
due under the lease that could total $2.5 million at June 30, 2008 (not
including our remaining lease obligations in 2008).  At June 30, 2008,
Ocimum had on deposit in escrow $0.7 million to partially secure both Ocimum’s
performance under the lease and payment of the $3.0 million promissory
note.  We have retained full rights in perpetuity to use the databases
of our former Genomics business existing as of closing for our commercial drug
development business.  We also retained certain assets associated with
our molecular diagnostics business and continue to explore strategic
alternatives for these assets.





This sale was part of ourtransformation into a commercial drug development company.  We
continue to consider other strategic opportunities and paths to enhance
shareholder value, including but not limited to, additional sources of funding
and new strategic relationships with pharmaceutical companies and other third
parties.




10.






On March
14, 2008, we entered into an agreement with a then member of our Board of
Directors to purchase 920,426 shares (as adjusted for the reverse stock split)
owned directly or indirectly by that Director for $3.3 million (the “Share
Purchase”).  In addition, we agreed to pay the director $0.1 million
for certain fees and expenses.  In connection with the Share Purchase,
the director resigned from the Company’s Board of Directors and surrendered
stock options for 6,000 shares (as adjusted for the reverse stock split) of our
Common Stock.





In
December 2007, NASDAQ notified us that our stock would be subject to delisting
if we did not regain compliance with a listing requirement that the closing bid
price of our Common Stock equal or exceed $1.00 per share for a minimum of 10
consecutive trading days.  On May 23, 2008, our stockholders approved
a one-for-five reverse split of our outstanding Common Stock shares that allowed
us to regain compliance with NASDAQ’s listing requirements.





We have
incurred net losses in each year since our inception, including losses of $34.7
million in 2007, $54.7 million in 2006 and $48.3 million in 2005.  At
June 30, 2008, we had an accumulated deficit of $362.0 million.  Our
losses have resulted principally from costs incurred from our disposed
businesses and the development of our commercial drug development
business.  We expect to incur additional losses in the
future.





Results
of Continuing Operations





With the
completion of the sale of our Genomics Assets in December 2007, the Genomics
Division has been classified as a “Discontinued Operation” for historical
financial statement purposes.  Our remaining continuing operations
consist of our commercial drug development business and, to a much lesser
extent, our molecular diagnostics business.  In addition, certain
expenses previously allocated to the operations that were discontinued that we
have subsequently determined would not be eliminated as a result of the sale,
have been re-allocated to our commercial drug development business for all
periods presented.  Expenses for our molecular diagnostic business are
also included in our operating expenses from continuing operations; however,
these expenses are not considered material to Ore Pharmaceuticals.





Three
Months Ended June 30, 2008 and 2007





Revenue.  Revenue
from continuing operations was $1.0 million for the three months ended June 30,
2008 and less than $0.1 million for the same period in 2007.  The 2008
revenue resulted primarily from a licensing agreement with H. Lundbeck for
certain technology rights unrelated to our core commercial drug development
business.  We expect to derive future revenue primarily from the
out-licensing or partnering of our drug candidate GL1001 (that would occur no
sooner than 2009) and of other compounds in our pipeline.





Research and Development
Expense. Research and development expenses, which consist primarily of
costs associated with the evaluation of customer-supplied drug candidates and,
to a lesser degree, further development of our drug candidate, GL1001, increased
to $3.4 million for the three months ended June 30, 2008 from $2.7 million for
the same period in 2007.  The increase is primarily due to $0.5
million in increased third-party costs for further development of our
preclinical compound, GL1001.  For 2008, we expect research and
development expenses to increase modestly over 2007, primarily as a result of
further development of GL1001.





Selling, General and Administrative
Expense. Selling, general and administrative expenses from continuing
operations, which consist primarily of sales, marketing, accounting, legal,
human resources and other general corporate expenses, decreased to $2.5 million
for the three months ended June 30, 2008 from $2.9 million for the same period
in 2007.  The decrease is largely due to lower employee-related
expenses.  For 2008, we expect a slight increase in selling, general
and administrative expenses over 2007.





Net Interest Income. Net
interest income decreased to $0.2 million for the three months ended June 30,
2008 from $0.5 million for the same period in 2007, due to the decline in the
balance of our cash and cash equivalents and marketable securities
available-for-sale and a decrease in our rates of return on
investments.





Six
Months Ended June 30, 2008 and 2007





Revenue.  Revenue
from continuing operations was $1.8 million for the six months ended June 30,
2008 and less than $0.1 million for the same period in 2007.  The 2008
revenue resulted primarily from a licensing agreement with H. Lundbeck for
certain technology rights unrelated to our core commercial drug development
business.





Research and Development
Expense. Research and development expenses increased to $6.2 million for
the six months ended June 30, 2008 from $5.1 million for the same period in
2007.  The increase is primarily due to $0.6 million in increased
third-party costs for further development of our preclinical compound,
GL1001.





Selling, General and Administrative
Expense. Selling, general and administrative expenses from continuing
operations increased to $7.7 million for the six months ended June 30, 2008 from
$6.1 million for the same period in 2007.  The increase is largely due
to $0.8 million in increased legal and advisory fees associated with the Share
Purchase, strategic planning and our reverse split of the Company’s shares, $0.4
million of expense related to the Share Purchase and $0.3 million in accelerated
lease costs resulting from the Company’s relocation of its corporate
headquarters. This
increase was partially offset by $0.4 million in higher severance expenses in
2007 than in 2008 and $0.4 million in fees received in 2007 for providing
transition services to the buyer of our Preclinical business that we sold in
December 2006.




11.




Net Interest Income. Net
interest income decreased to $0.5 million for the six months ended June 30, 2008
from $1.1 million for the same period in 2007, due to the decline in the balance
of our cash and cash equivalents and marketable securities available-for-sale
and a decrease in our rates of return on investments.





Liquidity
and Capital Resources





From
inception through June 30, 2008, we have financed our operations and
acquisitions through the issuance and sale of equity securities and payments
from customers.  As of June 30, 2008, we had approximately $17.8
million in cash, cash equivalents and marketable securities available-for-sale,
compared to $32.8 million as of December 31, 2007.  Currently, we have
no material commitments for capital expenditures.





Net cash
from operating activities from continuing operations increased to a negative
$12.2 million for the six months ended June 30, 2008 from a negative $8.5
million for the same period in 2007, primarily due to timing of customer
payments and our increased loss from continuing operations for the six months
ended June 30, 2008.





We expect
our cash burn for the second half of 2008 to be 40-50% less than that for the
first half of 2008.  We expect to derive future revenue primarily from
the out-licensing or partnering of GL1001 (that would occur no sooner than 2009)
and of other compounds in our pipeline.





Assuming
we realize our objectives as to revenue and cash receipts (including primarily
the out-licensing or partnering of GL1001), as to which there can be no
assurance, we believe that existing cash, cash equivalents and marketable
securities available-for-sale, payment in June 2009 of the $3.0 million
promissory note from Ocimum and potential payments from the out-licensing of our
compounds will be sufficient to support our operations for at least the next two
years.  We expect long-term support of our operations to come from
additional out-licensing payments (including up-front payments, milestones and
royalties) from our drug development pipeline.  These estimates are
forward-looking statements that involve risks and uncertainties.  Our
actual future capital requirements and the adequacy of our available funds will
depend on many factors, including those discussed under “Risks Factors” in our
Form 10-K for the year ended December 31, 2007 and our subsequent filings with
the SEC.





Recently
Issued Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  SFAS 157 is effective for fiscal years
beginning after November 15, 2007.  In February 2008, the FASB decided
to issue a final Staff Position to allow a one-year deferral of adoption of SFAS
157 for non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  The
FASB also decided to amend SFAS 157 to exclude FASB Statement No. 13 and its
related interpretive accounting pronouncements that address leasing
transactions.  We adopted SFAS 157 for financial assets and
liabilities on January 1, 2008 and the adoption had no impact on our financial
position or results of operations.





In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R revises SFAS 141, “Business
Combinations”.  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e., the date
the acquirer obtains control).  Presently, an acquisition is valued as
of the date the parties agree upon the terms of the transaction.  SFAS
141R also modifies, among other things, the accounting for direct costs
associated with an acquisition, contingencies acquired and contingent
consideration.  We will adopt SFAS 141R for business combinations for
which the acquisition date occurs after January 1, 2009.





In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for
Collaborative Agreements” (“EITF 07-1”).  EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative
arrangements, as defined therein, which includes arrangements we have entered
into regarding development and commercialization of products.  EITF
07-1 is effective for us as of January 1, 2009.  We have not yet
determined the effect the adoption of this statement may have on our financial
position, results of operations and cash flows.





Item
4.                      Controls
and Procedures





Evaluation
of Disclosure Controls and Procedures





As of June
30, 2008, under the supervision and with the participation of our management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), an evaluation was performed of the effectiveness of the design and
operation of our “disclosure controls and procedures” (“Disclosure
Controls”).  These are controls and procedures designed to reasonably
assure that information required to be disclosed in our reports filed under the
Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC.
Disclosure
Controls are also designed to reasonably assure that such information is
accumulated and communicated to our management, including the CEO and CFO as
appropriate, to allow timely decisions regarding required
disclosure.  Based on that evaluation, our CEO and CFO have concluded
that, as of June 30, 2008, our disclosure controls and procedures were effective
to provide reasonable assurance that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC, and that material information relating to us
is made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared.




12.









Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
all errors and all instances of fraud.  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.  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.  Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of 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.  The design of any system of
controls is based, in part, on 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.  Projections of any evaluation of the effectiveness of
controls to future periods are subject to risks.  Over time, controls
may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.





Changes
in Internal Control Over Financial Reporting





There were
no changes in our internal controls over financial reporting during the second
quarter of 2008 that materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.





PART
II                               OTHER
INFORMATION





Item
1.                     Legal
Proceedings





We are not
currently a party to any material legal proceedings.





Item
2.                      Unregistered
Sales of Equity Securities and Use of Proceeds





None.





Item
3.                      Defaults
Upon Senior Securities





None.





Item
4.                      Submission
of Matters to a Vote of Security Holders





The
Company held its Annual Meeting of Stockholders on May 23, 2008 (“Annual
Meeting”).  At the Annual Meeting, the Company’s stockholders elected
two directors to the Company’s Board of Directors; approved a one-for-five
reverse stock split of the Company’s Common Stock and ratified the selection of
our independent registered public accounting firm, as described
below.  At the Annual Meeting, 23,559,745 shares, out of a total of
27,515,461 shares of Common Stock outstanding at the record date, were
represented in person or by proxy.




13.






The
proposals considered at the Annual Meeting were voted on as
follows:




For
              
              
              Withheld1
              
              To
      elect two directors to hold office until the 2011 Annual
      Meetingof
      Stockholders or his earlier resignation or removal.Mark
      D. Gessler
              
              
              21,799,400
              
              
              
              1,760,345J.
      Stark Thompson, Ph.D.
              
              
              22,039,620
              
              
              
              1,520,125The
      following individuals' term of office as a director continue
      afterthe
      meeting: Michael J. Brennan, M.D.; Charles L. Dimmler,
III;Mark
      J. Gabrielson; G. Anthony Gorry, Ph.D.; and David L. Urdal,
      Ph.D.For
              
              
              Against
              
              
              Abstain2
              
              To
      approve an amendment to the Amended and Restated
    Certification
              
              
              21,739,264
              
              
              
              1,710,095
              
              
              
              110,386of
      Incorporation, as amended, of the Company to give effect to
    aone-for-five
      reverse stock split of the Company's Common Stock.For
              
              
              Against
              
              
              Abstain3
              
              To
      ratify the selection of Ernst & Young LLP as the
    Company's
              
              
              22,903,022
              
              
              
              621,737
              
              
              
              34,986independent
      registered public accounting firm for the year endingDecember
      31, 2008.




Item
5.                     Other
Information





None.





Item
6.                     Exhibits




31
            Certifications
      pursuant to Rule 13a-14(a)/15d-14(a).32
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.







14.






SIGNATURES







Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.









ORE
      PHARMACEUTICALS INC.Date:
            August
      7, 2008
            By:
            /s/
      Philip L. Rohrer, Jr.Philip
      L. Rohrer, Jr.Chief
      Financial Officer(Principal
      Financial and Accounting Officer)












15.