**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**Form 10-K**





**(Mark
                One)****x**
            
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934****For
                the fiscal year ended June 30, 2007****or****o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934**





**Commission
      File Number 0-22987**


**URIGEN
      PHARMACEUTICALS, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **94-3156660**(State
                or other jurisdiction
            
            (IRS
                Employerof
                incorporation or organization)
            
            Identification
                No.)**875
                Mahler Road, Suite 235, Burlingame, CA**
            
            **94010**(Address
                of principal offices)
            
            (Zip
                Code)




**(650) 259-0239**


(Registrant’s
      telephone number, including area code)





Securities
      registered pursuant to Section 12(b) of the Act:
**None**




Securities
      registered pursuant to Section 12(g) of the Act: **Common Stock,
      Par Value $.001**




Indicate
      by check mark whether the
      registrant is a well-known seasoned issuer, as defined in Rule 405 of the
      Securities Act. Yes**o**No**x**




Indicate
      by check mark if the
      registrant is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Exchange Act. Yes**o**No**x**




Indicate
      by check mark whether the
      registrant (1) has filed all reports required 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. Yes**x**No**o**




Indicate
      by check mark if disclosure of
      delinquent filers pursuant to Item 405 of Regulation S-K is not contained
      herein, and will not be contained, to the best of registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this
      Form 10-K.**o**




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
                Accelerated
                Filer**o**
            
            Accelerated
                Filer**o**
            
            Non-accelerated
                Filer**x**


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




The
      aggregate market value of the common stock held by non-affiliates of the
      registrant, based upon the last sale price of the common stock reported on
      the
      OTC-Bulletin Board on December 29, 2006 was $4,755,400.




The
      number of shares of registrant’s common stock outstanding, as of October
      1, 2007 was 68,289,535.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




None.










**URIGEN
      PHARMACEUTICALS,
      INC.**




**FORM 10-K—ANNUAL
      REPORT**


**FOR
      THE YEAR ENDED JUNE 30, 2007**




**TABLE
      OF CONTENTS**





**Page**PART IItem
                1
            
            Business
            
            3Item
                1A
            
            Risk
                Factors
            
            18Item
                1B
            
            Unresolved
                Staff
                Comments
            
            34Item
                2
            
            Properties
            
            34Item
                3
            
            Legal
                Proceedings
            
            34Item
                4
            
            Submission
                of Matters to a Vote
                of Security Holders
            
            34PART IIItem
                5
            
            Market
                for Registrant’s Common
                Equity, Related Stockholder Matters and Issuer Purchases of Equity
                Securities
            
            34Item
                6
            
            Selected
                Financial
                Data
            
            35Item
                7
            
            Management’s
                Discussion and
                Analysis of Financial Condition and Results of Operations
            
            36Item
                7A
            
            Quantitative
                and Qualitative
                Disclosures About Market Risk
            
            45Item
                8
            
            Financial
                Statements and
                Supplementary Data
            
            46Item
                9
            
            Changes
                in and Disagreements With
                Accountants on Accounting and Financial Disclosure
            
            46Item
                9A
            
            Controls
                and
                Procedures
            
            46Item
                9B
            
            Other
                Information
            
            47PART IIIItem
                10
            
            Directors
                and Executive Officers
                of the Registrant
            
            48Item
                11
            
            Executive
                Compensation
            
            53Item
                12
            
            Security
                Ownership of Certain
                Beneficial Owners and Management and Related Stockholder
                Matters
            
            55Item
                13
            
            Certain
                Relationships and Related
                Transactions
            
            57Item
                14
            
            Principal
                Accountant Fees and
                Services
            
            57PART IVItem
                15
            
            Exhibits
                and Financial Statement
                Schedules
            
            58SIGNATURES
            
            64





2




**PART I**




**ITEM
                1.**
            **BUSINESS**




*This
      Annual Report on Form 10-K contains certain forward-looking statements
      within the meaning of Section 27A of the Securities Act of 1933, as
      amended, and Section 21E of the Securities Exchange Act of 1934, as
      amended. These forward-looking statements include, without limitation,
      statements containing the words “believes,” “anticipates,” “expects,” “intends,”
“projects,” “estimates” and other words of similar import or the negative of
      those terms or expressions. Forward-looking statements in this section include,
      but are not limited to, expectations regarding any strategic opportunities
      that
      may be available to us, expectations of future levels of research and
      development spending, general and administrative spending, levels of capital
      expenditures and operating results, our intention to license potential products
      and technologies to a pharmaceutical company that may assume responsibility
      for
      late-stage development and commercialization and our intention to seek revenue
      from the licensing of our proprietary manufacturing technologies.
      Forward-looking statements subject to certain known and unknown risks,
      uncertainties and other factors that may cause our actual results, performance
      or achievements to be materially different from any future results, performance
      or achievements expressed or implied by such forward-looking statements. Factors
      that could affect our actual results include the outcomes of our clinical trials
      in patients with painful bladder syndrome, urethritis and acute
      urgency/frequency from an overactive bladder; uncertainties related to our
      financial condition, uncertainties related to the strategic opportunities that
      may be available to us; our need for additional capital;  our going
      concern report from our independent registered public accounting firm and the
      other risk factors set forth in this Annual Report on Form 10-K. Further,
      there can be no assurance that necessary regulatory approvals for any of our
      potential products may be obtained. We undertake no obligation to revise or
      update any such forward-looking statements. The reader is strongly urged to
      read
      the information set forth under the caption “Part I, Item 1A. Risk Factors,
      for a detailed description of these significant risks, uncertainties and other
      factors.”*




**CORPORATE
      OVERVIEW**





We
      were
      formerly known as Valentis, Inc. and were formed as the result of the merger
      of
      Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in
      Delaware on August 12, 1997. In August 1999, we acquired U.K.-based
      PolyMASC Pharmaceuticals plc.





On
      October 5, 2006, we entered into an Agreement and Plan of Merger, as
      subsequently amended (the   “Merger”) with Urigen N.A.., Inc., a
      Delaware corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our
      newly formed wholly-owned subsidiary (“Valentis Holdings ”). Pursuant to the
      Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into
      Urigen N.A., Inc. with Urigen N.A., Inc. surviving as our wholly-owned
      subsidiary. In connection with the Merger, each Urigen stockholder received,
      in
      exchange for each share of Urigen N.A., Inc. common stock held by such
      stockholder immediately prior to the closing of the Merger, 2.2554 shares of
      our
      common stock. At the effective time of the Merger, each share of Urigen N.A..,
      Inc. Series B preferred stock was exchanged for 11.277 shares of our common
      stock. An aggregate of 51,226,679 shares of our common stock were issued to
      the
      Urigen N.A., Inc. stockholders.  Upon completion of the Merger, we
      changed our name from Valentis, Inc. to Urigen Pharmaceuticals, Inc. (the
      "Company").





From
      and
      after the Merger, our business is conducted through our wholly owned subsidiary
      Urigen N.A. The discussion of our business in this annual report is that of
      our
      current business which is conducted through Urigen N.A.







We
      are
      located in Burlingame, California, where our headquarters and business
      operations are located.




3




**BUSINESS
                OVERVIEW**




We
      specialize in the design and implementation of innovative products for patients
      with urological ailments including, specifically, the development of innovative
      products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, and
      Overactive Bladder (OAB).




Urology
      represents a specialty pharmaceutical market of approximately 12,000 physicians
      in North America. Urologists treat a variety of ailments of the urinary tract
      including urinary tract infections, bladder cancer, overactive bladder, urgency
      and incontinence and interstitial cystitis, a subset of PBS. Many of these
      indications represent significant, underserved therapeutic market
      opportunities.




Over
      the
      next several years a number of key demographic and technological factors should
      accelerate growth in the market for medical therapies to treat urological
      disorders, particularly in our product categories. These factors include the
      following:




·
            *Aging
                population.*The incidence of urological disorders increases with age.
                The over-40 age group in the United States is growing almost twice
                as fast
                as the overall population. Accordingly, the number of individuals
                developing urological disorders is expected to increase significantly
                as
                the population ages and as life expectancy continues to
                rise.




·
            *Increased
                consumer awareness.*In recent years, the publicity associated with
                new technological advances and new drug therapies has increased the
                number
                of patients visiting their urologists to seek treatment for urological
                disorders.




Urigen
      N.A. has been established as a specialty pharmaceutical company to develop
      and
      commercialize products for the treatment of urological disorders. We have
      established an initial group of clinical stage products, as more fully described
      below, that we believe offer potential solutions to underserved urology
      markets.




Urigen
      N.A. is a specialty pharmaceutical company dedicated to the development and
      commercialization of therapeutic products for urological disorders. Our two
      lead
      programs target significant unmet medical needs and major market opportunities
      in urology. Our URG101 project targets painful bladder syndrome which affects
      approximately 10.5 million men and women in North America. URG101 has
      demonstrated safety and activity in a Phase IIa (open-label) human clinical
      trial and in a Phase IIb double-blind, placebo-controlled trial. URG101 is
      a
      unique, proprietary combination therapy of components approved by global
      regulatory authorities that is locally delivered to the bladder for rapid relief
      of pain and urgency. In 2007, URG101 clinical development will encompass a
      pharmacodynamic study. We have also begun to develop additional indications
      for URG101 focusing on radiation cystitis and dyspareunia (painful
      intercourse).




Our
      clinical-stage projects, URG301 and URG302, target acute
      urgency in patients diagnosed with an overactive bladder, another major unmet
      need that is insufficiently managed by presently available overactive bladder
      drugs. URG301 and URG302 are proprietary dosage forms of approved drugs that
      are
      locally delivered to control urinary urgency. A Urigen N.A. sponsored
      Investigational New Drug, or IND, is currently being prepared with subject
      enrollment scheduled for late 2007. We also plan, subject to additional
      financing, to initiate two clinical programs targeting the use of URG301 in
      patients diagnosed with acute urethral discomfort, or AUD, associated with
      cystoscopy and urethritis.




To
      expand
      the pipeline, we have initiated discussions with pharmaceutical companies that
      have either an approved product or a product in development for the treatment
      of
      additional urological indications. We believe that our URG100 and URG300
      programs, when commercialized, will offer significant “marketing coat-tails”
that can dramatically grow the sales of niche urology products. Although such
      products do not match the potential revenue streams of URG101 and URG301, the
      incremental income they could generate for us is potentially significant as
      such
      products will enable us to maximize the time, effort and expense of the sales
      organization that we plan to establish to market URG101 and URG301 to urologists
      in the United States.




4




We
      plan
      to market our products to urologists and urogynecologists in the United States
      via a specialty sales force managed internally. As appropriate, our specialty
      sales force will be augmented by co-promotion and licensing agreements with
      pharmaceutical companies that have the infrastructure to market our products
      to
      general practitioners. In all other countries, we plan to license marketing
      and
      distribution rights to our products to pharmaceutical companies with strategic
      interests in urology and gynecology.




**POTENTIAL
      PRODUCTS, TECHNOLOGIES AND SERVICES**




Following
      is a description of our products currently in development, the anticipated
      market for such products as well as the competitive environment in these
      markets.




**Proprietary
      Product Candidates:**




***URG101***




**Market
      Opportunity for Treatment of Painful Bladder Syndrome**




Presently,
      no approved products exist for treating PBS, and those that have been approved
      for interstitial cystitis, a subset of PBS, are based on clinical studies which
      have shown the drugs to be marginally effective. According to its website,
      the
      FDA has approved two drugs for the treatment of interstitial cystitis and
      neither is labeled as providing immediate system relief. For example, at three
      months, the oral drug Elmiron achieved a therapeutic benefit in only 38% of
      patients on active drug versus 20% on placebo. The other drug approved for
      interstitial cystitis, RIMSO®-50 is an intravesical treatment that was not based
      on double-blind clinical trial results. According to The Interstitial Cystitis
      Data Base Study Experience published in the year 2000, RIMSO®-50 is widely
      recognized as ineffective and not included among the top ten most common
      physician-prescribed treatments for urinary symptoms.




Consequently,
      there remains a significant need for new therapeutic interventions such as
      URG101 that can address the underlying disease process while also providing
      acute symptom relief. PBS is a chronic disease characterized by moderate to
      severe pelvic pain, urgency, urinary frequency, dyspareunia (painful
      intercourse) with symptoms originating from the bladder. Current epidemiology
      data shows that PBS may be much more prevalent than previously
      thought.




One
      theory of PBS’s pathological cause implicates a dysfunction of the bladder
      epithelium surface called the urothelium. The epithelium is the inner lining
      of
      tissue organs. Normally, the urothelium is covered with a mucus layer, the
      glycosaminoglycan, or GAG, layer, which is thought to protect the bladder from
      urinary toxins. A deficiency in the GAG layer would allow these toxins to
      penetrate into the bladder wall activating pain sensing nerves and causing
      bladder muscle spasms. These spasms trigger responses to urinate resulting
      in
      the symptoms of pelvic pain, urgency and frequency, the constellation of
      symptoms associated with this disease. Once established, PBS can be a chronic
      disease, which can persist throughout life and can have a devastating impact
      on
      quality of life.




We
      believe that the prevalence of PBS in North America is estimated to be 10.5
      million, of which 3.8 million would experience severe enough symptoms to be
      classified as having interstitial cystitis, a subset of PBS. This estimate
      was
      based on studies conducted by Clemens and colleagues at Northwestern University
      and by Matt T. Rosenberg and Matthew Hazzard at the Mid-Michigan Health
      Centers. Each group independently concluded that the number of subjects with
      interstitial cystitis have been significantly underestimated. They evaluated
      over 1,000 female primary care patients over the course of a year using a pain,
      urgency/frequency questionnaire to categorize subjects as symptomatic or not.
      We
      calculated the North America PBS population based on a cutoff score of 10 on
      the
      pain, urgency/frequency scale, and assumed a rtio of 1:2 for men to women;
      and
      for interstitial cystitis population we used a more stringent cutoff score
      of
      15.




5




**Product
      Development**




We
      have
      licensed the URG101 technology from the University of California, San Diego.
      The
      license agreement is exclusive with regard to patent rights and non-exclusive
      with regard to the written technical information. We may also grant a sublicense
      to third parties. Pursuant to the license agreement, which was effective as
      of
      January 18, 2006, we were required to pay a license issue fee in the form
      of 7.5% of Urigen N.A. authorized common stock, and we are required to pay
      (i) license maintenance fees of $15,000 per year, (ii) milestone
      payments of up to $625,000 upon the occurrence of certain events related to FDA
      approval, (iii) an earned royalty fee equal to 1.5% to 3.0% of net sales,
      (iv) sublicense fee, if applicable, and (v) beginning in the year of
      any commercial sales, a minimum annual royalty fee of $35,000. The term of
      the
      license agreement ends on the earlier of the expiration date of the
      longest-lived of the patent rights or the tenth anniversary of the first
      commercial sale. Either party may terminate the license agreement for cause
      in
      the event that the other party commits a material breach and fails to cure
      such
      breach. In addition, we may terminate the license agreement at any time and
      for
      any reason upon a 90-day written notice. In the event that any licensed product
      becomes the subject of a third-party claim, we have the right to conduct the
      defense at our own expense, and may contest or settle claims in our sole
      discretion; provided, however, that we may not agree to any settlement that
      would invalidate any valid claim of the patent rights or impose any ongoing
      obligation on the university. Pursuant to the terms of the license agreement,
      we
      must indemnify the university against any and all claims resulting or arising
      out of the exercise of the license or any sublicense, including product
      liability. In addition, upon the occurrence of a sale of a licensed product,
      application for regulatory approval or initiation of human clinical trials,
      we
      must obtain and maintain comprehensive and commercial general liability
      insurance.




The
      individual components of this combination therapy, lidocaine and heparin, were
      originally approved as a local anesthetic and an anti-coagulant, respectively.
      It was demonstrated that a proprietary formulation of these components reduced
      symptoms of pelvic pain and urgency upon instillation into the
      bladder.




The
      rationale for this combination therapy is two-fold. The lidocaine is a local
      anesthetic that reduces the sensations of pain, urge and muscle spasms. The
      heparin, a glycosaminoglycan, coats the bladder wall augmenting natural
      heparinoids, which may be deficient on the surface of the urothelium. Heparin
      is
      not being utilized in this application for its anti-coagulant properties.
      Heparinoids comprise part of the mucus layer of the urothelium and help to
      limit
      urinary toxins from penetrating the underlying tissues thereby preventing pain,
      tissue inflammation and muscle spasms.




**Clinical
      Trial Status**




Urigen
      N.A. filed an IND in 2005 to initiate a Phase IIb multi-center, randomized,
      double-blind, placebo-controlled study to evaluate the safety and efficacy
      of
      intravesical alkalinized lidocaine-heparin for the symptoms of pelvic pain
      and
      urgency of bladder origin. A Phase I study was not required because the
      components of URG101 are FDA-approved for other uses. The study enrolled 90
      subjects randomized to drug vs. placebo in a 1:1 ratio. The study included
      a
      clinically relevant three-week treatment phase to evaluate the safety and
      efficacy of URG101 for the treatment of pelvic pain and/or urgency of bladder
      origin. While URG101 did not meet the primary endpoint in the study, we believe
      the trial provided information necessary to proceed with development of the
      product. There are other examples of clinical trials not achieving primary
      endpoints, but the lessons learned in the study can lead to success in
      Phase III, such as for Acorda Therapeutics, Inc. in their 2004 (missed
      primary endpoint) and 2006 (Phase III success) press releases. The
      rationale for continued development of URG101 is several-fold: the largest
      and
      most experienced clinical trial site met both the primary (70% drug response
      versus 17% placebo) and secondary endpoints of the study. Additionally, the
      study achieved a high level of statistical significance on improvement in
      urgency with just one dose over placebo and trended toward improvement in pain
      with just one dose. We believe that these results indicate that, in a controlled
      clinical trial, subjects receiving study drug experienced meaningful symptom
      improvement in both urgency and bladder pain over placebo. In the Phase II
      study
      patients were enrolled with bladder pain *and/or*urgency (both were not
      required) and mild/intermittent subjects were enrolled, which can result in
      the
      high placebo effect observed due to “regression to the mean.” Additional drug
      dosing and drug administration techniques were identified that we plan to
      incorporate into future clinical trials.




6




**Competitive
      Landscape**




PBS
      is
      currently an underserved medical market. There is no acute treatment for pain
      of
      bladder origin other than narcotics. Currently, there are two approved
      therapeutics, RIMSO®-50 and Elmiron®, for the treatment of interstitial
      cystitis. Both of these approved products require chronic administration before
      any benefit is achieved. Other non-approved therapies provide marginal, if
      any
      benefit.




Development
      of drugs for PBS/IC has targeted a wide array of potential causes with limited
      success. We believe that URG101 will be well positioned, as it will address
      both
      the acute pain the patient experiences and the dysfunctional aspect of the
      urothelium of the bladder wall.




**Commercialization
      Plan**




Remaining
      a virtual company, Urigen will commercialize URG101 in the United States by
      collaborating with appropriate vendors to conduct a situational analysis of
      the
      United States; develop an appropriate product strategy; and then, create and
      implement a launch plan that includes the establishment of a 75 to 100 member
      sales organization that Urigen will have the option to acquire post the
      successful launch of URG101.





As
      appropriate, co-promotional agreements will be established with interested
      parties to ensure that URG101 is adequately promoted to the entire U.S.
      healthcare community. In all countries outside the United States, Urigen will
      either assign licensing rights to or establish Supply and Distribution
      Agreements with interested parties. Initial discussions to acquire such rights
      have begun with interested parties who have a strategic interest in Urology
      and
      Painful Bladder Syndrome, and have the requisite infrastructure and resources
      to
      successfully commercialize URG101.





Manufacturing
      of URG101 finished goods kits will be conducted by contract manufacturers
      approved by regulatory authorities and with a history of having demonstrated
      an
      ability to support a global supply chain demand. Negotiations with such
      manufacturers are in progress to establish requisite manufacturing and supply
      agreements.




**Market
      Opportunity for Treatment of Radiation Cystitis**




We
      estimate that the incidence of radiation cystitis in the United States is more
      than 34,000 cases per year. This estimate is based on a comprehensive review
      of
      more than 40 peer-reviewed articles on specific pelvic irradiation treatments,
      such as brachytherapy and external beam radiation therapy, and the frequency
      of
      adverse urogenital side effects. The annual incidence was then calculated by
      the
      annual incidence of pelvic cancer, which can be found at
*www.cancer.gov*, its estimated radiation rate and adverse urinary
      symptom rate. Although the symptoms of radiation cystitis are similar to those
      of interstitial cystitis, the clinical etiology or underlying cause, can be
      differentiated based on medical history. In fact, clinical studies of products
      in development for interstitial cystitis typically exclude patients suffering
      from radiation cystitis. According to a search of the FDA’s website, currently,
      there are no FDA-approved or licensed treatments of these symptoms that are
      caused by pelvic irradiation.




7




Pelvic
      irradiation, both external beam and brachytherapy, represents one of the
      cornerstones of cancer therapy for a variety of local cancers including:
      prostate, ovarian, cervical, bladder, and colorectal cancers. Radiation
      cystitis, or pelvic pain and/or urgency of bladder origin secondary to pelvic
      irradiation, is a well-recognized side effect of pelvic
      irradiation.




Based
      on
      extensive review of literature, we have calculated that radiation cystitis
      is
      observed in 6-15% of patients receiving pelvic radiotherapy, and that for
      prostate cancer this rate is higher and ranges from 25-30%, or about 1 out
      of
      3-4 men treated. The average time from the beginning of radiation therapy to
      chronic symptoms can be several months to several years. The acute symptoms
      of
      radiation cystitis may be so painful as to disrupt the radiation treatment
      regimen. In most cases, acute symptoms are reversible several weeks after
      cessation of therapy. However there is a subset of patients that develop chronic
      radiation cystitis in which these symptoms remain indefinitely, possibly due
      to
      irreversible damage and/or improper healing of the bladder wall.




**Clinical
      Trial Status**




Three
      subjects with radiation cystitis were treated by our scientific founder in
      his
      urology clinic at the University of California, San Diego Medical Center during
      2005-2006 on a compassionate basis. This was not part of a clinical trial.
      The
      three subjects all responded with relief of their symptoms after the
      installation of URG101 into their urinary bladders. We believe that these
      treatments, coupled with our clinical experience with URG101 for PBS, warrant
      further testing for radiation cystitis. Consequently, we have expanded
      our  IND to include the evaluation of URG101 in a Phase II
      multi-center, randomized, double-blind, placebo-controlled crossover to
      open-label study to evaluate the safety and efficacy of URG101 in patients
      exhibiting symptoms of pelvic pain and /or urgency of bladder origin secondary
      to pelvic irradiation. This study will be conducted in collaboration with
      leading academic and oncology centers. Site initiation and commencement of
      enrollment is dependent on our ability to raise additional funds through grant
      or equity sources.




**Competitive
      Landscape**




According
      to a search of the FDA’s website, currently, no approved products exist for the
      treatment of radiation cystitis. Relevant scientific literature reports that
      therapies commonly used to treat interstitial cystitis have met limited success
      when used to treat radiation cystitis. Based on clinical experience to date,
      we
      anticipate that URG101 could potentially offer first-line treatment to patients
      suffering from pelvic pain and/or urgency due to pelvic
      irradiation.




**Market
      Opportunity for Treatment of Dyspareunia**




Dyspareunia
      is sexual dysfunction manifested as painful or difficult sexual intercourse.
      The
      disorder is recurrent and associated with a disruption of normal functioning.
      Dyspareunia occurs most frequently in females; however, incidence has also
      been
      reported among males.




The
      actual incidence of dyspareunia is difficult to determine, since the majority
      of
      cases are unreported by patients. In a survey conducted by Edward O.
      Laumann, Anthony Paik and Raymond C. Rosen on sexual experience and
      dyspareunia, 24% of respondents stated that dyspareunia was “frequent” or
“constant,” 47% reported that they had less frequent intercourse because of
      dyspareunia, and 33% reported that their dyspareunia had an adverse effect
      on
      their relationship with a sexual partner.




**Clinical
      Trial Status**




An
      unpublished clinical study by Dr. Joel M.H. Teichman and Dr. Blayne
      Welk demonstrates that administration of URG101 relieves symptoms of dyspareunia
      in women suffering from the disorder. Dr. Teichman and Dr. Welk, each of
      Vancouver, Canada, studied twelve PSB/IC patients that were sexually active,
      diagnosed with dyspareunia and treated with an intravesical therapeutic
      solution. The patients were treated with intravesical instillations three times
      per week for three weeks, and re-evaluated three weeks later. Eleven of the
      twelve patients reported improvements of greater than 50%. Eight patients
      reported no dyspareunia after instillations. Drs. Teichman and Welk concluded
      intravesical therapeutic solution provides relief of voiding symptoms, pain,
      and
      dyspareunia in PSB/IC patients. Based on these anecdotal results, we are
      collaborating with a leading academic center to explore the potential of URG101
      to effectively treat women diagnosed with dyspareunia.




8




We
      plan
      to initiate a double-blind placebo-controlled study to evaluate the safety
      and
      efficacy of intravesical alkalinized lidocaine-heparin for dyspareunia.
      Following the completion of this study, we will publish the results in a peer
      reviewed urology journal.




**Competitive
      Landscape**




There
      are
      no approved medications that treat dyspareunia. Personal lubricants and
      medications that increase blood flow (e.g. sildenafil - Viagra® or alprostadil -
      Muse®) or relax muscles have been demonstrated to be helpful in some cases. We
      believe that URG101 represents a significant potential opportunity for the
      treatment of female sexual dysfunction due to dyspareunia.







**URG301
      and URG302**




**Market
      Opportunity for Treatment of Overactive Bladder (OAB)**




According
      to an article published by the Mayo Foundation for Medical Education and
      Research, overactive bladder is a fairly common malady as approximately 17
      million individuals in the United States and more than 100 million worldwide
      are
      afflicted. Importantly, the condition worsens as people age.




Although
      not life-threatening, for the individual overactive bladder is inconvenient,
      potentially embarrassing, and may disrupt sleep; while significantly impacting
      quality of life. Frequently these individuals are afraid to leave their home,
      or
      are unable to participate in a lengthy meeting, dinner, or social event.
      Unfortunately, many of these people hesitate to seek treatment because they
      think their symptoms are a normal part of aging. This mindset is incorrect
      as
      overactive bladder is not normal, is treatable, and treatment can significantly
      ease symptoms and improve quality of life.




Patient
      compliance studies report that more than half of patients taking an oral OAB
      drug stop taking it within six months of initiation of therapy. Such studies
      also report that only 10 to 20 percent of people remain on an oral OAB medicine
      six to 12 months after initiating treatment. About a third to one-half of those
      who discontinue their drug therapy do so due to side effects, they simply can
      not tolerate the drug or do not find the minimal benefit they receive to
      outweigh the negative effects of the drug.




Manufacturers
      of these overactive bladder therapies have expended significant research energy
      and money in their efforts to reduce side effects to increase patients’
adherence to treatment. However, some physicians, experts and healthcare
      providers do not believe that the marginal benefits of these oral agents
      outweigh the significant side effects endured by patients prescribed such
      drugs.




Importantly,
      given these efficacy and side effect limitations, the overactive bladder market
      has experienced significant and constant double digit annual growth. According
      to sales data provided by the four largest U.S. pharmaceutical companies in
      their annual reports, we estimate that in the five year period 2000 through
      2004
      sales of OAB drugs in the United States grew from $636 million to more than
      $1.3
      billion, and year over year percentage increases for this five year period
      were
      40%, 25%, 18%, and 13%, respectively.




9




**Product
      Development**




We
      are
      developing an IND to initiate an exploratory study to evaluate the safety and
      efficacy of an intraurethral suppository to treat the symptoms of acute urinary
      urgency associated with overactive bladder. The study will enroll subjects
      randomized to drug vs. placebo in a 1:1 ratio. The study will involve a
      clinically relevant treatment phase to evaluate the safety and efficacy of
      URG301 and URG302 for the treatment of urgency associated with overactive
      bladder.




**Commercialization
      Plan**




We
      will
      commercialize URG301 and URG302 in the United States by conducting a situational
      analysis of the United States; developing an appropriate product strategy;
      and
      then, creating and implementing a launch plan that incorporates the 75 to 100
      member sales organization that we are planning to establish for the launch
      of
      URG101. As appropriate, co-promotional agreements will be established with
      interested parties to ensure that URG301 and URG302 are adequately promoted
      to
      the entire U.S. healthcare community.




In
      all
      countries outside the United States, Urigen will either assign licensing rights
      to or establish Supply and Distribution Agreements with interested parties.
      Discussions to acquire such rights will be scheduled with interested
      pharmaceutical companies who have a strategic interest in Incontinence and
      Overactive Bladder, and have the requisite infrastructure and resources to
      successfully commercialize URG301 and URG302.




**Competitive
      Landscape**




Approved
      prescription drugs used to treat overactive bladder are not optimally effective
      and have side effects that can limit their use. These approved drugs—oxybutynin
      (Ditropan®, Ditropan XL® and Oxytrol®, a skin patch); tolterodine (Detrol®,
      Detrol LA®); trospium (Sanctura®); solifenacin (Vesicare®); and darifenacin
      (Enablex®)—demonstrate remarkably similar efficacy.




However,
      they do differ in the side effects they cause and their
      cost. Side effects include dry mouth, constipation, and mental confusion. In
      clinical studies, Ditropan XL, Detrol LA, Oxytrol, Sanctura, Vesicare, and
      Enablex have caused fewer side effects than the short acting dosage forms of
      oxybutynin (Ditropan) and tolterodine (Detrol).




Oxybutynin
      has been available since 1976 and tolterodine since 1998. The short-acting
      form
      of oxybutynin is available as a less expensive generic drug while the
      extended-release formulations of both oxybutynin and tolterodine are available,
      but not as generics. An oxybutynin patch (Oxytrol) was launched in 2003 while
      solifenacin and darifenacin were introduced in 2004.




Retail
      prices for these products vary considerably and are tied directly to the number
      of pills taken per day and whether or not the product is available generically.
      The least expensive is generic oxybutynin 5mg with an average monthly cost
      of
      $20 compared to Ditropan 5mg at $79 and Ditropan XL 5mg costing $122 per month
      on average. The average monthly cost for Detrol is $138; Detrol LA $119;
      Sanctura $116; Vesicare $121; and Enablex $116. (Prices from May 2006
      Wolters Kluwer Health, Pharmaceutical Audit Suite)




**URG301**




10




**Market
      Opportunity for Treatment of Acute Urethral Discomfort
      (AUD)**




Medical
      procedures involving instrument insertion into the male or female urethra can
      be
      a painful experience for many patients. Nevertheless, cystoscopy and
      catheterization are common medical procedures performed in a variety of medical
      specialties on an outpatient basis to examine the urinary tract and the bladder
      for polyps, strictures, abnormal growths and other problems.




**Product
      Development**




We
      are
      considering developing a urethral suppository that contains lidocaine in a
      generally recognized as safe, or GRAS, approved carrier base. Upon insertion,
      the suppository would melt promptly and distribute the drug to the urethral
      tissue achieving a rapid anesthetic effect.




As
      all of
      the components of the suppository are already approved by global regulatory
      authorities, such as the FDA and the European Medicines Agency, or EMEA, our
      development timelines for URG301 could be streamlined since both active drug
      and
      inactive components that have all been previously used in humans. However,
      this
      suppository will be considered a new product and will require a full review
      by
      the FDA and EMEA. Additionally, the single, acute use nature of these clinical
      trials portends an efficient and timely development plan as clinical trial
      costs
      for long, multi-dose studies are significantly higher than short, single-dose
      trials like the AUD clinical development program. For both AUD and urethritis
      URG301 programs, we are evaluating a clinical development route that may only
      require equivalent lidocaine serum levels to the approved product lidocaine
      jelly. If this development program is possible, then clinical trial requirements
      for these indications will be reduced.




**Commercialization
      Plan**




URG301
      will be commercialized using the sales, marketing and distribution
      infrastructure established for URG101.




**Competitive
      Landscape**




The
      standard of care for Acute Urethral Discomfort ranges from no treatment,
      instrument lubrication and administration of lidocaine hydrochloride jelly
      (Xylocaine®) as a local anesthetic. Only lidocaine jelly is approved for surface
      anesthesia and lubrication of the male and female urethra during cystoscopy,
      catheterization and other endourethral operations. In males, 20 ml. of 2%
      lidocaine jelly is administered to the urethra and a penile clamp is then
      applied to the corona for several minutes to hold the product in the urethra.
      The shorter female urethra is filled with lidocaine; however, anecdotal clinical
      data suggests that the product often spills out of the urethra or into the
      bladder limiting its effect. Each application requires a separate tube of
      lidocaine jelly that costs approximately $20.




Based
      on unpublished clinical experience, we believe that URG301
      would deliver a more robust and predictable therapeutic effect in comparison
      to
      lidocaine jelly. The clinical experience was provided by Kalium, Inc., from
      which we licensed the product, and involved subjects who were offered the
      suppository instead of lidocaine jelly prior to catheterization. This work
      was
      not performed under a formal clinical trial. URG301 could be commercialized
      using the sales, marketing and distribution infrastructure established for
      URG101. We also believe that URG301 can be marketed at a price competitive
      with
      lidocaine jelly.




11




**URG301**




**Market
      Opportunity for Treatment of Urethritis**




A
      significant percentage of patients with PBS have a substantial urethral
      component to their disease. The severity of urethral pain and discomfort may
      compromise the administration of intravesical therapies. To overcome this
      problem, we intend to evaluate potential development of a urethral suppository
      to resolve this pain and discomfort.




Preliminary
      work, by Kalium, Inc., from which we licensed the product, has been conducted
      to
      test a variety of GRAS approved carriers and therapeutic agents as well as
      to
      optimize melt times for the suppository. Additionally, patients with urethritis
      were offered the use of a suppository that contained lidocaine and heparin
      for
      the treatment of their symptoms of urethral pain and inflammation. An optimized
      formulation has been tested in an open-label clinical trial. This study was
      undertaken to determine the proportion of urethral symptoms by 50% or more
      in
      patients with urethritis. Results were evaluated 15 minutes after administration
      of the suppository using the PORIS scale. The result of this pilot Phase II
      (open label) study in approximately 30 patients demonstrated a 50% or greater
      improvement in 83% of patients experiencing pain and 84% of patients
      experiencing urgency related to urethritis following a single treatment.
      Importantly, 50% of patients had complete resolution of pain and 63% had
      complete resolution of urgency. Duration of relief following a single treatment
      was greater than 12 hours in approximately 30% of subjects. This testing was
      not
      performed as a formal clinical trial, but under physician care and information
      provided to us from Kalium, Inc. Clinical development for urethritis will be
      similar to AUD as lidocaine jelly is also approved for urethritis.




The
      licensed patents cover a range of active ingredients that can be formulated
      in
      the suppository to create a desired therapeutic effect. Such agent may include
      antibiotics, antimicrobials, antifungals, analgesics, anesthetics, steroidal
      anti-inflammatories, non-steroidal anti-inflammatories, mucous production
      inhibitors, hormones and antispasmodics.




**CORPORATE
      COLLABORATIONS**




We
      have retained Navigant
      Consulting, Inc. to serve as our marketing group. Initially, pursuant to
      the terms of the agreement, Navigant has conducted a situational assessment
      of
      physicians, healthcare payers and patient advocacy groups to generate a product
      strategy that addresses key geographical markets, customers, product
      positioning, lifecycle management and pricing. The project cost of this first
      phase was $125,000, of which $25,000 had been paid through June 30, 2007 and
      $50,000 was paid in August 2007 with the balance of $50,000 being paid in
      monthly installments of $5,000. Then, as appropriate, Navigant will create
      and
      implement a commercialization plan specific for us in the United States. The
      estimated project cost of this second phase is approximately $2.6 million.
      Pursuant to the terms of the agreement, Navigant will bill us monthly for all
      professional services at established hourly rates, which range from $150 to
      $350
      per hour, plus related out-of-pocket expenses. Payment of invoices is not
      contingent upon results. Navigant may terminate the agreement if payment of
      fees
      is not made within 60 days of the invoice date. There is no definitive
      termination date of the agreement, but the estimated timing for all of the
      projects ranges from 30 to 42 months. As appropriate, co-promotional
      agreements will be established with interested parties to ensure that URG101
      is
      adequately promoted to the entire United States healthcare community.





We
      also have two license agreements pursuant to which we license
      certain patent rights and technologies:





In
      January 2006, Urigen N.A.  entered into an asset-based transaction
      agreement with a related party, Urigen, Inc. Simultaneously, Urigen
      N.A. entered into a license agreement with the University of California,
      San Diego, or UCSD, for certain patent rights.   In exchange for this
      license, Urigen issued 818,646 common shares and is required to make annual
      maintenance payments of $15,000 and milestone payments of up to $625,000, which
      are based on certain events related to FDA approval. As of June 30, 2006,
      $25,000 of milestone payments has been incurred. Urigen is also required to
      make
      royalty payments of 1.5-3.0 % of net sales of licensed products, with a minimum
      annual royalty of $35,000. The term of the agreement ends on the earlier of
      the
      expiration of the longest-lived of the patents rights or the tenth anniversary
      of the first commercial sale. Either party may terminate the license agreement
      for cause in the event that the other party commits a material breach and fails
      to cure such breach. In addition, Urigen may terminate the license agreement
      at
      any time and for any reason upon a 90-day written notice.




12




Pursuant
      to our license agreement with
      Kalium, Inc., made as of May 12, 2006, we and our affiliates have
      an exclusive license to the patent rights and technologies, and the right
      to sublicense to third parties. As partial consideration for the rights under
      the license agreement and as a license fee, Urigen N.A., Inc. was required
      to
      issue 720,000 shares of our common stock. We are required to pay royalties
      ranging from 2.0% to 4.5% of net sales, and milestone payments of up to $437,500
      upon the occurrence of certain events related to FDA approval, and any
      applicable sublicense payments in an amount equal to 22.5% of fees received
      for
      any sublicense. Pursuant to the terms of the license agreement, we must
      indemnify Kalium against any and all liabilities or damages arising out of
      the
      development or use of the licensed products or technology, the use by third
      parties of licensed products or technology, or any representations or warranty
      by us. In the event that any licensed product becomes the subject of a
      third-party claim, we have the right to conduct the defense at our own expense,
      and may settle claims in our sole discretion; provided, however, that Kalium
      must cooperate with us. The term of the license agreement ends on the earlier
      of
      the expiration date of the last to expire of any patent or the tenth anniversary
      of the first commercial sale. The license agreement may be terminated by either
      party if the other party fails to substantially perform or otherwise materially
      breaches any material terms or covenants of the agreement, and such failure
      or
      breach is not cured within 30 days of notice thereof. In addition, Kalium
      may terminate the agreement or convert the license to non-exclusive rights
      if we
      fail to meet certain milestones.




We
      also
      have a consulting agreement with Dennis Giesing, PhD, dated as of
      December 11, 2006, pursuant to which Dr. Giesing agreed to perform such
      services as the director of product development for one full day per calendar
      week relating to the design, structuring, monitoring and conduct of certain
      clinical trials. The term of the agreement is one year, with automatic renewal
      on each anniversary unless either party gives notice of its intention not to
      renew. For the term of the consulting agreement, Dr. Giesing is entitled to
      receive a fee of $4,000 per month and received an initial issuance of
      19,200 shares of Urigen N.A. Series B preferred stock, which shares
      vest in twelve equal monthly installments from the date of issuance, and are
      subject to repurchase by us upon the termination of the consulting
      relationship.




In
      countries outside of the United States, we anticipate we will either assign
      licensing rights to or establish supply and distribution agreements with
      interested parties. Initial discussions to acquire such rights have begun with
      interested parties who have a strategic interest in urology and CPP and have
      the
      requisite infrastructure and resources to successfully commercialize
      URG101.




Like
      many
      companies our size, we do not have the ability to conduct preclinical or
      clinical studies for our product candidates without the assistance of third
      parties who conduct the studies on our behalf. These third parties are usually
      toxicology facilities and clinical research organization, or CROs that have
      significant resources and experience in the conduct of pre-clinical and clinical
      studies. The toxicology facilities conduct the pre-clinical safety studies
      as
      well as all associated tasks connected with these studies. The CROs typically
      perform patient recruitment, project management, data management, statistical
      analysis, and other reporting functions.




Third
      parties that we use, and have used in the past, to conduct clinical trials
      include Clinimetrics Research Canada, Inc. and Cardinal Health PTS, LLC. We
      have
      a Master Clinical Services Agreement with Clinimetrics Research, made as of
      October 4, 2005, which provides that from time to time we may engage
      Clinimetrics Research for research and clinical services. All services provided
      by Clinimetrics Research are pursuant to a work order on a per project basis,
      which work order sets out the description of the services, the fee and payments
      schedule for the services, a description of the deliverables to be provided
      by
      Clinimetrics Research, the materials to be provided by each party and a timeline
      for the project. There is no limit to the number of work orders that may be
      submitted pursuant to the agreement. Unless otherwise provided in the work
      order, invoices are submitted by Clinimetrics Research to us on a monthly basis,
      and payments must be made within 30 days of receipt of an invoice. The term
      of
      the agreement is three years, unless sooner terminated. A work order or the
      agreement may be terminated by us at any time upon prior written notice, by
      either party upon a material breach by the other party, which breach remains
      uncured for 30 days, by either party in the event of bankruptcy or insolvency
      of
      the party, and by us if the parties are unable to agree on a substitute project
      manager.




13




We
      received a quotation for services from Cardinal Health, dated
      July 22, 2005, pursuant to which Cardinal Health agreed to perform formulation
      development activities and stability testing. Pursuant to the terms of the
      agreement, the estimated time period for the development activities was two
      to
      three months. The quotation contained estimated costs for the services and
      activities to be performed by Cardinal Health. Only a small portion of the
      quotation was completed by Cardinal Health on our behalf.




We
      intend
      to continue to rely on third parties to conduct clinical trials of its product
      candidates and to use different toxicology facilities and CROs for all of our
      pre-clinical and clinical studies.




**INTELLECTUAL
      PROPERTY**




We
      have
      multiple intellectual property filings around our products. In general, we
      plan
      to file for broad patent protection in all markets where we intend to
      commercialize our products. Typically, we will file our patents first in the
      United States or Canada and expand the applications internationally under the
      Patent Cooperation Treaty, or PCT.




Currently,
      we own or have licensed two (2) issued patents and three (3) patent
      applications. Based on these filings, we anticipate that our lead product
      URG101, may be protected until at least 2025 and our URG300 urethral suppository
      platform will be protected until at least 2018 and potentially beyond
      2025.




**Summary
      of our Patents and Patent Applications:**




·
            We
                have licensed *U.S. Patent Application 60/540186*entitled “Novel
                Interstitial Therapy for Immediate Symptom Relief and Chronic Therapy
                in
                Interstitial Cystitis” from the University of California, San Diego. The
                application claim treatment formulations and methods for reducing
                the
                symptoms of urinary frequency, urgency and/or pelvic pain, including
                interstitial cystitis. We have received a favorable international
                search
                report from the United States Patent and Trademark Office and are
                optimistic that patents covering the claims for our products will
                be
                issued in due course.




·
            We
                have filed PCT Application PCT/US2006/019745 entitled “Kits and Improved
                Compositions for Treating Lower Urinary Tract Disorders: Formulations
                for
                Treating Lower Urinary Tract Symptoms: which is directed to superior
                buffered formulations and kits for treating lower urinary tract symptoms
                and disorders.




·
            We
                have licensed *U.S. Patent Application*Serial No. 11/475809,
                entitled “Transluminal Drug Delivery Methods and Devices” from
                Kalium, Inc. The application is directed to a urethral suppository
                that includes a carrier base, an anesthetic, a buffering agent, and,
                optionally a polysaccharide.




·
            We
                have licensed *U.S. Patent No. 6,464,670*entitled “Method of
                Delivering Therapeutic Agents to the Urethra and an Urethral Suppository”
                from Kalium, Inc. The patent describes a meltable suppository having
                a “baseball bat” shape for the administration of therapeutic agents to the
                urethra. This shape is suited for the female
                urethra.




·
            We
                have licensed *U.S. Patent No. 7,267,670*entitled “Reinforced
                Urethral Suppository” from Kalium, Inc. This application covers the
                mechanical structure of a reinforced suppository that can be used
                to
                deliver a range of therapeutic agents to the
                urethra.




14




Our
      failure to obtain patent protection or otherwise protect our proprietary
      technology or proposed products may have a material adverse effect on our
      competitive position and business prospects. The patent application process
      takes several years and entails considerable expense. There is no assurance
      that
      additional patents will issue from these applications or, if patents do issue,
      that the claims allowed will be sufficient to protect our
      technology.




The
      patent positions of pharmaceutical
      and biotechnology firms are often uncertain and involve complex legal and
      factual questions. Furthermore, the breadth of claims allowed in biotechnology
      patents is unpredictable. We cannot be certain that others have not filed patent
      applications for technology covered by our pending applications or that we
      were
      the first to invent the technology that is the subject of such patent
      applications. Competitors may have filed applications for, or may have received
      patents and may obtain additional patents and proprietary rights relating to
      compounds, products or processes that block or compete with ours. We are aware
      of patent applications filed and patents issued to third parties relating to
      urological drugs, urological delivery technologies and urological therapeutics,
      and there can be no assurance that any patent applications or patents will
      not
      have a material adverse effect on potential products we or our corporate
      partners are developing or may seek to develop in the future.





Patent
      litigation is widespread in the biotechnology industry.
      Litigation may be necessary to defend against or assert claims of infringement,
      to enforce patents issued to us, to protect trade secrets or know-how owned
      or
      licensed by us, or to determine the scope and validity of the proprietary rights
      of third parties. Although no third party has asserted that we are infringing
      such third party’s patent rights or other intellectual property, there can be no
      assurance that litigation asserting such claims will not be initiated, that
      we
      would prevail in any such litigation or that we would be able to obtain any
      necessary licenses on reasonable terms, if at all. Any such claims against
      us,
      with or without merit, as well as claims initiated by us against third parties,
      can be time-consuming and expensive to defend or prosecute and to resolve.
      If
      other companies prepare and file patent applications in the United States that
      claim technology also claimed by us, we may have to participate in interference
      proceedings to determine priority of invention which could result in substantial
      cost to us even if the outcome is favorable to us. There can be no assurance
      that third parties will not independently develop equivalent proprietary
      information or techniques, will not gain access to our trade secrets or disclose
      such technology to the public or that we can maintain and protect unpatented
      proprietary technology. We typically require our employees, consultants,
      collaborators, advisors and corporate partners to execute confidentiality
      agreements upon commencement of employment or other relationships with us.
      There
      can be no assurance, however, that these agreements will provide meaningful
      protection or adequate remedies for our technology in the event of unauthorized
      use or disclosure of such information, that the parties to such agreements
      will
      not breach such agreements or that our trade secrets will not otherwise become
      known or be discovered independently by its competitors.




**GOVERNMENT
      REGULATION**




The
      production and marketing of any of our potential products will be subject to
      extensive regulation for safety, efficacy and quality by numerous governmental
      authorities in the United States and other countries. In the United States,
      pharmaceutical products are subject to rigorous regulation by the United States
      Food and Drug Administration, or FDA. We believe that the FDA and comparable
      foreign regulatory bodies will regulate the commercial uses of our potential
      products as drugs. Drugs are regulated under certain provisions of the Public
      Health Service Act and the Federal Food, Drug, and Cosmetic Act. These laws
      and
      the related regulations govern, among other things, the testing, manufacturing,
      safety, efficacy, labeling, storage, record keeping, and the promotion,
      marketing and distribution of drug products. At the FDA, the Center for Drug
      Evaluation and Research is responsible for the regulation of drug
      products.




15




The
      necessary steps to take before a new drug may be marketed in the United States
      include the following: (i) laboratory tests and animal studies;
      (ii) the submission to the FDA of an IND application for clinical testing,
      which must become effective before clinical trials commence; (iii) under
      certain circumstances, approval by a special advisory committee convened to
      review clinical trial protocols involving drug therapeutics; (iv) adequate
      and well-controlled clinical trials to establish the safety and efficacy of
      the
      product; (v) the submission to the FDA of a new drug application or NDA;
      and (vi) FDA approval of the new drug application prior to any commercial
      sale or shipment of the drug.




Facilities
      used for the manufacture of drugs are subject to periodic inspection by the
      FDA
      and other authorities, where applicable, and must comply with the FDA’s Good
      Manufacturing Practice, or GMP, regulations. Manufacturers of drugs also must
      comply with the FDA’s general drug product standards and may also be subject to
      state regulation. Failure to comply with GMP or other applicable regulatory
      requirements may result in withdrawal of marketing approval, criminal
      prosecution, civil penalties, recall or seizure of products, warning letters,
      total or partial suspension of production, suspension of clinical trials, FDA
      refusal to review pending marketing approval applications or supplements to
      approved applications, or injunctions, as well as other legal or regulatory
      action against us or our corporate partners.




Clinical
      trials are conducted in three sequential phases, but the phases may overlap.
      In
      Phase I (the initial introduction of the product into human subjects or
      patients), the drug is tested to assess safety, metabolism, pharmacokinetics
      and
      pharmacological actions associated with increasing doses. Phase II usually
      involves studies in a limited patient population to (i) determine the
      efficacy of the potential product for specific, targeted indications,
      (ii) determine dosage tolerance and optimal dosage, and (iii) further
      identify possible adverse effects and safety risks. If a compound is found
      to be
      effective and to have an acceptable safety profile in Phase II evaluations,
      Phase III trials are undertaken to further evaluate clinical efficacy and
      test for safety within a broader patient population at geographically dispersed
      clinical sites. There can be no assurance that Phase I, Phase II or
      Phase III testing will be completed successfully within any specific time
      period, if at all, with respect to any of our or our corporate partners’
potential products subject to such testing. In addition, after marketing
      approval is granted, the FDA may require post-marketing clinical studies that
      typically entail extensive patient monitoring and may result in restricted
      marketing of the product for an extended period of time.




The
      results of product development, preclinical animal studies, and human studies
      are submitted to the FDA as part of the NDA. The NDA must also contain extensive
      manufacturing information, and each manufacturing facility must be inspected
      and
      approved by the FDA before the NDA will be approved. Similar regulatory approval
      requirements exist for the marketing of drug products outside the
      United States (e.g., Europe and Japan). The testing and approval process is
      likely to require substantial time, effort and financial and human resources,
      and there can be no assurance that any approval will be granted on a timely
      basis, if at all, or that any potential product developed by us and/or our
      corporate partners will prove safe and effective in clinical trials or will
      meet
      all the applicable regulatory requirements necessary to receive marketing
      approval from the FDA or the comparable regulatory body of other countries.
      Data
      obtained from preclinical studies and clinical trials are subject to
      interpretations that could delay, limit or prevent regulatory approval. The
      FDA
      may deny the NDA if applicable regulatory criteria are not satisfied, require
      additional testing or information, or require post-marketing testing and
      surveillance to monitor the safety or efficacy of a product. Moreover, if
      regulatory approval of a biological product candidate is granted, such approval
      may entail limitations on the indicated uses for which it may be marketed.
      Finally, product approvals may be withdrawn if compliance with regulatory
      standards is not maintained or if problems occur following initial marketing.
      Among the conditions for NDA approval is the requirement that the prospective
      manufacturer’s quality control and manufacturing procedures conform to the
      appropriate GMP regulations, which must be followed at all times. In complying
      with standards set forth in these regulations, manufacturers must continue
      to
      expend time, financial resources and effort in the area of production and
      quality control to ensure full compliance.




16




For
      clinical investigation and marketing outside the United States, we and our
      corporate partners may be subject to FDA as well as regulatory requirements
      of
      other countries. The FDA regulates the export of drug products, whether for
      clinical investigation or commercial sale. In Europe, the approval process
      for
      the commencement of clinical trials varies from country to country. The
      regulatory approval process in other countries includes requirements similar
      to
      those associated with FDA approval set forth above. Approval by the FDA does
      not
      ensure approval by the regulatory authorities of other countries.




We
      are subject to federal, state and local laws and regulations
      governing the use, manufacture, storage, handling and disposal of hazardous
      materials, chemicals and radioactive materials and waste products. Although
      we
      believe that its safety procedures for handling and disposing of such materials
      comply and will continue to comply with the standards prescribed by such laws
      and regulations, the risk of accidental contamination or injury from these
      materials cannot be eliminated completely. In the event of such an accident,
      we
      could be held liable for any damages that result, and any such liability could
      exceed our resources. Although we believe that we are is in compliance in all
      material respects with applicable environmental laws and regulations, there
      can
      be no assurance that we will not be required to incur significant costs to
      comply with environmental laws and regulations in the future or that any of
      our
      operations, business or assets will not be materially adversely affected by
      current or future environmental laws or regulations.




**GENERAL
      COMPETITION WITHIN THE UROLOGICAL THERAPEUTIC INDUSTRY**




Competition
      in the pharmaceutical industry is intense and is characterized by extensive
      research efforts and rapid technological progress. Several pharmaceutical
      companies are also actively engaged in the development of therapies for the
      treatment of PBS and overactive bladder.  Such competitors may develop
      safer, more effective or less costly urological therapeutics. Moreover, we
      face
      competition from such companies, in establishing corporate collaborations with
      pharmaceutical and biotechnology companies, relationships with academic and
      research institutions and in negotiating licenses to proprietary technology,
      including intellectual property.




Many
      competitors and potential competitors have substantially
      greater product development capabilities and financial, scientific,
      manufacturing, managerial and human resources than us. There is no assurance
      that research and development by such competitors will not render our potential
      products and technologies, or the potential products and technologies developed
      by its corporate partners, obsolete or non-competitive, or that any potential
      product and technologies us or our corporate partners develop would be preferred
      to any existing or newly developed products and technologies. In addition,
      there
      is no assurance that competitors will not develop safer, more effective or
      less
      costly PBS therapies, achieve superior patent protection or obtain
      regulatory approval or product commercialization earlier than us or our
      corporate partners, any of which could have a material adverse effect on our
      business, financial condition or results of operations.




**PRODUCT
      LIABILITY INSURANCE**




The
      manufacture and sale of human therapeutic products involve an inherent risk
      of
      product liability claims and associated adverse publicity. We currently have
      only limited product liability insurance, and there can be no assurance that
      we
      will be able to maintain existing or obtain additional product liability
      insurance on acceptable terms or with adequate coverage against potential
      liabilities. Such insurance is expensive, difficult to obtain and may not be
      available in the future on acceptable terms, or at all. An inability to obtain
      sufficient insurance coverage on reasonable terms or to otherwise protect
      against potential product liability claims could inhibit our business. A product
      liability claim brought against us in excess of our insurance coverage, if
      any,
      could have a material adverse effect upon our business, financial condition
      and
      results of operations.





17




**EMPLOYEES**




As
      of
      June 30, 2007, we had three full-time employees, including one who holds a
      doctoral degree.  These employees are engaged in finance and
      administrative activities.




We
      currently employ five individuals full-time, including two who hold doctoral
      degrees. Current employees are engaged in product development, marketing,
      finance and administrative activities, including assessing strategic
      opportunities that may be available to us. Our employees are not represented
      by
      a collective bargaining agreement. We believe our relationships with our
      employees are good.





**ITEM
                1A.**
            **RISK
                FACTORS**




The
      following risk factors outline certain risks and uncertainties concerning future
      results and should be read in conjunction with the information contained in
      this
      Annual Report on Form 10-K. Any of these risk factors could materially and
      adversely affect our business, operating results and financial condition.
      Additional risks and uncertainties not presently known to us, or those we
      currently deem immaterial, may also materially harm our business, operating
      results and financial condition.




**We
      have received a “going concern”
opinion from our independent registered public accounting firm, which
      may negatively impact our business.**





We
      have
      received a report from Burr, Pilger & Mayer LLP, our independent registered
      public accounting firm, regarding our consolidated financial statements for
      the
      fiscal year ended June 30, 2007, which included an explanatory
      paragraph stating that the financial statements were prepared assuming we will
      continue as a going concern. The report also stated that our recurring operating
      losses and need for additional financing have raised substantial doubt about
      our
      ability to continue as a going concern.





**In
        connection with the audit of our June 30, 2007 financial statements our
        independent registered public accounting firm identified material weaknesses
        in
        our internal controls over financial reporting.**




We
        have
        been informed that during the course of our audit that our independent
        registered public accounting firm concluded that our internal controls over
        financial reporting suffer from certain “material weaknesses” as defined in
        standards established by the Public Company Accounting Oversight Board and
        the
        American Institute of Certified Public Accountants. We intend to commence
        a
        process of developing, adopting and implementing policies and procedures
        to
        address such material weaknesses that are consistent with those of small,
        public
        companies. However, that process may be time consuming and costly and there
        is
        no assurance as to when we will effectively address such material
        weaknesses.




**We
      have a history of losses and may never be profitable**.





We
      have
      engaged in research and development activities since our inception. We incurred
      losses from operations of approximately $6.1 million, $15.6 million and
      $11.3 million, for our fiscal years ended June 30, 2007, 2006 and
      2005, respectively. As of June 30, 2007, we had an accumulated deficit
      totaling approximately $243.7 million. Our products are in the development
      stage and, accordingly, our business operations are subject to all of the risks
      inherent in the establishment and maintenance of a developing business
      enterprise, such as those related to competition and viable operations
      management.  We have not generated revenues from the
      commercialization of any products. Our net operating losses over the near-term
      and the next several years are expected to continue as a result of the further
      clinical trial activity and preparation for regulatory submission necessary
      to
      support regulatory approval of our products. Costs associated with Phase III
      clinical trials are generally substantially greater than Phase II clinical
      trials, as the number of clinical sites and patients required is much
      larger.




18




There
      can
      be no assurance that we will be able to generate sufficient product revenue
      to
      become profitable at all or on a sustained basis. We expect to have
      quarter-to-quarter fluctuations in expenses, some of which could be significant,
      due to expanded research, development, and clinical trial
      activities.





**Our
      potential products and technologies are in early stages of
      development.**




The
      development of new pharmaceutical products is a highly risky undertaking, and
      there can be no assurance that any future research and development efforts
      we
      might undertake will be successful. All of our potential products will require
      extensive additional research and development prior to any commercial
      introduction. There can be no assurance that any future research and development
      and clinical trial efforts will result in viable products.




We
      do not
      yet have the required clinical data and results to successfully market our
      forerunner product, URG101, or any other potential product in any jurisdiction,
      and future clinical or preclinical results may be negative or insufficient
      to
      allow us to successfully market any of our product candidates. Obtaining needed
      data and results may take longer than planned or may not be obtained at
      all.







**Our
      primary product candidate did not meet its primary endpoint in a Phase II
      clinical study; therefore we are dependent upon incorporating appropriate
      protocol changes to the product candidate in order to achieve positive results
      in subsequent trials.**




URG101
      is
      our patent-protected product, targeting PBS. We have recently completed a
      multi-center, randomized, double-blind and placebo-controlled Phase IIb
      study in 90 patients. On October 30, 2006, Urigen N.A. announced that
      URG101 did not meet the primary endpoint in a Phase II clinical trial in PBS.
      We
      announced that the primary endpoint in this study was improvement in pain and
      urgency at the end of the study as monitored by the Patient Overall Rating
      of
      Improvement of Symptoms questionnaire, a measurement tool used in clinical
      trials of chronic pelvic pain. In this study, the difference between the URG101
      treatment group and the placebo group did not achieve statistical significance
      for the primary endpoint of the study.




We
      believe the overall results of the clinical trial may have been compromised
      by
      issues relating to patient selection. Furthermore, we believe that incorporation
      of appropriate protocol changes may allow us to achieve positive results in
      subsequent trials. Other exploratory endpoints were either statistically
      significant or trended in that direction, such as improvement in urgency with
      one treatment and a trend toward improvement in bladder pain with one treatment.
      In addition, we have identified important and significant changes to the study
      treatment protocol, such as requiring minimum pain and urgency scores upon
      entry
      that will be incorporated and tested in a single dose, placebo-controlled
      cross-over pharmacodynamic study. This pharmacodynamic study is planned to
      be
      completed as the next clinical step in the development of URG101; however,
      there
      can be no assurance that we will be able to achieve the primary endpoint in
      this
      study or that URG101 will otherwise be successfully developed into a commercial
      product.




**We
      are subject to substantial government regulation, which could materially
      adversely affect our business.**




The
      production and marketing of our potential products and our ongoing research
      and
      development, pre-clinical testing and clinical trial activities are currently
      subject to extensive regulation and review by numerous governmental authorities
      in the United States and will face similar regulation and review for overseas
      approval and sales from governmental authorities outside of the United States.
      All of the products we are currently developing must undergo rigorous
      pre-clinical and clinical testing and an extensive regulatory approval process
      before they can be marketed. This process makes it longer, harder and more
      costly to bring our potential products to market, and we cannot guarantee that
      any of our potential products will be approved. The pre-marketing approval
      process can be particularly expensive, uncertain and lengthy, and a number
      of
      products for which FDA approval has been sought by other companies have never
      been approved for marketing. In addition to testing and approval procedures,
      extensive regulations also govern marketing, manufacturing, distribution,
      labeling, and record-keeping procedures. If we or our business partners do
      not
      comply with applicable regulatory requirements, such violations could result
      in
      non-approval, suspensions of regulatory approvals, civil penalties and criminal
      fines, product seizures and recalls, operating restrictions, injunctions, and
      criminal prosecution.




19




Withdrawal
      or rejection of FDA or other government entity approval of our potential
      products may also adversely affect our business. Such rejection may be
      encountered due to, among other reasons, lack of efficacy during clinical
      trials, unforeseen safety issues, inability to follow patients after treatment
      in clinical trials, inconsistencies between early clinical trial results and
      results obtained in later clinical trials, varying interpretations of data
      generated by clinical trials, or changes in regulatory policy during the period
      of product development in the United States and abroad. In the United States,
      there is stringent FDA oversight in product clearance and enforcement
      activities, causing medical product development to experience longer approval
      cycles, greater risk and uncertainty, and higher expenses. Internationally,
      there is a risk that we may not be successful in meeting the quality standards
      or other certification requirements. Even if regulatory approval of a product
      is
      granted, this approval may entail limitations on uses for which the product
      may
      be labeled and promoted, or may prevent us from broadening the uses of our
      current potential products for different applications. In addition, we may
      not
      receive FDA approval to export our potential products in the future, and
      countries to which potential products are to be exported may not approve them
      for import.




Manufacturing
      facilities for our products will also be subject to
      continual governmental review and inspection. The FDA has stated publicly that
      compliance with manufacturing regulations will continue to be strictly
      scrutinized. To the extent we decide to manufacture our own products, a
      governmental authority may challenge our compliance with applicable federal,
      state and foreign regulations. In addition, any discovery of previously unknown
      problems with one of our potential products or facilities may result in
      restrictions on the potential product or the facility. If we decide to outsource
      the commercial production of our products, any challenge by a regulatory
      authority of the compliance of the manufacturer could hinder our ability to
      bring our products to market.




From
      time
      to time, legislative or regulatory proposals are introduced that could alter
      the
      review and approval process relating to medical products. It is possible that
      the FDA or other governmental authorities will issue additional regulations
      which would further reduce or restrict the sales of our potential products.
      Any
      change in legislation or regulations that govern the review and approval process
      relating to our potential and future products could make it more difficult
      and
      costly to obtain approval for these products.




**We
      rely on third parties to assist us in conducting clinical trials. If these
      third
      parties do not successfully carry out their contractual duties or meet expected
      deadlines, we may not be able to obtain regulatory approval for or commercialize
      our product candidates.**




Like
      many
      companies our size, we do not have the ability to conduct preclinical or
      clinical studies for our product candidates without the assistance of third
      parties who conduct the studies on our behalf. These third parties are usually
      toxicology facilities and clinical research organization, or CROs that have
      significant resources and experience in the conduct of pre-clinical and clinical
      studies. The toxicology facilities conduct the pre-clinical safety studies
      as
      well as all associated tasks connected with these studies. The CROs typically
      perform patient recruitment, project management, data management, statistical
      analysis, and other reporting functions.




Third
      parties that we use, and have used in the past, to conduct clinical trials
      include Clinimetrics Research Canada, Inc. and Cardinal Health PTS, LLC. We
      intend to continue to rely on third parties to conduct clinical trials of our
      product candidates and to use different toxicology facilities and CROs for
      all
      of our pre-clinical and clinical studies.




20




Our
      reliance on these third parties for development activities reduces our control
      over these activities. If these third parties do not successfully carry out
      their contractual duties or obligations or meet expected deadlines, or if the
      quality or accuracy of the clinical data they obtain is compromised due to
      the
      failure to adhere to our clinical protocols or for other reasons, our clinical
      trials may be extended, delayed or terminated. If these third parties do not
      successfully carry out their contractual duties or meet expected deadlines,
      we
      may be required to replace them. Although we believe there are a number of
      third-party contractors we could engage to continue these activities, replacing
      a third-party contractor may result in a delay of the affected trial.
      Accordingly, we may not be able to obtain regulatory approval for or
      successfully commercialize our product candidates.




**Delays
      in the commencement or completion of clinical testing of our product candidates
      could result in increased costs to us and delay our ability to generate
      significant revenues.**




Delays
      in
      the commencement or completion of clinical testing could significantly impact
      our product development costs. We do not know whether current or planned
      clinical trials will begin on time or be completed on schedule, if at all.
      The
      commencement of clinical trials can be delayed for a variety of reasons,
      including delays in:




·
            obtaining
                regulatory approval to commence a clinical
                trial;




·
            reaching
                agreement on acceptable terms with prospective contract research
                organizations and clinical trial
                sites;




·
            obtaining
                sufficient quantities of clinical trial materials for any or all
                product
                candidates;





·
            obtaining
                institutional review board approval to conduct a clinical trial at
                a
                prospective site; and




·
            recruiting
                participants for a clinical trial.




In
      addition, once a clinical trial has begun, it may be suspended or terminated
      by
      us or the FDA or other regulatory authorities due to a number of factors,
      including:




·
            failure
                to conduct the clinical trial in accordance with regulatory
                requirements;




·
            inspection
                of the clinical trial operations or clinical trial site by the FDA
                or
                other regulatory authorities resulting in the imposition of a clinical
                hold; or




·
            lack
                of adequate funding to continue the clinical
                trial.




Clinical
      trials require sufficient participant enrollment, which is a function of many
      factors, including the size of the target population, the nature of the trial
      protocol, the proximity of participants to clinical trial sites, the
      availability of effective treatments for the relevant disease, the eligibility
      criteria for our clinical trials and competing trials. Delays in enrollment
      can
      result in increased costs and longer development times. Our failure to enroll
      participants in our clinical trials could delay the completion of the clinical
      trials beyond current expectations. In addition, the FDA could require us to
      conduct clinical trials with a larger number of participants than it may project
      for any of our product candidates. As a result of these factors, we may not
      be
      able to enroll a sufficient number of participants in a timely or cost-effective
      manner.




21




Furthermore,
      enrolled participants may drop out of clinical trials, which could impair the
      validity or statistical significance of the clinical trials. A number of factors
      can influence the discontinuation rate, including, but not limited to: the
      inclusion of a placebo in a trial; possible lack of effect of the product
      candidate being tested at one or more of the dose levels being tested; adverse
      side effects experienced, whether or not related to the product candidate;
      and
      the availability of numerous alternative treatment options that may induce
      participants to discontinue from the trial.




The
      Company, the FDA or other applicable regulatory authorities may suspend clinical
      trials of a product candidate at any time if we or they believe the participants
      in such clinical trials, or in independent third-party clinical trials for
      drugs
      based on similar technologies, are being exposed to unacceptable health risks
      or
      for other reasons.




**We
      do not have commercial-scale manufacturing capability, and we lack
      commercial manufacturing experience.**




If
      we are
      successful in achieving regulatory approval and developing the markets for
      our
      potential products, we would have to arrange for its scaled-up manufacture
      of
      our products. At the present time, we have not arranged for the large-scale
      manufacture of our products. There can be no assurance that we will, on a timely
      basis, be able to make the transition from manufacturing clinical trial
      quantities to commercial production quantities successfully or be able to
      arrange for contract manufacturing. We believe one or more contractors will
      be
      able to manufacture our products for initial commercialization if the products
      obtain FDA and other regulatory approvals. Potential difficulties in
      manufacturing our products, including scale-up, recalls or safety alerts, could
      have a material adverse effect on our business, financial condition, and results
      of operations.




Our
      products can only be manufactured in a facility that has undergone a
      satisfactory inspection by the FDA and other relevant regulatory authorities.
      For these reasons, we may not be able to replace manufacturing capacity for
      our
      products quickly if we or our contract manufacturer(s) are unable to use
      manufacturing facilities as a result of a fire, natural disaster (including
      an
      earthquake), equipment failure, or other difficulty, or if such facilities
      were
      deemed not in compliance with the regulatory requirements and such
      non-compliance could not be rapidly rectified. An inability or reduced capacity
      to manufacture our products would have a material adverse effect on our
      business, financial condition, and results of operations.




We
      expect
      to enter into definitive and perhaps additional arrangements with contract
      manufacturing companies in order to secure the production of our products or
      to
      attempt to improve manufacturing costs and efficiencies. If we are unable to
      enter into definitive agreements for manufacturing services and encounters
      delays or difficulties in finalizing or otherwise establishing relationships
      with manufacturers to produce, package, and distribute our products, then market
      introduction and subsequent sales of such products would be adversely
      affected.




**If
      we fail to obtain acceptable prices or appropriate
      reimbursement for our products, our ability to successfully commercialize our
      products will be impaired.**




Government
      and insurance reimbursements for healthcare expenditures play an important
      role
      for all healthcare providers, including physicians and pharmaceutical companies
      such as ours, which plan to offer various products in the United States and
      other countries in the future. Our ability to earn sufficient returns on our
      potential products will depend in part on the extent to which reimbursement
      for
      the costs of such products will be available from government health
      administration authorities, private health coverage insurers, managed care
      organizations, and other organizations. In the United States, our ability to
      have our products eligible for Medicare, Medicaid or private insurance
      reimbursement will be an important factor in determining the ultimate success
      of
      our products. If, for any reason, Medicare, Medicaid or the insurance companies
      decline to provide reimbursement for our products, our ability to commercialize
      our products would be adversely affected. There can be no assurance that our
      potential drug products will be eligible for reimbursement.




22




There
      has
      been a trend toward declining government and private insurance expenditures
      for
      many healthcare items. Third-party payors are increasingly challenging the
      price
      of medical and pharmaceutical products.




If
      purchasers or users of our products and related treatments are not able to
      obtain appropriate reimbursement for the cost of using such products, they
      may
      forgo or reduce such use. Even if our products are approved for reimbursement
      by
      Medicare, Medicaid and private insurers, of which there can be no assurance,
      the
      amount of reimbursement may be reduced at times, or even eliminated. This would
      have a material adverse effect on our business, financial condition and results
      of operations.




Significant
      uncertainty exists as to the reimbursement status of newly approved
      pharmaceutical products, and there can be no assurance that adequate third-party
      coverage will be available.




**We
      have limited sales, marketing and distribution experience.**




We
      have
      very limited experience in the sales, marketing, and distribution of
      pharmaceutical products. There can be no assurance that we will be able to
      establish sales, marketing, and distribution capabilities or make arrangements
      with our current collaborators or others to perform such activities or that
      such
      effort will be successful. If we decide to market any of our products directly,
      we must either acquire or internally develop a marketing and sales force with
      technical expertise and with supporting distribution capabilities. The
      acquisition or development of a sales, marketing and distribution infrastructure
      would require substantial resources, which may not be available to us or, even
      if available, divert the attention of our management and key personnel, and
      have
      a negative impact on further product development efforts.




**We
      intend to seek additional collaborative arrangements to develop and
      commercialize our products. These collaborations, if secured, may not be
      successful.**




We
      intend
      to seek additional collaborative arrangements to develop and commercialize
      some
      of our potential products, including URG101 in North America and Europe. There
      can be no assurance that we will be able to negotiate collaborative arrangements
      on favorable terms or at all or that our current or future collaborative
      arrangements will be successful.




Our
      strategy for the future research, development, and commercialization of our
      products is based on entering into various arrangements with corporate
      collaborators, licensors, licensees, health care institutions and principal
      investigators and others, and our commercial success is dependent upon these
      outside parties performing their respective contractual obligations responsibly
      and with integrity. The amount and timing of resources such third parties will
      devote to these activities may not be within our control. There can be no
      assurance that such parties will perform their obligations as expected. There
      can be no assurance that our collaborators will devote adequate resources to
      our
      products.




**If
      our product candidates do not gain market acceptance, we may
      be unable to generate significant revenues.**




Even
      if
      our products are approved for sale, they may not be successful in the
      marketplace. Market acceptance of any of our products will depend on a number
      of
      factors, including demonstration of clinical effectiveness and safety; the
      potential advantages of our products over alternative treatments; the
      availability of acceptable pricing and adequate third-party reimbursement;
      and
      the effectiveness of marketing and distribution methods for the products. If
      our
      products do not gain market acceptance among physicians, patients, and others
      in
      the medical community, our ability to generate significant revenues from our
      products would be limited.




23




**If
      we are not successful in acquiring or licensing additional product candidates
      on
      acceptable terms, if at all, our business may be adversely
      affected.**




As
      part
      of our strategy, we may acquire or license additional product candidates for
      treatment of urinary tract disorders. We may not be able to identify promising
      urinary tract product candidates. Even if we are successful in identifying
      promising product candidates, we may not be able to reach an agreement for
      the
      acquisition or license of the product candidates with their owners on acceptable
      terms or at all.




We
      intend
      to in-license, acquire, develop and market additional products and product
      candidates so that we are not solely reliant on URG101, URG301 and URG302 sales
      for our revenues. Because we have limited internal research capabilities, we
      are
      dependent upon pharmaceutical and biotechnology companies and other researchers
      to sell or license products or technologies to us. The success of this strategy
      depends upon our ability to identify, select and acquire the right
      pharmaceutical product candidates, products and technologies.




We
      may
      not be able to successfully identify any other commercial products or product
      candidates to in-license, acquire or internally develop. Moreover, negotiating
      and implementing an economically viable in-licensing arrangement or acquisition
      is a lengthy and complex process. Other companies, including those with
      substantially greater resources, may compete with us for the in-licensing or
      acquisition of product candidates and approved products. We may not be able
      to
      acquire or in-license the rights to additional product candidates and approved
      products on terms that we find acceptable, or at all. If we are unable to
      in-license or acquire additional commercial products or product candidates,
      we
      may be reliant solely on URG101, URG301 and URG302 sales for revenue. As a
      result, our ability to grow our business or increase our profits could be
      severely limited.




**If
      our efforts to develop new product candidates do not succeed, and product
      candidates that we recommend for clinical development do not actually begin
      clinical trials, our business will suffer.**




We
      intend
      to use our proprietary licenses and expertise in urethral tract disorders to
      develop and commercialize new products for the treatment and prevention of
      urological disorders. Once recommended for development, a candidate undergoes
      drug substance scale up, preclinical testing, including toxicology tests, and
      formulation development. If this work is successful, an IND, would need to
      be
      prepared, filed, and approved by the FDA and the product candidate would then
      be
      ready for human clinical testing.




The
      process of developing new drugs and/or therapeutic products is inherently
      complex, time-consuming, expensive and uncertain. We must make long-term
      investments and commit significant resources before knowing whether our
      development programs will result in products that will receive regulatory
      approval and achieve market acceptance. Product candidates that may appear
      to be
      promising at early stages of development may not reach the market for a number
      of reasons. In addition, product candidates may be found ineffective or may
      cause harmful side effects during clinical trials, may take longer to progress
      through clinical trials than had been anticipated, may not be able to achieve
      the pre-defined clinical endpoint due to statistical anomalies even though
      clinical benefit was achieved, may fail to receive necessary regulatory
      approvals, may prove impracticable to manufacture in commercial quantities
      at
      reasonable cost and with acceptable quality, or may fail to achieve market
      acceptance. To date, our development efforts have been focused on URG101 for
      PBS. While we have experience in developing urethral suppositories, our
      development efforts for URG301 and URG302 have just begun. There can be no
      assurance that we will be successful with the limited knowledge and resources
      we
      have available at the present time.




24




All
      of our product candidates are in preclinical or clinical
      development and have not received regulatory approval from the FDA or any
      foreign regulatory authority. An IND has been filed and is effective for URG101
      for the treatment of chronic pelvic pain, which is currently in Phase II
      clinical trial; however, an IND has not been filed for URG301 or URG302.
      Typically, the regulatory approval process is extremely expensive, takes many
      years to complete and the timing or likelihood of any approval cannot be
      accurately predicted.




As
      part
      of the regulatory approval process, we must conduct preclinical studies and
      clinical trails for each product candidate to demonstrate safety and efficacy.
      The number of preclinical studies and clinical trials that will be required
      varies depending on the product candidate, the indication being evaluated,
      the
      trial results and regulations applicable to any particular product
      candidate.




The
      results of preclinical studies and initial clinical trials of our product
      candidates do not necessarily predict the results of later-stage clinical
      trails. Product candidates in later stages of clinical trials may fail to show
      the desired safety and efficacy despite having progressed through initial
      clinical trails. We cannot assure you that the data collected from the
      preclinical studies and clinical trails of our product candidates will be
      sufficient to support FDA or other regulatory approval. In addition, the
      continuation of a particular study after review by an institutional review
      board
      or independent data safety monitoring board does not necessarily indicate that
      our product candidate will achieve the clinical endpoint.




The
      FDA
      and other regulatory agencies can delay, limit or deny approval for many
      reasons, including:




·
            changes
                to the regulatory approval process for product candidates in those
                jurisdictions, including the United States, in which we may be seeking
                approval for our product
                candidates;




·
            a
                product candidate may not be deemed to be safe or
                effective;




·
            the
                ability of the regulatory agency to provide timely responses as a
                result
                of its resource constraints;




·
            the
                manufacturing processes or facilities may not meet the applicable
                requirements; and




·
            changes
                in their approval policies or adoption of new regulations may require
                additional clinical trials or other
                data.




Any
      delay
      in, or failure to receive, approval for any of our product candidates or the
      failure to maintain regulatory approval could prevent us from growing our
      revenues or achieving profitability.




**Our
      potential international business would expose us to a number of
      risks.**




We
      anticipate that a substantial amount of future sales of our potential products
      will be derived from international markets. Accordingly, any failure to achieve
      substantial foreign sales could have a material adverse effect on our overall
      sales and profitability. Depreciation or devaluation of the local currencies
      of
      countries where we sell our products may result in these products becoming
      more
      expensive in local currency terms, thus reducing demand, which could have an
      adverse effect on our operating results. Our ability to engage in non-United
      States operations and the financial results associated with any such operations
      also may be significantly affected by other factors, including:




·
            foreign
                government regulatory authorities;




·
            product
                liability, intellectual property and other
                claims;




·
            export
                license requirements;




25




·
            political
                or economic instability in our target
                markets;




·
            trade
                restrictions;




·
            changes
                in tax laws and tariffs;




·
            managing
                foreign distributors and
                manufacturers;




·
            managing
                foreign branch offices and staffing;
                and




·
            competition.




If
      these
      risks actually materialize, our anticipated sales to international customers
      may
      decrease or not be realized at all.




**Competition
      in our target markets is intense, and developments by other companies could
      render our product candidates obsolete.**




The
      pharmaceutical industry is not a static environment, and market share can change
      rapidly if competing products are introduced. While we believe we are in the
      process of developing products unique in the delivery and application for
      treatment of urological maladies, we face competition from
      Ortho-McNeil, Inc., BioNiche, Inc., Plethora Solutions Ltd., and SJ
      Pharmaceuticals, Inc., among others, who have either already developed or
      are in the process of developing products similar to ours. Further, there can
      be
      no assurance that we can avoid intense competition from other medical technology
      companies, pharmaceutical or biotechnology companies, universities, government
      agencies, or research organizations that might decide to develop products
      similar to ours. Many of these existing and potential competitors have
      substantially greater financial and/or other resources. Our competitors may
      succeed in developing technologies and products that are more effective or
      cheaper to use than any that we may develop. These developments could render
      our
      products obsolete and uncompetitive, which would have a material adverse effect
      on our business, financial condition and results of operations.




**If
      we suffer negative publicity concerning the safety of our products in
      development, our sales may be harmed and we may be forced to withdraw such
      products.**




If
      concerns should arise about the safety of our products once developed and
      marketed, regardless of whether or not such concerns have a basis in generally
      accepted science or peer-reviewed scientific research, such concerns could
      adversely affect the market for these products. Similarly, negative publicity
      could result in an increased number of product liability claims, whether or
      not
      these claims are supported by applicable law.




**Adverse
      events in the field of drug therapies may negatively impact regulatory
      approval or public perception of our potential products and
      technologies.**




The
      FDA
      may become more restrictive regarding the conduct of clinical trials
      including urological and other therapies. This approach by the FDA could lead
      to
      delays in the timelines for regulatory review, as well as potential delays
      in
      the conduct of clinical trials. In addition, negative publicity may affect
      patients’ willingness to participate in clinical trials. If fewer patients are
      willing to participate in clinical trials, the timelines for recruiting patients
      and conducting such trials will be delayed.




26




**If
      our intellectual property rights do not adequately protect our products, others
      could compete against us more directly, which would hurt our
      profitability.**




Our
      success depends in part on our ability to obtain patents or rights to patents,
      protect trade secrets, operate without infringing upon the proprietary rights
      of
      others, and prevent others from infringing on our patents, trademarks and other
      intellectual property rights. We will be able to protect our intellectual
      property from unauthorized use by third parties only to the extent that it
      is
      covered by valid and enforceable patents, trademarks or licenses. Patent
      protection generally involves complex legal and factual questions and,
      therefore, enforceability of patent rights cannot be predicted with certainty;
      thus, any patents that we own or licenses from others may not provide us with
      adequate protection against competitors. Moreover, the laws of certain foreign
      countries do not recognize intellectual property rights or protect them to
      the
      same extent as do the laws of the United States.




In
      addition to patents and trademarks, we rely on trade secrets
      and proprietary know-how. We seek protection of these rights, in part, through
      confidentiality and proprietary information agreements. These agreements may
      not
      provide sufficient protection or adequate remedies for violation of our rights
      in the event of unauthorized use or disclosure of confidential and proprietary
      information. Failure to protect our proprietary rights could seriously impair
      our competitive position.




**If
      third parties claim we are infringing their intellectual property rights, we
      could suffer significant litigation or licensing expenses or be prevented from
      marketing our products.**




Any
      future commercial success by the Company depends significantly on our ability
      to
      operate without infringing on the patents and other proprietary rights of
      others. However, regardless of the Company’s intent, our potential products may
      infringe upon the patents or violate other proprietary rights of third parties.
      In the event of such infringement or violation, we may face expensive litigation
      and may be prevented from pursuing product development or commercialization
      of
      our potential products or selling our products.




**Litigation
      may harm our business or otherwise distract our
      management.**




Substantial,
      complex or extended litigation could cause us to incur large expenditures and
      distract our management, and could result in significant monetary or equitable
      judgments against us. For example, lawsuits by employees, patients, customers,
      licensors, licensees, suppliers, distributors, stockholders, or competitors
      could be very costly and substantially disrupt our business. Disputes from
      time
      to time with such companies or individuals are not uncommon, and we cannot
      assure that we will always be able to resolve such disputes out of court or
      on
      terms favorable to us.




In
      previous years, there has been significant litigation in the United States
      involving patents and other intellectual property rights. Competitors in the
      biotechnology industry may use intellectual property litigation against us
      to gain advantage. In the future, we may be a party to litigation to
      protect our intellectual property or as a result of an alleged infringement
      of
      others’ intellectual property. These claims and any resulting lawsuit, if
      successful, could subject us to significant liability for damages and
      invalidation of our proprietary rights. Any potential intellectual property
      litigation, if successful, also could force us to stop selling, incorporating
      or
      using our potential products that use the challenged intellectual property;
      obtain from the owner of the infringed intellectual property right a license
      to
      sell or use the relevant technology, which license may not be available on
      reasonable terms, or at all; or redesign our potential products that use the
      technology. We may also be required in the future to initiate claims or
      litigation against third parties for infringement of our intellectual property
      rights to protect such rights or determine the scope or validity of our
      intellectual property or the rights of our competitors. The pursuit of these
      claims could result in significant expenditures and the diversion of our
      technical and management personnel and we may not have sufficient cash and
      manpower resources to pursue any such claims. If we are forced to take any
      of
      these actions, our business may be seriously harmed.




27


Any
      claims, with or without merit, and regardless of whether we prevail in the
      dispute, would be time-consuming, could result in costly litigation and the
      diversion of technical and management personnel and could require us to develop
      non-infringing technology or to enter into royalty or licensing agreements.
      An
      adverse determination in a judicial or administrative proceeding and failure
      to
      obtain necessary licenses or develop alternate technologies could prevent us
      from developing and selling our potential products, which would have a material
      adverse effect on our business, results of operations and financial
      condition.







**If
      we fail to attract and keep key management and scientific personnel, we may
      be
      unable to develop or commercialize our product candidates
      successfully.**




Our
      success depends on our continued ability to attract, retain and motivate highly
      qualified management and scientific personnel. The loss of the services of
      any
      principal member of our senior management, including William J. Garner,
      Chief Executive Officer, Martin E. Shmagin, Chief Financial Officer, and
      Terry M. Nida, Chief Operating Officer, could delay or prevent the
      commercialization of our product candidates. We employ these individuals on
      an
      at-will basis and their employment can be terminated by us or them at any time,
      for any reason and with or without notice, subject to the terms contained in
      their employment offer letters.




Competition
      for qualified personnel in the biotechnology field is intense. We may not be
      able to attract and retain quality personnel on acceptable terms given the
      competition for such personnel among biotechnology, pharmaceutical and other
      companies.




We
      have
      established a scientific advisory board consisting of C. Lowell Parsons, M.D.
      who is Chairman and Professor of the Department of Urology at the University
      of
      California, San Diego and S. Grant Mulholland, M.D. who is Chair Emeritus of
      Urology at Jefferson Medical College of Thomas Jefferson
      University.  These members assist us in formulating research and
      development strategies. These scientific advisors are not our employees and
      may
      have commitments to, or consulting or advisory contracts with, other entities
      that may limit their availability to us. The failure of our scientific advisors
      to devote sufficient time and resources to our programs could harm our business.
      In addition, our scientific advisors may have arrangements with other companies
      to assist those companies in developing products or technologies that may
      compete with our products.







**If
      our primary product candidate, URG101, or any of our other product candidates,
      cannot be shown to be safe and effective in clinical trials, are not approvable
      or not commercially successful, then the benefits of the Merger may not be
      realized. Our Phase IIb clinical trial of URG101 did not meet its primary
      endpoint. We cannot guarantee that URG101, or any other of our product
      candidates, will be successful in any future clinical trials and any future
      clinical trial of URG101, or any other of our product candidate, would require
      substantial additional capital, which may not be available on commercially
      reasonable terms, or at all.**




Following
      the Merger, our primary product candidate is URG101. URG101 and our other
      product candidates are subject to all of the risks attendant to any drug and
      biologic product candidate. For instance, any of our product candidates must
      be
      rigorously tested in clinical trials, and shown to be safe and effective before
      the FDA, or its foreign counterparts, will consider them for approval. Failure
      to demonstrate that our product candidates, especially URG101, are safe and
      effective, or significant delays in demonstrating safety and efficacy, would
      diminish the anticipated benefits of the Merger. Moreover, once approved for
      sale, if ever, any product must be successfully commercialized. Failure to
      successfully commercialize one or more of our current product candidates would
      also diminish the anticipated benefits of the Merger.




28




As
      stated
      above, on October 30, 2006, Urigen N.A. announced that URG101 did not meet
      the primary endpoint in a Phase II clinical trial in chronic pelvic pain of
      bladder origin. Urigen N.A. announced that the primary endpoint in this study
      was improvement in pain and urgency at the end of the study as monitored by
      the
      Patient Overall Rating of Improvement of Symptoms questionnaire, a measurement
      tool used in clinical trials of chronic pelvic pain. We believe the overall
      results of the clinical trial may have been compromised by issues relating
      to
      patient selection. Furthermore, we believe that incorporation of appropriate
      protocol changes may allow it to achieve positive results in subsequent
      trials.




If
      URG101, or any of our other product candidates, cannot be shown to be safe
      and
      effective in clinical trials, are not approvable or not commercially successful,
      then the benefits of the Merger may not be realized, which would materially
      adversely affect our business.




**We**may
      not achieve projected development goals in the time frame we announce and
      expect.**




We
      may
      set goals for and make public statements regarding timing of the accomplishment
      of objectives material to its success, such as the commencement and completion
      of clinical trials, anticipated regulatory approval dates, and time of product
      launch. The actual timing of these events can vary dramatically due to factors
      such as delays or failures in its clinical trials, the uncertainties inherent
      in
      the regulatory approval process, and delays in achieving product development,
      manufacturing or marketing milestones necessary to commercialize the combined
      company’s products. There can be no assurance that our clinical trials will be
      completed, that we will make regulatory submissions or receive regulatory
      approvals as planned, or that the combined company will be able to adhere to
      its
      current schedule for the scale-up of manufacturing and launch of any of its
      products. If we fail to achieve one or more of these milestones as planned,
      the
      price of our common shares could decline.




**We
      face potential Canadian tax liability related to Urigen N.A.’s continuation from
      British Columbia to the State of Delaware.**




For
      Canadian income tax purposes, there will be a deemed
      disposition at fair market value of all of Urigen N.A.’s assets owned
      immediately before Urigen N.A. continued into Delaware. Any gains resulting
      from
      this disposition will be included in income in Urigen N.A.’s final Canadian
      income tax return. To the extent Urigen N.A. does not have sufficient losses
      for
      income tax purposes to shelter the gains, a Canadian tax liability will
      result.




In
      addition, to the extent the fair market value of the assets exceeds Urigen
      N.A.’s debts and the paid up capital of Urigen N.A.’s common stock immediately
      before the continuance, Urigen N.A. will be subject to an additional tax at
      the
      same rate as if a dividend had been paid by Urigen N.A.






**We
      will need to obtain additional financing in order to continue our operations,
      which financing might not be available or which, if it is available, may be
      on terms that are not favorable to us.**




Our
      ability to engage in future development and clinical testing of our potential
      products will require substantial additional financial resources. We currently
      use approximately $200,000 per month to operate our business and we believe
      we
      have sufficient cash to continue our operations until February 2008. Our future
      funding requirements will depend on many factors, including:




·
            Our
                financial condition;




·
            timing
                and outcome of the Phase II clinical trials for
                URG101;




·
            developments
                related to our collaboration agreements, license agreements, academic
                licenses and other material
                agreements;




29




·
            our
                ability to establish and maintain corporate
                collaborations;




·
            the
                time and costs involved in filing, prosecuting and enforcing patent
                claims; and




·
            competing
                pharmacological and market
                developments.




We
      may have insufficient working capital to fund our cash needs unless we are
      able to raise additional capital in the future. We have financed our operations
      to date primarily through the sale of equity securities and through corporate
      collaborations. If we raise additional funds by issuing equity securities,
      substantial dilution to our stockholders may result. We may not be
      able to obtain additional financing on acceptable terms, or at all. Any failure
      to obtain an adequate and timely amount of additional capital on commercially
      reasonable terms will have a material adverse effect on our business and
      financial condition, including our viability as an enterprise. As a result
      of
      these concerns, our management is assessing, and may pursue, in addition to
      the Merger, other strategic opportunities, including the sale of our securities
      or other actions.






**If
      we are unable to complete our assessment as to the adequacy of our internal
      control over financial reporting within the required time periods as required
      by
      Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such
      assessments identify and report material weaknesses in our controls, investors
      could lose confidence in the reliability of our financial statements, which
      could result in a decrease in the value of our common
      stock.**




As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities
      and Exchange Commission adopted rules requiring public companies to include
      a report of management on internal control over financial reporting in their
      Annual Reports on Form 10-K. This report is required to contain an
      assessment by management of the effectiveness of a company’s internal control
      over financial reporting. In addition, the independent registered public
      accounting firm auditing a public company’s financial statements must attest to
      and report on management’s assessment of the effectiveness of the company’s
      internal control over financial reporting. Our current non-affiliated market
      capitalization qualifies us as a non-accelerated filer. As such, we are required
      to comply with the Section 404 requirements beginning with the fiscal year
      that ends June 30, 2008. We intend to diligently and vigorously assess
      (and enhance as may be appropriate) our internal control over financial
      reporting in order to ensure compliance with the Section 404 requirements.
      We anticipate expending significant resources in developing the necessary
      documentation and testing procedures required by Section 404, however,
      there is a risk that we will not comply with all of the requirements imposed
      by
      Section 404. In addition, the very limited size of our organization could
      lead to conditions that could be considered material weaknesses, such as those
      related to segregation of duties, that is possible in larger organizations
      but
      significantly more difficult in smaller organizations. Also, controls related
      to
      our general information technology infrastructure may not be as
      comprehensive as in the case of a larger organization with more sophisticated
      capabilities and more extensive resources. It is not clear how such
      circumstances should be interpreted in the context of an assessment of internal
      control over financial reporting. If we fail to implement required new or
      improved controls, we may be unable to comply with the requirements of
      Section 404 in a timely manner, which may result in our independent
      registered public accounting firm issuing a qualified or adverse report on
      our
      internal control over financial reporting. This could result in an adverse
      reaction in the financial markets due to a loss of confidence in the reliability
      of our financial statements, which could cause the market price of our common
      stock to decline.








**We
      may continue to incur losses for the foreseeable future, and might never achieve
      profitability.**




We
      may
      never become profitable, even if we are able to commercialize additional
      products. We will need to conduct significant research, development, testing
      and
      regulatory compliance activities that, together with projected general and
      administrative expenses, is expected to result in substantial increase in
      operating losses for at least the next several years. Even if we achieve
      profitability, we may not be able to sustain or increase profitability on a
      quarterly or annual basis.




30




**Our
      stock**price is expected to be volatile, and the
      market price of our common stock may drop following the
      Merger.**




The
      market price of our common stock is subject to significant fluctuations. Market
      prices for securities of early-stage pharmaceutical, biotechnology and other
      life sciences companies have historically been particularly volatile. Some
      of
      the factors that may cause the market price of our common stock to fluctuate
      include:




·
            the
                results of our current and any future clinical trials of its product
                candidates;




·
            the
                results of ongoing preclinical studies and planned clinical trials
                of our
                preclinical product candidates;




·
            the
                entry into, or termination of, key agreements, including, among others,
                key collaboration and license
                agreements;




·
            the
                results and timing of regulatory reviews relating to the approval
                of our
                product candidates;




·
            the
                initiation of, material developments or conclusion of litigation to
                enforce or defend any of our intellectual property
                rights;




·
            failure
                of any of our product candidates, if approved, to achieve commercial
                success;




·
            general
                and industry-specific economic conditions that may affect our research
                and
                development expenditures;




·
            the
                results of clinical trials conducted by others on drugs that would
                compete
                with our product candidates;




·
            issues
                in manufacturing our product candidates or any approved
                products;




·
            the
                loss of key employees;




·
            the
                introduction of technological innovations or new commercial products
                by
                our competitors;




·
            changes
                in estimates or recommendations by securities analysts, if any, who
                cover
                our common stock;




·
            future
                sales of our common stock; and




·
            period-to-period
                fluctuations in our financial
                results.




Moreover,
      the stock markets in general have experienced substantial volatility that has
      often been unrelated to the operating performance of individual companies.
      These
      broad market fluctuations may also adversely affect the trading price of our
      common stock.




31




In
      the
      past, following periods of volatility in the market price of a company’s
      securities, stockholders have often instituted class action securities
      litigation against those companies. Such litigation, if instituted, could result
      in substantial costs and diversion of management attention and resources, which
      could significantly harm our financial position, results of operations and
      reputation.




**Our
      common stock is quoted on the OTC Bulletin Board. As a result, our common stock
      is subject to trading restrictions as a “penny stock,” which could adversely
      affect the liquidity and price of such stock.**




Our
      common stock has been quoted on the OTC Bulletin Board since June 19, 2007.
      Because our common stock is not listed on any national securities exchange,
      our
      shares are subject to the regulations regarding trading in “penny stocks,” which
      are those securities trading for less than $5.00 per share. The following is
      a
      list of the general restrictions on the sale of penny stocks:




·
            Prior
                to the sale of penny stock by a broker-dealer to a new purchaser,
                the
                broker-dealer must determine whether the purchaser is suitable to
                invest
                in penny stocks. To make that determination, a broker-dealer must
                obtain,
                from a prospective investor, information regarding the purchaser's
                financial condition and investment experience and objectives.
                Subsequently, the broker-dealer must deliver to the purchaser a written
                statement setting forth the basis of the suitability finding and
                obtain
                the purchaser’s signature on such
                statement.




·
            A
                broker-dealer must obtain from the purchaser an agreement to purchase
                the
                securities. This agreement must be obtained for every purchase until
                the
                purchaser becomes an “established customer.” A broker-dealer may not
                effect a purchase of a penny stock less than two business days after
                a
                broker-dealer sends such agreement to the
                purchaser.




·
            The
                Exchange Act requires that prior to effecting any transaction in
                any penny
                stock, a broker-dealer must provide the purchaser with a “risk disclosure
                document” that contains, among other things, a description of the penny
                stock market and how it functions and the risks associated with such
                investment. These disclosure rules are applicable to both purchases
                and
                sales by investors.




·
            A
                dealer that sells penny stock must send to the purchaser, within
                ten days
                after the end of each calendar month, a written account statement
                including prescribed information relating to the
                security.




These
      requirements can severely limit the liquidity of securities in the secondary
      market because few brokers or dealers are likely to be willing to undertake
      these compliance activities. Because our common stock is subject to the rules
      and restrictions regarding penny stock transactions, an investor’s ability to
      sell to a third party and our ability to raise additional capital may be
      limited. We make no guarantee that our market-makers will make a market in
      our
      common stock, or that any market for our common stock will
      continue.




**Our
      stock price could be adversely affected by dispositions of our shares pursuant
      to registration statements currently in effect.**




Some
      of
      our current stockholders hold a substantial number of shares, which they are
      currently able to sell in the public market under certain registration
      statements currently in effect, or otherwise. Sales of a substantial number
      of
      our shares or the perception that these sales may occur, could cause the
      trading price of our common stock to fall and could impair our ability to raise
      capital through the sale of additional equity securities.




As
      of
      June 30, 2007, we had issued and outstanding 17,062,856 shares of our
      common stock. This amount does not include, as of
      June 30, 2007:




·
                approximately 2.6 million shares of our common stock issuable upon
                the exercise of all of our outstanding options and the release of
                restricted stock awards; and




·
                approximately 4.7 million shares of our common stock issuable upon
                the exercise of all of our outstanding
                warrants.




32




These
      shares of common stock, if and when issued, may be sold in the public
      market assuming the applicable registration statements continue to remain
      effective and subject in any case to trading restrictions to which our insiders
      holding such shares may be subject from time to time. If these options or
      warrants are exercised and sold, our stockholders may experience additional
      dilution and the market price of our common stock could fall.




In
      addition, in connection with the Merger, stockholders of Urigen N.A. may sell
      a
      significant number of shares of our common stock they received in the Merger.
      Such holders have had no ready market for their Urigen N.A. shares and might
      be
      eager to sell some or all of their shares. Further, Urigen N.A. recently entered
      into agreements with a couple of its vendors and business partners which give
      Urigen N.A.. the right to pay certain amounts due to such vendors and business
      partners for goods and services with shares of its Series B preferred stock
      in lieu of cash. Such vendors and business partners may be more inclined to
      sell
      our common stock than other investors as they have not been long-term investors
      of Urigen N.A.. Significant sales could adversely affect the market price for
      our common stock for a period of time.




**Our
      amended and restated certificate of incorporation and by-laws, include
      anti-takeover provisions that may enable our management to resist an
      unwelcome takeover attempt by a third party.**




Our
      basic
      corporate documents and Delaware law contain provisions that enable our
      management to attempt to resist a takeover unless it is deemed by our management
      and board of directors to be in the best interests of our stockholders. Those
      provisions might discourage, delay or prevent a change in control of our company
      or a change in our management. Our board of directors may also choose to
      adopt further anti-takeover measures without stockholder approval. The existence
      and adoption of these provisions could adversely affect the voting power of
      holders of our common stock and limit the price that investors might be willing
      to pay in the future for shares of our common stock.




**Our
      agreements with a vendor and business partners, which give us
      the right to pay certain amounts due with shares of Series B preferred
      stock and common stock, may adversely affect the market price for the combined
      Company’s common stock.**




Urigen
      N.A. has entered into agreements with a vendor and business partners that
      give us the right to pay certain amounts due for goods and services with shares
      of its Series B preferred stock and common stock. Under the agreement with
      one of our business partners, we were required to make a one-time issuance
      of 19,200 shares of Series B preferred stock, under the agreement with
      the other business partner, Urigen may pay milestone fees of up to $437,500
      in
      shares of its common stock in lieu of cash, and under the vendor agreement,
      we are required to issue $10,000 worth of our common stock per
      month until the agreement is terminated by either party. There is no definitive
      termination date of the vendor agreement. The shares issued under the agreement
      with the first business partner vest in twelve equal monthly installments from
      the date of issuance, and are subject to repurchase by us upon the termination
      of the consulting relationship.







**We
      may not be able to meet the initial listing standards to trade on a national
      securities exchange such as the Nasdaq Capital Market or the American Stock
      Exchange, which could adversely affect the liquidity and price of the combined
      company’s common stock.**




We
      intend
      to raise additional capital and consummate a reverse stock split in order to
      meet the requirements to obtain the listing of our common stock on a national
      securities exchange such as the Nasdaq Capital Market or the American Stock
      Exchange. The initial listing qualification standards for new issuers are
      stringent and, although we may explore various actions to meet the minimum
      initial listing requirements for a listing on a national securities exchange,
      there is no guarantee that any such actions will be successful in bringing
      us
      into compliance with such requirements.




33




If
      we
      fail to achieve listing of our common stock on a national securities exchange,
      our common shares may continue to be traded on the OTC Bulletin Board or other
      over-the-counter markets in the United States, although there can be no
      assurance that our common shares will be eligible for trading on any such
      alternative markets or exchanges in the United States.




In
      the
      event that we are not able to obtain a listing on a national securities exchange
      or maintain our reporting on the OTC Bulletin Board or other quotation service
      for our common shares, it may be extremely difficult or impossible for
      stockholders to sell their common shares in the United States. Moreover,
      if our common stock remains quoted on the OTC Bulletin Board or other
      over-the-counter market, the liquidity will likely be less, and therefore the
      price will be more volatile, than if our common stock was listed on a national
      securities exchange. Stockholders may not be able to sell their common shares
      in
      the quantities, at the times, or at the prices that could potentially be
      available on a more liquid trading market. As a result of these factors, if
      our
      common shares fail to achieve listing on a national securities exchange, the
      price of our common shares is likely to decline. In addition, a decline in
      the
      price of our common shares could impair our ability to achieve a national
      securities exchange listing or to obtain financing in the future.




**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**




None.







**ITEM
                2.**
            **PROPERTIES**





We
      pay a
      fee of $2,683 per month, which is based on estimated fair market value, to
      EGB Advisors, LLC for rent and other office services at our headquarters in
      Burlingame, California. EGB Advisors, LLC is owned solely by William J. Garner,
      president and chief executive officer of Urigen Pharmaceuticals,
      Inc.




**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**




None.




**ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.





**PART II**




**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**




**Market
      Information**


Our
      common stock is quoted on the
      OTC Bulletin Board under the symbol “URGP.OB.” Previously, commencing June 19,
      2007 our common stock was quoted on the OTC Bulletin Board under the symbol
      VLTS.OB. From May 21, 2007 through June 18, 2007, our common stock was quoted
      on
      the National Quotation Bureau’s Pink Sheets under the symbol “VLTS. PK.” Prior
      to May 21, 2007, our common stock was listed on the Nasdaq Capital Market under
      the symbol “VLTS.” The following table sets forth, for the calendar periods
      indicated, the high and low per share sales prices for our common stock as
      reported by the Nasdaq Capital Market through May 18, 2007, by the National
      Quotation Bureau’s Pink Sheets from May 21, 2007 through July 15, 2007 and by
      the OTC Bulletin Board since July 16, 2007.




34




**High**
            
            
            **Low****2005**First
                Quarter
            
            $
            3.90
            
            
            $
            2.20Second
                Quarter
            
            
            3.19
            
            
            
            2.26Third
                Quarter
            
            
            2.90
            
            
            
            2.11Fourth
                Quarter
            
            
            2.60
            
            
            
            1.48**2006**
            
            ****
            
            
            
            ****First
                Quarter
            
            $
            3.95
            
            
            $
            2.12Second
                Quarter
            
            
            4.06
            
            
            
            2.64Third
                Quarter
            
            
            3.50
            
            
            
            0.15Fourth
                Quarter
            
            
            1.07
            
            
            
            0.29**2007**First
                Quarter
            
            $
            0.47
            
            
            $
            0.22Second
                Quarter
            
            
            0.32
            
            
            
            0.10Third
                Quarter
            
            
            0.16
            
            
            
            0.16Fourth
                Quarter  (October 2, 2007)
            
            
            0.15
            
            
            
            0.15






On
      October 2, 2007 the last sale price reported on the OTC Bulletin Board for
      our common stock was $0.15 per share. As of that date, there were 532
      stockholders of record of our common stock.




**Sales
      and Repurchases of Securities**




During
      the period covered by this Annual Report on Form 10-K, we sold and issued
      the following securities, which were not registered under the Securities Act
      of
      1933:




There
      were no registered or unregistered shares issued during the fiscal year.
      Further, we repurchased 24,881 shares of common stock from an employee upon
      releasing of vested restricted stock for an aggregate price of $11,459 during
      the fiscal year ended June 30, 2007.




**Dividends**




We
      have
      never paid any cash dividends on our common stock.







**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**




The
      data
      set forth below should be read in conjunction with “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and the Consolidated
      Financial Statements and related Notes included elsewhere in this report.




35




**Year Ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003****(in thousands, except per share data)****Consolidated
                Statement of Operations Data:**License
                and milestone revenue
            
            $
            571
            
            
            $
            627
            
            
            $
            1,640
            
            
            $
            7,284
            
            
            $
            3,958Contract
                research revenue
            
            
            ―
            
            
            
            100
            
            
            
            476
            
            
            
            —
            
            
            
            —Other
                revenue
            
            
            —
            
            
            
            —
            
            
            
            61
            
            
            
            194
            
            
            
            —Total
                revenue
            
            
            571
            
            
            
            727
            
            
            
            2,177
            
            
            
            7,478
            
            
            
            3,958Costs
                and Operating expenses:Cost
                of contract research revenue
            
            
            ―
            
            
            
            93
            
            
            
            521
            
            
            
            —
            
            
            
            —Research
                and development
            
            
            872
            
            
            
            10,847
            
            
            
            8,823
            
            
            
            9,465
            
            
            
            9,421General
                and administrative
            
            
            4,783
            
            
            
            5,368
            
            
            
            4,109
            
            
            
            4,501
            
            
            
            9,403Restructuring
                charges
            
            
            1,029
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            832Total
                operating expenses
            
            
            6,684
            
            
            
            16,308
            
            
            
            13,453
            
            
            
            13,966
            
            
            
            19,656Loss
                from operations
            
            
            (6,113
            )
            
            
            (15,581
            )
            
            
            (11,276
            )
            
            
            (6,488
            )
            
            
            (15,698
            )Interest,
                other income and expense, net
            
            
            2,380
            
            
            
            244
            
            
            
            193
            
            
            
            4
            
            
            
            838Net
                loss
            
            
            (3,733
            )
            
            
            (15,337
            )
            
            
            (11,083
            )
            
            
            (6,484
            )
            
            
            (14,860
            )Deemed
                dividend
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,972
            )Adjustment
                resulting from the reduction in the Series A Preferred stock
                conversion price
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (22,293
            )Dividends
                on convertible preferred stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (882
            )Net
                loss applicable to common stockholders
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )
            
            $
            (6,484
            )
            
            $
            (43,007
            )Basic
                and diluted net loss per share applicable to common
                stockholders
            
            $
            (0.22
            )
            
            $
            (0.99
            )
            
            $
            (0.85
            )
            
            $
            (0.81
            )
            
            $
            (13.86
            )Shares
                used in computing basic and diluted net loss per common
                share
            
            
            17,052
            
            
            
            15,453
            
            
            
            13,028
            
            
            
            8,024
            
            
            
            3,103







**June 30,****2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003****(in thousands)****Consolidated
                Balance Sheet Data:**Cash,
                cash equivalents and short-term investments
            
            $
            478
            
            
            $
            4,348
            
            
            $
            12,513
            
            
            $
            20,450
            
            
            $
            3,290Working
                capital
            
            
            21
            
            
            
            2,300
            
            
            
            10,624
            
            
            
            16,905
            
            
            
            230Total
                assets
            
            
            1,109
            
            
            
            5,258
            
            
            
            14,152
            
            
            
            21,891
            
            
            
            6,078Accumulated
                deficit
            
            
            (243,707
            )
            
            
            (239,974
            )
            
            
            (224,637
            )
            
            
            (213,554
            )
            
            
            (207,070
            )Total
                stockholders’ equity
            
            
            435
            
            
            
            2,843
            
            
            
            11,569
            
            
            
            17,890
            
            
            
            2,589




As
        noted
        under Reclassifications in Note 1 to the Consolidated Financial Statements,
        the
        Company has reclassified patent costs to general and administrative expense,
        which had previously been classified in research and development expense.
        The
        amounts reclassified were $381,000, $346,000, $569,000, and $544,000 in the
        years ended June 30, 2006, 2005, 2004, and 2003, respectively.


**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                OF
                OPERATIONS**




*The
      discussion in “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” contains forward-looking statements within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities Exchange Act of 1934, as amended. These forward-looking
      statements include, without limitation, statements containing the words
“believes,” “anticipates,” “expects,” “intends,” “projects,” “estimates,” and
      other words of similar import or the negative of those terms or expressions.
      Forward-looking statements in this section include, but are not limited to,
      expectations regarding any strategic opportunities that may be available to
      us,
      expectations of future levels of research and development spending, general
      and
      administrative spending, levels of capital expenditures and operating results,
      our intention to license potential products and technologies to a pharmaceutical
      company that will assume responsibility for late-stage development and
      commercialization and our intention to seek revenue from the licensing of our
      proprietary manufacturing technologies. Forward-looking statements subject
      to
      certain known and unknown risks, uncertainties and other factors that may cause
      our actual results, performance or achievements to be materially different from
      any future results, performance or achievements expressed or implied by such
      forward-looking statements. Factors that could affect our actual results include
      the outcomes of our clinical trials in patients with peripheral arterial
      disease, uncertainties related to our financial condition, uncertainties related
      to the strategic opportunities that may be available to us, our need for
      additional capital, our going concern report from our independent registered
      public accounting firm and the other risk factors set forth in this Annual
      Report on Form 10-K. Further, there can be no assurance that necessary
      regulatory approvals for any of our potential products will be obtained. Actual
      results may differ materially from those projected in such forward-looking
      statements as a result of the “Risk Factors” described previously and other
      risks detailed in our reports filed with the Securities and Exchange Commission.
      We undertake no obligation to revise or update any such forward-looking
      statements.*




36




**CORPORATE
      OVERVIEW**





We
      were
      formerly known as Valentis, Inc. and were formed as the result of the merger
      of
      Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in
      Delaware on August 12, 1997. In August 1999, we acquired U.K.-based
      PolyMASC Pharmaceuticals plc.





On
      October 5, 2006, we entered into an Agreement and Plan of Merger, as
      subsequently amended (the “Merger ”) with Urigen N.A.., Inc., a Delaware
      corporation (“Urigen N.A.”), and Valentis Holdings, Inc., our
      newly formed wholly-owned subsidiary (“Valentis Holdings ”). Pursuant to the
      Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into
      Urigen N.A., with Urigen N.A. surviving as our wholly-owned subsidiary. In
      connection with the Merger, each Urigen stockholder received, in exchange for
      each share of Urigen N.A. common stock held by such stockholder immediately
      prior to the closing of the Merger, 2.2554 shares of our common stock. At the
      effective time of the Merger, each share of Urigen N.A. Series B preferred
      stock was exchanged for 11.277 shares of our common stock. An aggregate of
      51,226,679 shares of our common stock were issued to the Urigen N.A.
      stockholders. Upon completion of the Merger, we changed our name from Valentis,
      Inc. to Urigen Pharmaceuticals, Inc.





From
      and
      after the Merger, our business is conducted through our wholly owned subsidiary
      Urigen N.A. The discussion of our business in this annual report is that or
      our
      current business which is conducted through Urigen
      N.A  The historical financial results discussed herein are those
      of Valentis, Inc. through June 30, 2007.




**BUSINESS
      OVERVIEW**




We
      specialize in the design and implementation of innovative products for patients
      with urological ailments including, specifically, the development of innovative
      products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, and
      Overactive Bladder (OAB).




Urology
      represents a specialty pharmaceutical market of approximately 12,000 physicians
      in North America. Urologists treat a variety of ailments of the urinary tract
      including urinary tract infections, bladder cancer, overactive bladder, urgency
      and incontinence and interstitial cystitis, a subset of PBS. Many of these
      indications represent significant, underserved therapeutic market
      opportunities.




Over
      the
      next several years a number of key demographic and technological factors should
      accelerate growth in the market for medical therapies to treat urological
      disorders, particularly in our product categories. These factors include the
      following:




37




·
            *Aging
                population.*The incidence of urological disorders increases with age.
                The over-40 age group in the United States is growing almost twice
                as fast
                as the overall population. Accordingly, the number of individuals
                developing urological disorders is expected to increase significantly
                as
                the population ages and as life expectancies continue to
                rise.




·
            *Increased
                consumer awareness.*In recent years, the publicity associated with
                new technological advances and new drug therapies has increased the
                number
                of patients visiting their urologists to seek treatment for urological
                disorders.




Urigen
      N.A. has been established as a specialty pharmaceutical company to develop
      and
      commercialize products for the treatment and diagnosis of urological disorders.
      We have established an initial group of clinical stage products, as more fully
      described below, that we believe offer potential solutions to underserved
      urology markets.




Urigen
      N.A. is a specialty pharmaceutical company dedicated to the development and
      commercialization of therapeutic products for urological disorders. Our two
      lead
      programs target significant unmet medical needs and major market opportunities
      in urology. Our URG101 project targets painful bladder syndrome which affects
      approximately 10.5 million men and women in North America. URG101 has
      demonstrated safety and activity in a Phase IIa (open-label) human clinical
      trial and in a Phase IIb double-blind, placebo-controlled trial. URG101 is
      a
      unique, proprietary combination therapy of components approved by global
      regulatory authorities that is locally delivered to the bladder for rapid relief
      of pain and urgency. In 2007, URG101 clinical development will encompass a
      pharmacodynamic study. We have also begun to develop additional indications
      for URG101 focusing on radiation cystitis and dyspareunia (painful
      intercourse).




Our  clinical-stage
      projects, URG301 and URG302, target acute urgency in patients diagnosed with
      an
      overactive bladder, another major unmet need that is insufficiently managed
      by
      presently available overactive bladder drugs. URG301 and URG302 are proprietary
      dosage forms of approved drugs that are locally delivered to control urinary
      urgency. An Urigen N.A. sponsored Investigational New Drug, or IND, is currently
      being prepared with subject enrollment scheduled for late 2007. We also plan
      to
      initiate two clinical programs targeting the use of URG301 in patients diagnosed
      with acute urethral discomfort, or AUD, associated with cystoscopy and
      urethritis.




To
      expand
      the pipeline, we have initiated discussions with pharmaceutical companies that
      have either an approved product or a product in development for the treatment
      of
      additional urological indications. We believe that our URG100 and URG300
      programs, when commercialized, will offer significant “marketing coat-tails”
that can dramatically grow the sales of niche urology products. Although such
      products do not match the potential revenue streams of URG101 and URG301, the
      incremental income they could generate for us is potentially significant as
      such
      products will enable us to maximize the time, effort and expense of the sales
      organization that we plan to establish to market URG101 and URG301 to urologists
      in the United States.




We
      plan
      to market our products to urologists and urogynecologists in the United States
      via a specialty sales force managed internally. As appropriate, our specialty
      sales force will be augmented by co-promotion and licensing agreements with
      pharmaceutical companies that have the infrastructure to market our products
      to
      general practitioners. In all other countries, we plan to license marketing
      and
      distribution rights to its products to pharmaceutical companies with strategic
      interests in urology and gynecology.




38




**Results
      of Operations**




***Fiscal
      Years Ended June 30, 2007, 2006 and 2005***




***Revenue***


Revenue
      recognized in the fiscal years ended June 30, 2007, 2006 and 2005 is
      as follows (in thousands):




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**License
                and milestone revenue:GeneSwitch®
                gene regulation licenses
            
            $
            83
            
            
            $
            393
            
            
            $
            1,021PINCTM
                gene delivery technology licenses
            
            
            33
            
            
            
            114
            
            
            
            619PEGylation
                technology licenses
            
            
            85
            
            
            
            120
            
            
            
            —Manufacturing
                technology license
            
            
            370
            
            
            
            —
            
            
            
            —571
            
            
            
            627
            
            
            
            1,640Contract
                research revenue
            
            
            —
            
            
            
            100
            
            
            
            476Other
                revenue
            
            
            —
            
            
            
            —
            
            
            
            61Total
            
            $
            571
            
            
            $
            727
            
            
            $
            2,177







Changes
      in revenue for each of the fiscal years ended June 30, 2007, 2006 and
      2005 are explained below:




·
            The
                GeneSwitch® revenue recognized in fiscal 2007, 2006 and 2005 resulted
                primarily from license and annual license maintenance fees received
                under
                several agreements for our GeneSwitch® technology. The GeneSwitch® revenue
                recognized in fiscal 2005 included approximately $500,000 of license
                fees received from Schering AG that was non-recurring.  In
                 February, 2007, we completed the sale of all of our patents and
                intellectual property related to the GeneSwitch® gene regulation
                technology.




·
            The
                PINCTM gene delivery technology revenue recognized in fiscal 2007,
                2006 and 2005 resulted primarily from license and annual license
                maintenance fees received under several agreements for our PINCTM gene
                delivery technology. The PINCTM gene delivery technology revenue recognized
                in fiscal 2005 included approximately $500,000 of license fees
                received from Schering AG that was non-recurring. In October 2006, we
                sold all of our patents and intellectual property related to the
                PINCTM
                gene delivery technology.




·
            The
                PEGylation revenue recognized in fiscal 2007 and 2006 primarily
                reflected the licensing of our pegylated liposome technology. The
                decrease
                in PEGylation revenue recognized in fiscal 2007 as compared to 2006
                primarily reflected that certain revenue recognized in 2006 was
                non-recurring.




·
            In
                April 2007, we granted a worldwide, exclusive right and license to
                Acacia
                Patent Acquisition Corporation, or APAC, for the purpose of asserting
                our
                patents related to our plasmid DNA manufacturing technology. Under
                the
                agreement, APAC agreed to pay us a continuing royalty equal to fifty
                percent of all amounts and other consideration actually received
                by APAC
                from its exercise of rights granted in the license. The manufacturing
                technology revenue recognized in fiscal 2007 reflected license fees
                received from other companies prior to the agreement with
                APAC.




·
              In
                  fiscal 2006 and 2005, we recognized $100,000 and $476,000 of contract
                  research revenue under agreements with other companies, respectively.
                  Under the agreements, we were required to conduct research on the
                  manufacturing of certain biological materials for other companies.
                  The
                  revenue was recognized based on research performed during the periods.
                  We
                  did not conduct any contract research in fiscal
                  2007.


·
            Other
                revenue recognized in fiscal 2005 consisted primarily of profit
                sharing and royalties received under a plasmid DNA manufacturing
                agreement.




The
      Company does not expect to have revenues from its URG101 or URG 301 product
      lines until 2010.




39




***Costs
      and Expenses***




We
      did
      not conduct any contract research during fiscal year ended
      June 30, 2007. Costs of contract research were $93,000 and $521,000
      for fiscal years ended June 30, 2006 and 2005, respectively, which
      consisted of costs incurred for contract research on the manufacturing of
      biological materials for other companies and included direct and related
      overhead expenses and costs of general and administrative support.




Research
      and development expenses were $872,000, $10.8 million and $8.8 million for
      the fiscal years ended June 30, 2007, 2006 and 2005, respectively. The
      decrease in expenses in fiscal 2007 compared to 2006 was attributable to
      the cessation of our research and development activities following the
      announcement of negative results in our VLTS 934 Phase IIb clinical
      trial in July 2006. The increase in expenses in fiscal 2006 compared
      to 2005 primarily reflects increased expenses related to VLTS 934
      Phase IIb clinical trial and stock-based compensation expenses recorded in
      the year ended June 30, 2006. We expect research and development
      expenses to increase going forward from the levels of fiscal 2007 as we pursue
      the development of our potential products for the treatment of urological
      disorders.




All
      of
      our research and development expenses for the fiscal years ended
      June 30, 2007, 2006 and 2005 were incurred in connection with the
      development of novel peripheral arterial disease therapeutics.




General
      and administrative expenses were $4.8 million, $5.4 million and
      $4.1 million for the fiscal years ended June 30, 2007, 2006 and
      2005 respectively. The decrease in expenses in fiscal 2007 compared to 2006
      was primarily attributable to the reduction of workforce following the
      announcement of negative results in our VLTS 934 Phase IIb clinical
      trial in July 2006, partially offset by merger related expenses incurred in
      fiscal 2007.  The increase in expenses in fiscal 2006 compared to
      2005 was primarily attributable to stock-based compensation expenses recorded
      in
      fiscal 2006. We expect general and administrative expenses to decrease going
      forward from the levels of fiscal 2007.




***Restructuring
      Charges***




Following
      our announcement regarding the results of our clinical trial for VLTS 934
      in July 2006, we announced restructuring activities, including a workforce
      reduction of approximately 55% of our employees on August 18, 2006.
      Further reductions of approximately 55% of our remaining workforce occurred
      through the end of August and October 2006, including the termination of
      employment of John J. Reddington, Ph.D., DVM., our Chief Operating Officer,
      and
      Joseph A. Markey, our Vice President of Finance and Administration on October
      31, 2006. In July 2007, the Company terminated the employment of
      Benjamin F. McGraw, III, our President, Chief Executive Officer and
      Treasurer.  The total costs associated with the reduction in workforce
      were approximately $1.03 million, primarily related to severance benefits which
      has been recognized as restructuring charges and $921,000 has been paid as
      of  June 30, 2007. The remaining unpaid amount of $108,000
      as of June 30, 2007 was paid in July 2007.




***Interest
      Income***




Interest
      income was approximately $39,000, $279,000 and $285,000 in fiscal 2007,
      2006 and 2005, respectively. The decrease in interest income in fiscal 2007
      compared to 2006 and the decrease in interest income in fiscal 2006
      compared to 2005 were primarily attributable to lower interest income derived
      from lower investment balances.




***Other
      Income and Expense, net***




For
      the
      year ended June 30, 2007, other income and expenses, net primarily
      reflected nonrefundable proceeds received from the sale of most of our remaining
      potential products and technologies related to cardiovascular therapeutics
      and
      gene delivery and expression systems and gains from sale of most of our
      remaining machinery, equipment and furniture and fixtures totaling approximately
      $2.3 million. These proceeds received or gains on sales were recognized
      when payments were received, provided Valentis had no future performance or
      delivery obligations under the agreements. In addition, these proceeds received
      or gains were classified in other income and expenses, net because asset sales
      were part of the Company’s efforts to pursue strategic opportunities, which
      included the merger with Urigen N.A., the sale of certain assets and other
      actions. Other income and expense, net were expenses of approximately $35,000
      and $92,000 in fiscal 2006 and 2005, respectively. These expenses were
      primarily franchise tax payments.




40




**New
      Accounting Pronouncements**




In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No. 155, *Accounting for Certain Hybrid Financial Instruments — an
      amendment of FASB Statements No. 133 and 140*(“SFAS No. 155”).
      SFAS No. 155 permits an entity to measure at fair value any financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation. This statement is effective for all financial instruments acquired,
      issued, or subject to a remeasurement event occurring after the beginning of
      an
      entity’s first fiscal year that begins after September 15, 2006. The
      Company does not expect the adoption of SFAS No. 155 to have a material
      impact on its consolidated financial statements.




In
      June 2006, the FASB issued FASB Interpretation No. (FIN) 48,
*Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
      Statement No. 109*(“FIN48”), which prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 will be effective for fiscal years beginning after December 15, 2006.
      The Company does not expect the adoption of FIN48 to have a material impact
      on
      its consolidated financial statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, *Fair Value Measurements “*(SFAS No. 157)”, which
      defines fair value, establishes a framework for measuring fair value under
      Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about
      fair value measurements. SFAS No. 157 will be effective for fiscal years
      beginning after November 15, 2007. The Company does not expect the adoption
      of SFAS No. 157 to have a material impact on its consolidated financial
      statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
      108”), “Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 is effective for
      fiscal years ending on or after November 15, 2006 and addresses how
      financial statement errors should be considered from a materiality perspective
      and corrected. The literature provides interpretive guidance on how the effects
      of the carryover or reversal of prior year misstatements should be considered
      in
      quantifying a current year misstatement. Historically there have been two common
      approaches used to quantify such errors: (i) the “rollover” approach, which
      quantifies the error as the amount by which the current year income statement
      is
      misstated, and (ii) the “iron curtain” approach, which quantifies the error
      as the cumulative amount by which the current year balance sheet is misstated.
      The SEC Staff believes that companies should quantify errors using both
      approaches and evaluate whether either of these approaches results in
      quantifying a misstatement that, when all relevant quantitative and qualitative
      factors are considered, is material. The Company adopted the provisions of
      SAB
      108 in fiscal year ended June 30, 2007 and it had no impact on its
      consolidated financial statements.




In
      February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under
      which an entity may elect to record certain financial assets or liabilities
      at
      fair value upon their initial recognition. Subsequent changes in fair value
      would be recognized in earnings as those changes occur. The election of the
      fair
      value option would be made on a contract-by contract basis and would need to
      be
      supported by concurrent documentation or a preexisting documented policy. SFAS
      159 requires an entity to separately disclose the fair value of these items
      on
      the balance sheet or in the footnotes to the financial statements and to provide
      information that would allow the financial statement user to understand the
      impact on earnings from changes in the fair value. SFAS 159 is effective as
      of
      the beginning of an entity’s first fiscal year that begins after
      November 15, 2007. The Company does not expect the adoption of SFAS
      No. 159 to have a material impact on its consolidated financial
      statements.




41




**Liquidity
      and Capital Resources**




As
      discussed elsewhere in this report, including further below, we have received
      a
      report from our independent registered public accounting firm regarding the
      consolidated financial statements for the fiscal year ended
      June 30, 2007 that includes an explanatory paragraph stating that the
      financial statements have been prepared assuming we will continue as a going
      concern. The explanatory paragraph states the following conditions, which raise
      substantial doubt about our ability to continue as a going concern: (i) we
      have incurred operating losses since inception, including a net loss of
      $3.7 million for the fiscal year ended June 30, 2007,
      negative cash flows from operations of $4.5 million for the fiscal year
      ended June 30, 2007, and our accumulated deficit was
      $243.7 million at June 30, 2007 and (ii) we anticipate
      requiring additional financial resources to enable us to fund the completion
      of
      our development plan. These funds may be derived from the sale of a current
      license, licensing and distribution agreements outside the U.S., and
      additional financing.  See description of funds raised from a July
      2007 equity financing in Note 16 to the consolidated financial statements.
      We
      expect these funds to allow the Company to carry-on operations until at least
      the end of fiscal year 2008. Management’s plans as to these matters are also
      described in Note 1 to the consolidated financial statements.




If
      we are
      unable to obtain the required additional financial resources to enable us to
      fund the completion of the strategic opportunities that may be available to
      us,
      or if we are otherwise unsuccessful in completing any strategic alternative,
      our
      business, results of operation and financial condition would be materially
      adversely affected and we may be required to seek bankruptcy
      protection.




On
      July 11, 2006, we announced that no statistically significant
      difference was seen in the primary endpoint or any of the secondary endpoints
      in
      our Phase IIb clinical trial of VLTS 934 in PAD. We have no plans for
      further development of VLTS 934 or any of our other remaining potential products
      related to cardiovascular therapeutics and gene delivery and expression systems.
      We are currently focused on the design and implementation of innovative products
      for patients with urological ailments including, specifically, the development
      of innovative products for amelioration of Painful Bladder Syndrome or
      PBS.




Since
      our
      inception, we have financed our operations principally through public and
      private issuances of our common and preferred stock and funding from
      collaborative arrangements. We have used the net proceeds from the sale of
      the
      common and preferred stock for general corporate purposes, which have included
      funding research, development and product manufacturing, increasing our working
      capital, reducing indebtedness, pursuing and completing acquisitions or
      investments in businesses, products or technologies that are complementary
      to
      our own, and capital expenditures. We expect that proceeds received from any
      future issuance of stock will be used for similar purposes.




In
      January and June 2004, June 2005 and March 2006, we
      completed four separate private placements of common stock for gross proceeds
      of
      approximately $10.0 million, $12.0 million, $4.2 million and $5.3
      million, respectively. In connection with these private placements, we entered
      into registration rights agreements with the purchasers of our common stock.
      Pursuant to each of the registration rights agreements, we filed with the SEC
      registration statements related to the shares issued to the purchasers and
      shares issuable upon the exercise of the warrants under the respective private
      placements. In the event that we must suspend use of any registration statement
      for greater than 20 consecutive days or a total of 40 days in the
      aggregate during the time we are required to keep such registration statement
      effective under the applicable registration rights agreement, then we must
      pay
      to each applicable purchaser in cash 1.0% of the purchaser’s aggregate purchase
      price of the shares for the first month, as well as an additional 1.5% of the
      purchaser’s aggregate purchase price for each additional month thereafter, while
      the use of such registration statement has been suspended. We currently expect
      to be required to maintain availability of the registration statements for
      at
      least two years following the applicable closing of the private
      placements.




In
      addition, under the securities purchase agreements entered into in connection
      with the private placements completed in June 2005 and March 2006,
      while there is an effective registration statement if we fail to deliver a
      stock
      certificate that is free of restrictive legends within three trading days upon
      delivery of such a request by a purchaser, we are required to pay to the
      purchaser, for each $1,000 of shares of stock or shares issuable upon exercise
      of warrants requested, $10 per trading day for each trading day beginning five
      trading days after the delivery of the request, increasing to $20 per trading
      day after the first five trading days for which such damages have begun to
      accrue, until such certificate is delivered without restrictive
      legends.




42




In
      January 2007, Valentis terminated its existing property leases without any
      material adverse effect and moved to a nearby office space on a month-to-month
      basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
      Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
      The combined company currently subleases office facilities on a month-to-month
      basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
      is
      owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
      Inc.  The sublease is terminable upon 30 days’ notice.




Our
      capital expenditures were $0, $33,000 and $8,000 in fiscal 2007, 2006 and 2005,
      respectively. We expect our capital expenditures going forward to be near or
      at
      current levels.




Net
      cash
      used in operating activities for the year ended June 30, 2007 was
      approximately $4.5 million, which primarily reflected the net loss of
      $3.7 million, adjusted for non-cash stock-based compensation expenses of
      $1.3 million, gains on disposal of assets of $582,000 and the net decrease
      in
      operating assets and liabilities of $1.5 million. Net cash used in operating
      activities for the year ended June 30, 2006 was approximately
      $13.2 million, which primarily reflected the net loss of
      $15.3 million, adjusted for non-cash stock-based compensation expenses of
      $1.5 million and the decreases in receivable, deposits and other assets of
      $700,000. Net cash used in operating activities for the year ended
      June 30, 2005 was approximately $12.1 million, which primarily
      reflected the net loss of $11.1 million and the decreases in accrued
      liabilities of $1.3 million related to compensation and clinical trial
      expenses.




Net
      cash
      provided by investing activities was approximately $1.4 million for the
      fiscal year ended June 30, 2007, which primarily reflected the
      proceeds received from disposal of assets of $604,000 and maturities of
      available-for-sale investments of $750,000. Net cash provided by investing
      activities was approximately $2.9 million and $7.3 million for the
      fiscal years ended June 30, 2006 and 2005, respectively, which
      primarily reflected the maturities of available-for-sale
      investments.




Net
      cash
      used by financing activities was approximately $11,000 for the fiscal year
      ended
      June 30, 2007, which primarily reflected the repurchase of our common
      stock. Net cash provided by financing activities was approximately
      $5.0 million and $4.1 million for the fiscal years ended
      June 30, 2006 and 2005, respectively, which consisted primarily of net
      proceeds received from private placements of our common stock and
      warrants.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      we will continue as a going concern. The financial statements do not include
      any
      adjustments to reflect the possible future effects on the recoverability and
      classification of assets or the amounts and classification of liabilities that
      may result from the matters discussed above.




***Critical
      Accounting Policies***




**Clinical
      trial expenses**




We
      believe the accrual for clinical trial expense represents our most significant
      estimate used in the preparation of the consolidated financial statements.
      Our
      accruals for clinical trial expenses are based in part on estimates of services
      received and efforts expended pursuant to agreements established with clinical
      research organizations and clinical trial sites. We have a history of
      contracting with third parties that perform various clinical trial activities
      on
      our behalf in the ongoing development of our biopharmaceutical drugs. The
      financial terms of these contracts are subject to negotiations and may vary
      from
      contract to contract and may result in uneven payment flows. We determine our
      estimates through discussion with internal clinical personnel and outside
      service providers as to progress or stage of completion of trials or services
      and the agreed upon fee to be paid for such services. The objective of our
      clinical trial accrual policy is to reflect the appropriate trial expenses
      in
      our financial statements by matching period expenses with period services and
      efforts expended. In the event of early termination of a clinical trial, we
      accrue expenses associated with an estimate of the remaining, non-cancelable
      obligations associated with the winding down of the trial. Our estimates and
      assumptions for clinical trial expenses have been materially accurate in the
      past. Following the Company’s July 2006 announcement regarding the negative
      results of its Phase IIb clinical trial of VLTS 934 in patients with
      PAD, the Company ceased all research and development activities on all of its
      potential gene therapy products and technologies. However, we expect clinical
      trial expenses to continue to represent a critical accounting policy for our
      Company, as we commence testing in fiscal year 2008 of our urological product
      candidates.




43




**Revenue
      Recognition**




Revenue
      arrangements with multiple elements are divided into separate units of
      accounting if certain criteria are met, including whether the delivered item
      has
      value to the customer on a stand-alone basis and whether there is objective
      and
      reliable evidence of the fair value of the undelivered items. Consideration
      received is allocated among the separate units of accounting based on their
      respective fair values, and the applicable revenue recognition criteria are
      considered separately for each of the separate units.




Non-refundable
      up-front payments received in connection with research and development
      collaboration agreements, including technology advancement funding that is
      intended for the development of our core technology, are deferred and recognized
      on a straight-line basis over the relevant period specified in the agreement,
      generally the research term.




Revenue
      related to research with our corporate collaborators is recognized as research
      services are performed over the related funding periods for each contract.
      Under
      these agreements, we are required to perform research and development activities
      as specified in each respective agreement. The payments received under each
      respective agreement are not refundable and are generally based on a contractual
      cost per full-time equivalent employee working on the project. Research and
      development expenses under the collaborative research agreements approximate
      or
      exceed the revenue recognized under such agreements over the terms of the
      respective agreements. Deferred revenue may result when we do not incur the
      required level of effort during a specific period in comparison to funds
      received under the respective contracts. Payments received relative to
      substantive, at-risk incentive milestones, if any, are recognized as revenue
      upon achievement of the incentive milestone event because we have no future
      performance obligations related to the payment. Incentive milestone payments
      are
      triggered either by results of our research efforts or by events external to
      us,
      such as regulatory approval to market a product. Following our July 2006
      announcement regarding the negative results in our Phase IIb clinical trial
      of VLTS 934 in patients with PAD, we ceased all research and development
      activities on all of our potential gene therapy products and technologies,
      including under our agreements with corporate collaborators.




We
      also
      have licensed technology to various biotechnology, pharmaceutical and contract
      manufacturing companies. Under these arrangements, we receive nonrefundable
      license payments in cash. These payments are recognized as revenue when
      received, provided we have no future performance or delivery obligations under
      these agreements. Otherwise, revenue is deferred until performance or delivery
      is satisfied. Certain of these license agreements also provide the licensee
      an
      option to acquire additional licenses or technology rights for a fixed period
      of
      time. Fees received for such options are deferred and recognized at the time
      the
      option is exercised or expires unexercised. Additionally, certain of these
      license agreements involve technology that we have licensed or otherwise
      acquired through arrangements with third parties pursuant to which we are
      required to pay a royalty equal to a fixed percentage of amounts received by
      us
      as a result of licensing this technology to others. Such royalty obligations
      are
      recorded as a reduction of the related revenue. Furthermore, we receive royalty
      and profit sharing payments under a licensing agreement with a contract
      manufacturing company. Royalty and profit sharing payments are recognized as
      revenue when received. We are not currently providing contract research services
      for research and development manufacturing of biological materials for other
      companies.




**Stock-Based
      Compensation**




In
      December 2004, the FASB issued FAS 123R, “Share-Based Payment.”
FAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued
      to Employees,” and requires companies to recognize compensation expense, using a
      fair-value based method, for costs related to share-based payments including
      stock options and employee stock purchase plans. We adopted
      FAS 123(R) on July 1, 2005. Prior to the adoption, we
      disclosed such expenses on a pro forma basis in the notes to our financial
      statements. For the year ended June 30, 2007, we recorded
      approximately $1.34 million of stock-based compensation expenses, of which
      $164,000 was included in research and development expense and $1.17 million
      was
      included in general and administrative expense. For the year ended
      June 30, 2006, we recorded approximately $1.4 million of employee
      stock-based compensation expenses, of which $503,000 was included in research
      and development expense and $944,000 was included in general and administrative
      expense.




44




We
      did
      not grant any stock-based awards during the year ended June 30, 2007.
      We estimated the fair value of stock options granted during the year ended
      June 30, 2006 using the Black-Scholes-Merton option pricing model. The
      weighted-average assumptions used under this model were as follows: 1) Due
      to
      insufficient relevant historical option exercise data, the expected term of
      the
      options was estimated to be 6.1 years using the “simplified” method
      suggested in the Securities and Exchange Commission’s Staff Accounting Bulletin
      No. 107; 2) Expected volatility was estimated to be 143% based on the
      Company’s historical volatility that matched the expected term; 3) Risk-free
      interest rate of 4.5% is based on the U.S. Treasury yield curve in effect at
      the
      time of grant for periods corresponding with the expected term of the option;
      4)
      The Company assumed a zero percent dividend yield. In addition, under
      FAS 123R, fair value of stock options granted is recognized as expense over
      the vesting period, net of estimated forfeitures. Estimated annual forfeiture
      rate was based on historical data and anticipated future conditions. The
      estimation of forfeitures requires significant judgment, and to the extent
      actual results or updated estimates differ from our current estimates, such
      amounts will be recorded in the period estimates are revised (See Note 2
“Stock-Based Compensation” in our Notes to the Consolidated Financial Statements
      for more information).




**Contractual
      Obligations**




In
      January, 2007, the Company terminated its existing property leases without
      any
      material adverse effect and moved to a nearby office space on a month-to-month
      basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
      Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
      The combined company currently subleases office facilities on a month-to-month
      basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
      is
      owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
      Inc.  The sublease is terminable upon 30 days’ notice.




**Off
      Balance Sheet Arrangements**




At
      June 30, 2007 and 2006, we did not have any off balance sheet
      arrangements other than the month-to-month lease described in contractual
      obligations above.


**ITEM
                  7A.**
              **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK**


Valentis’
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment portfolio. We maintain a strict investment policy that is designed
      to
      limit default risk, market risk, and reinvestment risk. Our cash and cash
      equivalents consist of cash and money market accounts. Our investments consist
      primarily of commercial paper, medium term notes, U.S. Treasury notes and
      obligations of U.S. Government agencies and corporate bonds. The table below
      presents notional amounts and related weighted-average interest rates for our
      investment portfolio (in thousands, except percentages) as of June 30, 2007
      and 2006. All of our market risk sensitive instruments mature within a year
      from
      the balance sheet date.




**As of June 30,****2007**
            
            
            **2006**Cash
                and cash equivalentsEstimated
                market value
            
            $
            478
            
            
            $
            3,635Average
                interest rate
            
            
            5.20
            %
            
            
            4.96
            %Short-term
                investmentsEstimated
                market value
            
            $
            ―
            
            
            $
            750Average
                interest rate
            
            
            ―
            
            
            
            4.97
            %Total
                cash and cash equivalents and investment securities
            
            $
            478
            
            
            $
            4,385Average
                rate
            
            
            5.20
            %
            
            
            4.97
            %





45




**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA**




Our
      Financial Statements and notes thereto appear on pages 65 to 87 of this
      Annual Report on Form 10-K.







**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND  FINANCIAL
                DISCLOSURE**





On
      July
      16, 2007, we dismissed Ernst & Young LLP (“E&Y”) as our independent
      registered public accounting firm. The decision to dismiss E&Y was approved
      by our Board of Directors.





The
      reports of E&Y on our consolidated financial statements for the years ended
      June 30, 2006 and 2005 did not contain an adverse opinion or a disclaimer of
      opinion and were not qualified or modified as to uncertainty, audit scope,
      or
      accounting principles, except for it did include explanatory
      paragraphs in 2006 and 2005 describing conditions that raise substantial doubt
      about our ability to continue as a going concern as described in Note 1 to
      the
      consolidated financial statements and an explanatory paragraph for the adoption
      of Statement of Financial Accounting Standards No. 123(R), “ *Share-Based
      Payment*” ** in 2006.





In
      connection with the audits of our financial statements for the years ended
      June
      30, 2006 and 2005 and through July 16, 2007, there were no disagreements with
      E&Y on any matters of accounting principles or practices, financial
      statement disclosure, or auditing scope and procedures which, if not resolved
      to
      the satisfaction of E&Y would have caused E&Y to make reference to the
      matter in their report.





On
      July
      16, 2007, we engaged Burr, Pilger & Mayer LLP as our new independent
      registered public accounting firm to replace E & Y subsequent to
      June 30, 2007 upon consummation of the Merger. During the three most recent
      fiscal years and through July 16, 2007, the Company did not consult with
      Burr, Pilger & Mayer LLP regarding (i) the application of accounting
      principles to a specified transaction, either completed or proposed, or the
      type
      of audit opinion that might be rendered on our consolidated financial
      statements, and no written report or oral advice was provided to us by
      concluding there was an important factor to be considered by us in reaching
      a
      decision as to an accounting, auditing or financial reporting issue; or
      (ii) any matter that was either the subject of a disagreement, as that term
      is defined in Item 304(a)(1)(iv) of Regulation S-B and the related
      instructions in Item 304 of Regulation S-K, or a reportable event, as
      that term is defined in Item 304 of
      Regulation S-B.




**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





*Evaluation
        of Disclosure Controls and Procedures.* The Securities and Exchange
        Commission defines the term “disclosure controls and procedures” to mean a
        company’s controls and other procedures that are designed to ensure that
        information required to be disclosed in the reports that it files or submits
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported, within the time periods specified in the Commission’s rules and forms.
        Our chief executive officer and chief financial officer have concluded, based
        on
        the evaluation of the effectiveness of the disclosure controls and procedures
        by
        our management, with the participation of our chief executive officer and
        chief
        financial officer, as of the end of the period covered by this report, that
        our
        disclosure controls and procedures were effective for this purpose, except
        as
        noted below under “Changes in Internal Controls.”





*Changes in Internal Controls.*In connection with its audit of our
        consolidated financial statements for the year ended June 30, 2007, Burr,
        Pilger & Mayer LLP identified significant deficiencies, which represent
        material weaknesses. The material weaknesses were related to a lack of adequate
        segregation of duties. In addition, significant audit adjustments were needed
        to
        accrued expenses that were the result of an insufficient quantity of experienced
        resources involved with the financial reporting and year end closing process
        resulting from staff reductions associated with the downsizing of the
        Company.  The Company is in the process of conducting a search for
        qualified individuals for its accounting and financial reporting
        positions.


46


Prior to the issuance of our consolidated financial statements, we completed
        the
        account reconciliations, analyses and our management review such that we
        can
        certify that the information contained in our consolidated financial statements
        for the year ended June 30, 2007, fairly presents, in all material respects,
        the
        financial condition and results of operations of the Company.





*Limitations on Effectiveness of Controls and Procedures.* Our
        management, including our chief executive officer and chief financial officer,
        does not expect that our disclosure controls and procedures or our internal
        controls will prevent all errors and all fraud. A control system, no matter
        how
        well conceived and operated, can provide only reasonable, not absolute,
        assurance that the objectives of the control system are met. 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. These inherent limitations
        include, but are not limited to, the realities that judgments in decision-making
        can be faulty and that breakdowns can occur because of simple error or mistake.
        Additionally, controls can be circumvented by the individual acts of some
        persons, by collusion of two or more people, or by management override of
        the
        control. The design of any system of controls also 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. Over time, controls may become inadequate because of changes
        in conditions, or the degree of compliance with the policies or procedures
        may
        deteriorate. Because of the inherent limitations in a cost-effective control
        system, misstatements due to error or fraud may occur and not be
        detected.




**ITEM
                9B.**
            **OTHER
                INFORMATION**




None.




47





**PART III**




**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE REGISTRANT**




**Executive
      Officers and Directors**





Upon
      consummation of the Merger, the Compay's sole officer, Benjamin F. McGraw,
      was
      terminated as the Company's Chief Executive Officer, President, Treasurer,
      and
      Secretary. The following table lists the names and ages and positions of our
      current executive officers and directors.  . Each of the executive
      officers was appointed on July 16, 2007.




**Name**
            
            
            
            **Age**
            
            **Position**William
                J. Garner, M.D.
            
            41
            
            President,
                Chief Executive Officer and DirectorMartin
                E. Shmagin
            
            57
            
            Chief
                Financial Officer and DirectorTerry
                M. Nida
            
            59
            
            Chief
                Operating OfficerBenjamin
                F. McGraw, III, Pharm.D.
            
            58
            
            Chairman
                of the BoardGeorge
                M. Lasezkay, Pharm.D, J.D.
            
            55
            
            DirectorTracy
                Taylor
            
            53
            
            DirectorC.
                Lowell Parsons
            
            63
            
            Director







The
      principal occupations and positions for the past five years, and in some cases
      prior years, of the executive officers and directors named above, are as follows
      unless set forth elsewhere in this report:





**William
      J. Garner, M.D.,***41,* was appointed President and Chief
      Executive Officer on July 13, 2007.  Prior to that date, Dr. Garner
      was President and Chief Executive Officer of Urigen N.A.,
      Inc.  Dr. Garner is an experienced entrepreneur. Prior to
      founding Urigen N.A., Dr. Garner had been the founder and managing director
      of EGB Advisors, LLC, a pharmaceutical commercialization boutique. Through
      this entity, Dr. Garner worked on a number of biopharmaceutical business
      transactions and has raised financing for another company that he founded called
      Inverseon, Inc., developing a novel therapy for asthma. Before this,
      Dr. Garner worked in medical affairs at Hoffmann LaRoche in oncology. Prior
      to Hoffmann LaRoche, Dr. Garner was in the venture capital department at
      Paramount Capital Investments in New York City. Dr. Garner has a Master of
      Public Health from Harvard and received his M.D. degree from New York Medical
      College. Dr. Garner did  residency training in Anatomic Pathology at
      Columbia-Presbyterian and is currently a licensed physician in the State of
      New
      York.




**Martin
      E. Shmagin*****,****57,* was appointed as our
      Chief Financial Officer on July 13, 2007. Prior to that date, Mr. Shmagin served
      as Chief Financial Officer of Urigen N.A., Inc. For over ten years
      Mr. Shmagin served as president of Innovative Financial Solutions Ltd., an
      accounting and financial consulting firm that serves as chief financial officer
      and controller for start-up through mid-size businesses. From 1978 to 1986,
      Mr. Shmagin was vice president, Finance/chief financial officer of
      Fisher & Brother, Inc. From 1986 to 1989, he was comptroller of
      Strober Bros., Inc. and supported the company’s successful initial public
      offering. He then opened his own consulting firm where he assisted Stenograph
      Corporation with its acquisition of Baron Data Corporation and Hanover Direct
      with its acquisition of Gumps. He also supported a $24 million global systems
      conversion of American President Companies, Ltd., a $2.6 billion transportation
      company, where he coordinated the data conversion of eighty-three subsidiaries
      in multiple currencies. Mr. Shmagin holds a B.S. degree in accounting from
      New York University.




**Terry
      M. Nida,***59,*  was appointed as Chief Operating
      Officer on July 13, 2007. Prior to that, Mr. Nida served as Urigen N.A.,
      Inc.’s vice president for sales, marketing and corporate development. Prior to
      joining Urigen, Mr. Nida served as vice president, worldwide sales,
      marketing and corporate development for VIVUS, Inc. From November 1995
      to August 1998, Mr. Nida was vice president, Europe, and effective
      March 28, 1996 was appointed as an executive officer. Prior to joining
      VIVUS, Mr. Nida was vice president, sales, marketing and business
      development at Carrington Laboratories, with responsibility for all sales,
      marketing and business development activities. Mr. Nida was senior
      director, worldwide sales, marketing and business development for
      Centocor, Inc. from 1993 to 1994, and director of sales and marketing in
      Europe for Centocor, Inc. from 1990 to 1993. He holds a B.S. degree in
      english and an M.A. degree in administration of justice from Wichita State
      University.




48




**Benjamin
      F. McGraw, III, Pharm.D.**




Benjamin
      F. McGraw, III, Pharm.D., 58, served as the President and Chief Executive
      Officer of Valentis from  September 1994, when he joined Megabios
      Corp., and as Chairman since May 1997. Effective upon the closing of the
      Merger on July 13, 2007, Dr. McGraw resigned as President and Chief Executive
      Officer. In March 1999, Megabios merged with GeneMedicine, Inc. to
      form Valentis. Prior to Megabios, Dr. McGraw gained experience in R&D
      as Vice President, Development for Marion and Marion, Merrell Dow; in business
      development as Corporate Vice President, Corporate Development at
      Allergan, Inc.; and in finance as President of Carerra Capital Management.
      Dr. McGraw currently serves on the board of directors of ISTA
      Pharmaceuticals, Inc. Dr. McGraw received his Doctor of Pharmacy from
      the University of Tennessee Center for the Health Sciences, where he also
      completed a clinical practice residency.




**Tracy
      Taylor*****,****53****,***
      a director of Urigen and
      serves as president and chief executive officer of Kansas Technology Enterprise
      Corporation, or KTEC, a private-public partnership dedicated to stimulating
      technology-based economic development in the State of Kansas. Mr. Taylor’s
      extensive corporate and entrepreneurial experience has been integral to the
      success of KTEC.




After
      his
      initial position in corporate finance at Ford Motor Company, Mr. Taylor
      jointed United Telecom in 1982 to work on the company’s mergers and
      acquisitions. Less than two years later, Mr. Taylor was selected to a
      12-person team that developed a business plan for what eventually became the
      Sprint Corporation. As Sprint grew into a Fortune 100 company, Mr. Taylor
      played a leadership role in the management side, serving as the treasurer of
      US
      Sprint. Mr. Taylor led the regional site selection for Sprint’s World
      Headquarters in Overland Park, Kansas, which covers over 300 acres and holds
      more than 16,000 employees. Mr. Taylor graduated from Bethany College and
      received his M.B.A. degree from the University of Kansas. Mr. Taylor’s
      experience in business, entrepreneurial endeavors and technology-oriented
      business growth place him in a position to contribute to a wide variety of
      boards and organizations. While Mr. Taylor has served on several boards
      across the state and country, his most recent contributions have been on the
      Enterprise Center of Johnson County, a working incubator focused on the
      commercialization of technology; Mid-America Manufacturing Technology Center
      (MAMTC); KansasBio; and Catalyst Lighting, a publicly-traded company.
      Mr. Taylor has served on Urigen N.A., Inc.’s board of directors since
      December 2005.




**C.
      Lowell Parsons,
      M.D.,*********63****,*****a
      director of Urigen, is a leader in medical research into the causes and
      treatment of interstitial cystitis, which is a painful bladder syndrome with
      typical cystoscopic and/or histological features in the absence of infection
      or
      other pathology, and has published over 200 scientific articles and book
      chapters in this area describing his work. Dr. Parsons received his M.D.
      degree from the Yale University School of Medicine in New Haven, CT, in 1970.
      After completing his medical internship at Yale in 1971, Dr. Parsons spent
      two years as a staff associate in the Laboratory of Microbiology at the National
      Institutes of Health in Bethesda, Maryland. He then completed his urology
      residency training at the Hospital of the University of Pennsylvania in
      Philadelphia, Pennsylvania, in 1977. Dr. Parsons joined the Division of
      Urology faculty at the University of California, San Diego, or UCSD, in 1977
      as
      assistant professor. He served as Chief of Urology at the UCSD-affiliated
      Veterans Affairs Medical Center in La Jolla from 1977 to 1985. Since 1988,
      he has been Professor of Surgery/Urology.




49




**George
      M.
      Lasezkay, Pharm.D.**




George
      M.
      Lasezkay, Pharm.D., *55*, has served as one of our directors since
      May 2004. Since September 2003, Dr. Lasezkay has provided
      business development and strategic advisory services to biotechnology and
      emerging pharmaceutical companies through his consulting firm, Turning Point
      Consultants. From 1989 to 2002, Dr. Lasezkay served in various positions at
      Allegan, Inc., including Assistant General Counsel from 1994 to 1996, Vice
      President, Corporate Development from 1996 to 1998, and Corporate Vice
      President, Corporate Development from 1998 to 2002. Dr. Lasezkay currently
      serves on the board of directors of Collagenex Pharmaceuticals, Inc. and a
      number of privately-held companies. Dr. Lasezkay received his J.D. from the
      University of Southern California Law Center and his Doctor of Pharmacy and
      Bachelor of Science in Pharmacy from the State University of New York at
      Buffalo.




**Former
      Directors**




In
      connection with the closing of the Merger on July 13, 2007, Patrick G. Enright,
      Dennis J. Purcell, John S. Schroeder, MD and Reinaldo M. Diaz , resigned as
      directors of the Company.




**Committees
      of the Board of Directors**




Our
      Board
      of Directors has a standing Audit Committee, Compensation Committee and
      Nominating Committee.




**Audit
      Committee**




The
      Audit
      Committee meets with the independent auditors at least annually to review the
      results of the annual audit and discuss the financial statements, recommends
      to
      the Board of Directors the independent auditors to be retained and receives
      and
      considers the accountants’ comments as to controls, adequacy of staff and
      management performance and procedures in connection with audit and financial
      controls. The Audit Committee also meets with the independent auditors to review
      the quarterly financial results and to discuss the results of the independent
      auditors’ quarterly review and any other matters required to be communicated to
      the Audit Committee by the independent auditors under generally accepted
      auditing standards. During the fiscal year ended June 30, 2007, the Audit
      Committee was composed of three independent non-employee directors:
      Messrs. Enright and McDade and Dr. Lasezkay.




The
      Board
      of Directors intends to appoint new independent non-employee directors to the
      Audit Committee to fill the vacancies on the Audit Committee created by the
      resignations of Messrs. Enright and McDade.  The Audit Committee
      has adopted a written charter, a copy of which was included as an appendix
      to
      the proxy statement filed with the Securities and Exchange Commission for the
      2004 Annual Meeting of Stockholders.




**Compensation
      Committee**




The
      Compensation Committee makes recommendations concerning salaries and incentive
      compensation, awards stock options to employees and consultants under the
      Company’s stock option plans and otherwise determines compensation levels and
      performs such other functions regarding compensation as the Board of Directors
      may delegate. During the fiscal year ended June 30, 2007, the
      Compensation Committee was composed of three independent non-employee directors:
      Messrs. McDade and Diaz and Dr. Lasezkay. The Board of Directors
      determined that each member of the Compensation Committee is independent within
      the meaning of the Nasdaq Stock Market’s director independence standards. The
      Compensation Committee has adopted a written charter, a copy of which was
      included as an appendix to the proxy statement filed with the Securities and
      Exchange Commission for the 2004 Annual Meeting of Stockholders.




50




The
      Board
      of Directors intends to appoint new independent non-employee directors to the
      Compensation Committee to fill the vacancies on the Compensation Committee
      created by the resignations of Messrs. McDade and Diaz.




**Nominating
      and Governance Committee**




The
      Nominating and Governance Committee assists the Board of Directors in
      discharging the Board of Directors’ responsibilities regarding identifying
      qualified candidates to become members of the Board of Directors, selecting
      candidates to fill any vacancies on the Board of Directors, ensuring that we
      have and follow the appropriate governance standards and overseeing the
      evaluation of the Board of Directors. During the fiscal year ended
      June 30, 2007, the Nominating Committee was composed of three
      independent non-employee directors: Messrs. Schroeder, M.D. and Purcell.
      The Board of Directors has determined that each member of the Nominating
      Committee is independent within the meaning of the Nasdaq Stock Market’s
      director independence standards. The Nominating and Governance Committee has
      adopted a written charter, a copy of which was included as an appendix to the
      proxy statement filed with the Securities and Exchange Commission for the 2004
      Annual Meeting of Stockholders.




The
      Nominating Committee will consider and has adopted a policy with regard to
      the
      consideration of any director candidates recommended by security holders. The
      Nominating Committee uses a process similar to that contained in the Nominating
      Committee Charter for identifying and evaluating director nominees recommended
      by our stockholders. In the fiscal year ended June 30, 2007, there
      have been no material changes to the procedures by which security holders may
      recommend nominees to the Board of Directors.




The
      Board
      of Directors intends to appoint new independent non-employee directors to the
      Nominating and Governance Committee to fill the vacancies on the Nominating
      and
      Governance Committee created by the resignations of Messrs. Schroeder, M.D.
      and Purcell.




**Compensation
      of Directors**




The
      current Company plan states that each of our non-employee directors receives
      an
      annual retainer of $12,000 and a per meeting fee of $1,000. The chairman of
      the
      Audit Committee receives an annual retainer of $6,000 and a per meeting fee
      of
      $800 and the other members of the Audit Committee receive an annual retainer
      of
      $4,000 and a per meeting fee of $500. The chairman of the Compensation Committee
      receives an annual retainer of $3,500 and a per meeting fee of $800 and the
      other members of the Compensation Committee receive an annual retainer of $2,500
      and a per meeting fee of $500. The chairman of the Nominating Committee receives
      an annual retainer of $2,000 and a per meeting fee of $500 and the other members
      of the Nominating Committee receive an annual retainer of $1,500 and a per
      meeting fee of $500. The members of the Board of Directors are also eligible
      for
      reimbursement for their expenses incurred in connection with attendance at
      Board
      of Directors and committee meetings.




Under
      the
      1998 Non-Employee Directors’ Stock Option Plan as amended and restated, on the
      date following the date of the annual stockholders’ meeting of each year, each
      non-employee director will automatically be granted, without further action
      by
      the Company, our stockholders or the Board of Directors, an option to purchase
      10,000 shares of common stock. In addition, each new non-employee director
      will
      receive a one time grant to purchase 26,000 shares of common stock on the date
      of the annual stockholders’ meeting at which such new director is first elected
      to the Board of Directors. The exercise price of the options granted to the
      non-employee directors is 100% of the fair market value of the common stock
      on
      the date of the option grant.




For
      the
      fiscal year ended June 30, 2007, directors were paid as follows:






**Director**
              
              **Total**
              
              
              **Board
                  Member Fee**
              
              
              **Board
                  Meeting Fee**
              
              
              **Audit
                  Member Fee**
              
              
              **Audit
                  Meeting Fee**
              
              
              **Compensation
                  Member Fee**
              
              
              **Governance
                  Member Fee**Reinaldo
                Diaz
              
              $
              15,875
              
              
              $
              9,000
              
              
              $
              2,000
              
              
              $
              2,000
              
              
              $
              1,000
              
              
              $
              1,875
              
              
              $
              -Patrick
                Enright
              
              
              18,700
              
              
              
              9,000
              
              
              
              2,000
              
              
              
              4,500
              
              
              
              3,200
              
              
              
              -
              
              
              
              -George
                Lasexkay
              
              
              18,625
              
              
              
              9,000
              
              
              
              2,000
              
              
              
              3,000
              
              
              
              2,000
              
              
              
              2,625
              
              
              
              -Mark
                McDade
              
              
              5,125
              
              
              
              3,000
              
              
              
              -
              
              
              
              1,000
              
              
              
              500
              
              
              
              625
              
              
              
              -Alan
                Mendelson
              
              
              4,500
              
              
              
              3,000
              
              
              
              1,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              500Dennis
                Purcell
              
              
              12,125
              
              
              
              9,000
              
              
              
              2,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,125John
                Schroeder
              
              
              12,125
              
              
              
              9,000
              
              
              
              2,000
              
              
              
              1,125
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              87,075
              
              
              $
              51,000
              
              
              $
              11,000
              
              
              $
              11,625
              
              
              $
              6,700
              
              
              $
              5,125
              
              
              $
              1,625








51








**Compliance
      with Section 16(a) of the Exchange Act**




Section 16(a) of
      the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) requires
      that our directors, executive officers and persons who own more than ten percent
      of a registered class of our equity securities, file reports of ownership and
      changes in ownership (Forms 3, 4 and 5) with the Securities and Exchange
      Commission. Our directors, executive officers and, beneficial owners of more
      than ten percent of our common stock are required to furnish us with copies
      of
      all of these forms, which they file.




Based
      solely upon our review of these reports, any amendments thereto or written
      representations from certain reporting persons, we believe that during the
      fiscal year ended June 30, 2007, all filing requirements applicable to
      our directors, executive officers, beneficial owners of more than ten percent
      of
      our common stock and other persons subject to Section 16(a) of the
      Exchange Act were met, except Tracy Taylor and C. Lowell Parsons did not timely
      file a Form 3 upon their appointment as directors.




**Code
      of Business Conduct and Ethics**




The
      Board
      of Directors has adopted a Code of Business Conduct and Ethics that applies
      to
      all our directors, officers and employees, including our Chief Executive
      Officer, who is our principal executive officer, our Vice President of Finance
      and Administration, who is our principal financial officer and principal
      accounting officer. Our Code of Business Conduct and Ethics is posted on our
      website *www.urigen.com*. We will also provide a copy of our Code of
      Business Conduct and Ethics to any person without charge upon request made
      in
      writing to the Company, Attention: Martin Shmagin, Chief Financial Officer,
      875
      Mahler Road, Suite 235, Burlingame, California 94010. We intend to disclose
      any
      amendment to, or a waiver from, a provision of our Code of Business Conduct
      and
      Ethics that applies to its principal executive officer, principal financial
      officer, principal accounting officer or controller, or persons performing
      similar functions and that relates to any element of its Code of Business
      Conduct and Ethics by posting such information on its website
*www.urigen.com.*




52





**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**






**Summary
      Compensation Table**







The
      following table shows for the fiscal years ended June 30, 2007, 2006 and
      2005, compensation awarded or paid to, or earned by, the Company’s Chief
      Executive Officer and its executive officers, other than the Chief Executive
      Officer, whose total annual salary and bonus exceeded $100,000 for the fiscal
      year ended June 30, 2007, referred to as our named executive
      officers:




**Annual Compensation**
            
            **Long-Term Compensation****Name and Principal Position**
            
            
            
            **Year**
            
            **Salary**
            
            **Bonus(1)**
            
            **Other**
              **Annual**
              **Compensation(2)**
            
            **Securities**
              **Underlying**
              **Options/SARs**
            
            **Restricted**
              **Stock**
              **Award(s) $**
            
            **All Other**
              **Compensation**Benjamin
                F. McGraw, III,
            
            
            2007
            
            
            $370,000
            
            
            $176,000
            
            
            
            —
            
            
            
            ―
            
            
            
            ―
            
            
            
            $111,329
            (3)Pharm.D.,
                President, Chief
            
            
            2006
            
            
            370,000
            
            
            $—
            
            
            
            —
            
            
            
            438,000
            
            
            
            59,464
            
            
            
            $1,598
            (4)Executive
                Officer and Chairman
            
            
            2005
            
            
            370,000
            
            
            177,500
            
            
            
            —
            
            
            
            221,000
            
            
            
            —
            
            
            
            3,483
            (5)John
                J. Reddington, Ph.D., DVM
            
            
            2007
            
            
            $102,041
            
            
            $104,500
            
            
            
            —
            
            
            
            ―
            
            
            
            ―
            
            
            
            $325,594
            (6)Chief
                Operating Officer
            
            
            2006
            
            
            275,000
            
            
            22,950
            
            
            
            —
            
            
            
            257,000
            
            
            
            29,507
            
            
            
            1,102
            (7)2005
            
            
            255,000
            
            
            73,498
            
            
            
            —
            
            
            
            75,000
            
            
            
            —
            
            
            
            47,772
            (8)Joseph
                A. Markey
            
            
            2007
            
            
            $92,122
            
            
            $59,000
            
            
            
            —
            
            
            
            ―
            
            
            
            ―
            
            
            
            $238,133
            (9)Vice
                President of Finance and
            
            
            2006
            
            
            206,000
            
            
            13,875
            
            
            
            —
            
            
            
            122,000
            
            
            
            17,839
            
            
            
            845
            (10)2005
            
            
            185,000
            
            
            43,750
            
            
            
            —
            
            
            
            65,000
            
            
            
            —
            
            
            
            856
            (11)





(1)
            Bonuses
                reflect payment by the Company to the named executive officer during
                the
                fiscal year for such officer’s performance in the prior fiscal
                year.  The company issued to Dr. McGraw a promissory note in the
                amount of $176,000 in lieu of accrued bonus compensation.  The
                note bears interest at the rate of 5.0% per annum and may be prepaid
                by
                the Company in full or in part at any time without premium or penalty
                and
                is due and payable in full on December 25,
                2007.




(2)
            As
                permitted by rules promulgated by the Securities and Exchange
                Commission, no amounts are shown where the amounts constitute perquisites
                and do not exceed the higher of 10% of the sum of the salary and
                bonus
                column or $50,000.




(3)
            Represents
                insurance premiums of $3,412 paid by the Company with respect to
                group
                life insurance for the benefit of Dr. McGraw and $110,917 severance
                payment earned in fiscal year ended June 30, 2007, which was paid
                in July
                2007.




(4)
            Represents
                insurance premiums of $1,598 paid by the Company with respect to
                group
                life insurance for the benefit of
                Dr. McGraw.




(5)
            Represents
                insurance premiums of $3,483 paid by the Company with respect to
                group
                life insurance for the benefit of
                Dr. McGraw.




(6)
            Represents
                (i) severance payment of $291,500 per severance and change of control
                agreement. Dr. Reddington’s employement with the Company was terminated on
                October 31, 2006; (ii) payment of $33,634 for accrued vacation;
                and (iii) insurance premiums of $460 paid by the Company with respect
                to
                group life insurance for the benefit of
                Dr. Reddington.




(7)
            Represents
                insurance premiums of $1,102 paid by the Company with respect to
                group
                life insurance for the benefit of Dr. Reddington. Excludes
                approximately $59,000 of used lab equipment that the
                Company  purchased from DiagXotics, Inc. where Dr. Reddington
                had served as Chief Executive Officer for over 15 years until July
                2005.




(8)
            Represents
                (i) payment of $46,530 for moving expenses during fiscal year ended
                June 30, 2005; and (ii) insurance premiums of $1,242 paid by the
                Company with respect to group life insurance for the benefit of
                Dr. Reddington.




(9)
            Represents
                (i) severance payment of $213,200 per severance and change of control
                agreement. Mr. Markey’s employement with the Company was terminated on
                October 31, 2006; (ii) payment of $24,600 for accrued vacation;
                and (iii) insurance premiums of $333 paid by the Company with respect
                to
                group life insurance for the benefit of Mr.
                Markey.




(10)
            Represents
                insurance premiums of $845 paid by the Company with respect to group
                life
                insurance for the benefit of
                Mr. Markey.




(11)
            Represents
                insurance premiums of $856 paid by the Company with respect to group
                life
                insurance for the benefit of
                Mr. Markey.




53




**Stock
      Option Grants and Exercises**




The
      Company grants options to its executive officers under its 1997 Equity Incentive
      Plan and its 2001 Nonstatutory Incentive Plan. As of June 30, 2007,
      options to purchase a total of 2,347,244 shares were outstanding under the
      1997
      Equity Incentive Plan and the 2001 Nonstatutory Incentive Plan and options
      to
      purchase 1,892,551 shares remained available for grant thereunder.




The
      Company did not grant any stock options to the named executive officers during
      the fiscal year ended June 30, 2007. The following tables show for the
      fiscal year ended June 30, 2007, certain information regarding options
      exercised by, and held at year end by, the named executive
      officers:




**Aggregated
      Option Exercises in Last Fiscal Year and Fiscal Year End Option Values**




**Name**
            
            
            
            **Shares**
              **Acquired**
              **on Exercise**
              **(#)(1)**
            
            **Value**
              **Realized**
              **($)**
            
            **Number of Securities**
              **Underlying**
              **Unexercised**
              **Options at**
              **June 30, 2007**
              **(#) Exercisable/**
              **Unexercisable**
            
            **Value of Unexercised**
              **In-the-Money**
              **Options at**
              **June 30, 2007(2)**
              **($) Exercisable/**
              **Unexercisable**Benjamin
                F. McGraw III, Pharm.D.
            
            
            —
            
            
            
            —
            
            
            
            948,198/345,981
            
            
            
            $0/0Joseph
                A. Markey
            
            
            —
            
            
            
            —
            
            
            
            328,337/0
            (3)
            
            
            $0/0John
                J. Reddington, Ph.D., DVM
            
            
            —
            
            
            
            —
            
            
            
            502,000/0
            (4)
            
            
            $0/0




(1)
            None
                of the executive officers exercised any options in the last fiscal
                year.




(2)
            Calculated
                on the fair market value of the Company’s common stock on
                June 30, 2007, which was $0.16, minus the exercise price of the
                options.




(3)
            In
                accordance with the change of control and severance agreement, all
                outstanding stock options held by Mr. Markey became fully vested
                and
                exercisable on October 31, 2006, the date of the termination of
                Mr. Markey’s employment with the
                Company.




(4)
            In
                accordance with the change of control and severance agreement, all
                outstanding stock options held by Dr. Reddington became fully vested
                and
                exercisable on October 31, 2006, the date of the termination of
                Dr. Reddington’s employment with the
                Company.




**Change
      of Control and Severance Agreements**




In
      May 2006, the Company entered into Severance and Change of Control
      agreements with each of Benjamin F. McGraw III, the President and
      Chief Executive Officer of the Company, John J. Reddington, the Chief
      Operating Officer of the Company, and Joseph A. Markey, the Vice
      President of Finance and Administration of the Company. The term of the each
      such agreement is for two years from May 12, 2006, unless extended by
      mutual agreement by the Company and such executive officer or unless earlier
      terminated, as described below.




Each
      agreement provides that, if the Company terminates such executive officer’s
      employment during the term for any reason other than for cause, disability
      or
      death, then the executive officer shall be entitled to, among other things,
      the
      following: (i) the payment of all earned but unpaid base salary and any
      other benefit due through the date of termination, (ii) a lump sum cash
      payment in an amount equal to such executive officer’s then current annual base
      salary, and (iii) notwithstanding any provision to the contrary in any
      equity award agreement or equity compensation plan, all outstanding equity
      awards then held by such executive officer shall become fully vested and, if
      applicable, exercisable with respect to all shares subject thereto immediately
      prior to the date of termination.




54




Each
      agreement also provides that, if such executive officer terminates his
      employment with the Company for good reason or the Company terminates such
      executive officer’s employment for any reason other than for cause during the
      period commencing three months prior to and ending 12 months after a change
      in
      control of the Company, such executive officer shall be entitled to, among
      other
      things, the following in lieu of the payments described above: (i) the
      payment of all earned but unpaid base salary and any other benefit due through
      the date of termination, (ii) a lump sum cash payment in an amount equal to
      three times such executive officer’s then current base salary, in the case of
      the agreement with Dr. McGraw, or two times such executive officer’s then
      current base salary, in the case of the agreements with Dr. Reddington and
      Mr. Markey, and (iii) notwithstanding any provision to the contrary in
      any equity award agreement or equity compensation plan, all outstanding equity
      awards then held by such executive officer shall become fully vested and, if
      applicable, exercisable with respect to all shares subject thereto immediately
      prior to the date of termination.  Drs. McGraw and Reddington and Mr.
      Markey waived the portions of their agreements giving them more than one year’s
      salary on change of control.




Each
      agreement further provides that, if such executive officer terminates his
      employment with the Company without good reason or the Company terminates such
      executive officer’s employment for cause, then such executive officer will
      (i) receive his earned but unpaid salary through the date of termination,
      (ii) all accrued vacation, expense reimbursements and any other benefits
      due through the date of termination and (iii) not be entitled to any other
      compensation or benefits from the Company, except as required by law or to
      the
      extent provided under any agreement(s) relating to any equity
      awards.




Each
      agreement also provides that, for a period commencing on May 12, 2006
      and ending 24 months following the date of any termination, such executive
      officer shall not, directly or indirectly, (i) induce, solicit or encourage
      any employee of the Company to leave the Company or in any way interfere with
      the relationship between the Company and any employee thereof or
      (ii) induce, solicit or encourage any customer, supplier, licensee,
      licensor, franchisee or other business relation of the Company to cease doing
      business with the Company or in any way interfere with such
      relationship.




**Compensation
      Committee Interlocks and Insider Participation**






During
      the fiscal year ended June 30, 2007, none of the Company’s executive
      officers served on the board of directors of any entities whose directors or
      officers serve on the Company’s Compensation Committee. No current or former
      executive officer or employee of the Company serves on the Compensation
      Committee.




**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND
                RELATED STOCKHOLDER
                MATTERS**





The
      following table provides information at to shares of common stock beneficially
      owned as of October 1, 2007 by:




•
            each
                director;•
            each
                officer named in the summary compensation
                table;


•
            each
                person owning of record or known by us, based on information provided
                to
                us by the persons named below, to own beneficially at least 5% of
                our
                common stock; and•
            all
                directors and executive officers as a
                group.





Unless
      otherwise indicated, the persons named in the table below have sole voting
      and
      investment power with respect to the number of shares indicated as beneficially
      owned by them. Furthermore, unless otherwise indicated, the address of the
      beneficial owner is c/o Urigen Pharmaceuticals, Inc. 875 Mahler Road, Suite
      235,
      Burlingame, CA 94010.




55




Name
            
            Shares
                of Common Stock Beneficially Owned
            
            
            PercentageWilliam
                J. Garner M.D, President, Chief Executive Officer and
                Director
            
            
            18,476,540
            
            
            
            27.6
            %Martin
                E. Shmagin, Chief Financial Officer and Director
            
            
            2,914,073
            
            
            
            4.27
            %Terry
                M. Nida, Chief Operating Officer
            
            
            3,135,049
            
            
            
            4.59
            %Benjamin
                F. McGraw, Pharm.D, Chairman of the Board
            
            
            *
            
            
            
            *Tracy
                Taylor, Director
            
            
            *
            
            
            
            *C.
                Lowell Parsons, Director
            
            
            1,802,693
            
            
            
            2.64
            %George
                M. Lasezkay, Pharm.D., J.D., Director
            
            
            *
            
            
            
            *All
                officers and directors as a group (6 individuals owning
                stock)
            
            
            26,328,355
            
            
            
            38.56
            %




*
      Less
      than 1%






Except
      as
      otherwise indicated each person has the sole power to vote and dispose of all
      shares of common stock listed opposite his name.  Each person is
      deemed to own beneficially shares of common stock which are issuable upon
      exercise or warrants or options or upon conversion of convertible securities
      if
      they are exercisable or convertible within 60 days of October 1,
      2007.




**Equity
      Compensation Plan Information**




The
      following table sets forth
      information as of June 30, 2007 with respect to the Company’s
      compensation plans under which equity securities of the Company are authorized
      for issuance:




**Plan category**
            
            
            
            **Number of securitiesto be**
              **issued upon exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **Weighted-average exercise**
              **price of outstanding**
              **options, warrants and rights**
            
            **Number of securities remaining**
              **available for future issuance**
              **under equity compensation plans**
              **(excluding securities**
              **reflected in column (a))****(a)**
            
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders(1)
            
            
            2,492,065
            
            
            
            $5.70
            
            
            
            1,632,730Equity
                compensation plans not approved by security holders(2)
            
            
            77,344
            
            
            
            $7.48.01
            
            
            
            612,656Total
            
            
            2,569,409
            
            
            
            $5.76
            
            
            
            2,245,386




(1)
            Consists
                of the 1997 Equity Incentive Plan and the 1998 Non-Employee Directors’
                Stock Option Plan. These equity compensation plans are more fully
                described in Note 2 to Consolidated Financial Statements included in
                this Annual Report on
                Form 10-K.




(2)
            In
                May 2001, the Board of Directors adopted the 2001 Nonstatutory
                Incentive Plan covering 100,000 shares of common stock of the Company.
                An
                additional 590,000 shares were added to the plan as approved by the
                Board
                of Directors in May 2003, when the plan was amended and restated. The
                2001 Plan provides for grants of nonstatutory stock options, stock
                bonuses, rights to purchase restricted stock, or a combination of
                the
                foregoing, referred to as stock awards, to employees and consultants
                of
                the Company who are not officers and directors. The exercise price
                of
                options granted under the 2001 Plan is determined by the Board of
                Directors but cannot be less than 100% of the fair market value of
                the
                common stock on the date of the grant. Options under the 2001 Plan
                generally vest 25% one year after the date of grant and on a pro
                rata
                basis over the following 36 months and expire ten years after the
                date of grant or 90 days after termination of employment. Stock
                awards granted under the plan cannot be repriced without the prior
                approval of the Company’s stockholders. Upon a change in control of the
                Company, the surviving corporation or acquiring corporation is required
                to
                assume any stock awards outstanding under the 2001 Plan or substitute
                similar stock awards for any stock awards outstanding. If any surviving
                or
                acquiring corporation refuses to assume such Stock Awards or substitute
                similar stock awards, then such stock awards shall be terminated
                if not
                exercised prior to the change of control. Upon a change in control
                not
                approved by the Board of Directors, each outstanding stock award
                shall
                become fully vested immediately prior to the consummation of such
                change
                in control. As of June 30, 2007, options for 77,344 shares had been
                granted under this plan.




56




The
      foregoing summary is qualified in its entirety by reference to the full text
      of
      the 2001 Plan. the Company will provide, without charge, to each person to
      whom
      this proxy statement is delivered, upon request of such person and by first
      class mail within one business day of receipt of such request, a copy of the
      2001 Plan. Any such request should be directed as follows: Investor Relations,
      Urigen Pharmaceuticals, Inc., 875 Mahler Road, Burlingame, California
      94010; telephone number: (650) 259-0239.




**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS**




For
      the
      fiscal year ended June 30, 2007, the Company paid an aggregate of
      approximately $229,000 to the law firm of Latham & Watkins LLP for the
      provision of legal services during that period. Mr. Mendelson, a former
      director of the Company, is a partner of Latham & Watkins
      LLP.





During
      the fiscal year ended June 30, 2007, the spouse of
      Joseph A. Markey provided services to the Company for which she was
      paid approximately $74,000.




The
      Company has entered into indemnity agreements with each of its executive
      officers and directors which provide, among other things, that the Company
      will
      indemnify such officer or director, under the circumstances and to the extent
      provided for therein, for expenses, damages, judgments, fines and settlements
      he
      may be required to pay in actions or proceedings, which he is or may be made
      a
      party by reason of his position as a director, officer or other agent of the
      Company, and otherwise to the full extent permitted under Delaware law and
      the
      Company’s Bylaws.





We
      pay a
      monthly fee of $2,683 to EGB Advisors, LLC. EGB Advisors, LLC is owned
      solely by William J. Garner, President and CEO of the Company.
      Mr. Garner owns 18,476,540 shares of common stock. The fees are for rent,
      telephone and other office services which are based on estimated fair market
      value. Mr. Garner also received payment for services provided as a
      consultant to the Company. As of June 30, 2007, Mr. Garner and EGB
      Advisors, LLC were owed $14,610, collectively.





On
      November 17, 2006, Urigen, N.A. issued an unsecured promissory note to
      C. Lowell Parsons, a director of the Company, in the amount of
      $200,000.  Under the terms of the note, the Company is to pay interest
      at a rate per annum computed on the basis of a 360-day year equal to 12% simple
      interest. The foregoing amount is due and payable on the earlier of (i)
      forty-five (45) days after consummation of the Merger (as defined in the
      Agreement and Plan of Merger, dated as of October 5, 2006, between the Company
      and Valentis, Inc., or (ii) two (2) calendar years from the note issuance date
      (in either case, the “Due Date”).  Also, the Company agreed to issue
      1,000 shares of Series B Preferred Stock, par value $0.00001 per
      share.




**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND SERVICES**




Fees
      paid
      or accrued by the Company for services provided by the Company’s auditor, Burr,
      Pilger & Mayer LLP, for fiscal year 2007 are as follows:




57




*Audit
      Fees:*   The aggregate fees billed for professional services
      rendered for the audit of the Company's annual financial statements for the
      fiscal year ended June 30, 2007 were $120,000.


We
      have
      not paid any audit related or tax fees to Burr, Pilger & Mayer LLP, for
      fiscal year 2007.




Fees
      paid
      or accrued by the Company, Inc. for services provided by the Company’s
      former auditor, Ernst & Young LLP, for fiscal year 2006 are as
      follows:




*Audit
      Fees:*   The aggregate fees billed for professional services
      rendered for the audit of the Company annual financial statements for the fiscal
      year ended June 30, 2006 and the reviews of the financial statements
      included in the Company’s Forms 10-Q, issuance of consents and other services in
      connection with statutory and regulatory filings and accounting consultations
      in
      connection with or arising as a result of the audits and quarterly review of
      the
      financial statements for that fiscal year were $336,130.




*Audit-Related
      Fees:*** The aggregate fees billed for audit-related
      services were $27,000 for the fiscal year ended June 30, 2006.
      Audit-related fees consist of fees for services rendered for assurance and
      related services that are reasonably related to the performance of the audit
      or
      review of the Company’s financial statements and are not reported under “Audit
      Fees.” All of the audit-related fees in fiscal 2006 relate to services rendered
      for the audit of the Company’s employee benefit plans.




*Tax
      Fees:*   The aggregate fees billed for services for tax compliance
      was $28,100 for the fiscal year ended June 30, 2006.




During
      Fiscal 2006, all services provided by Ernst & Young were pre-approved
      by the Audit Committee.


Pursuant
      to our Audit Committee Charter, before the independent auditor is engaged by
      Valentis to render audit or non-audit services, the Audit Committee pre-approves
      the engagement. Audit Committee pre-approval of audit and non-audit services
      is
      not required if the engagement for the services is entered into pursuant to
      pre-approval policies and procedures established by the Audit Committee
      regarding the Company’s engagement of the independent auditor. The Audit
      Committee has established a pre-approved policy and procedure where pre-approval
      of specific audit and non-audit services that equal or are not expected to
      exceed $30,000 is not required so long as the Audit Committee is informed of
      each service provided by the independent auditor and such policies and
      procedures do not result in the delegation of the Audit Committee’s
      responsibilities under the Securities Exchange Act of 1934, as amended. Audit
      and non-audit services expected to exceed $30,000 require pre-approval of such
      audit and non-audit services by the Audit Committee. The Audit Committee may
      delegate to one or more designated members of the Audit Committee the authority
      to grant pre-approvals, provided such approvals are presented to the Audit
      Committee at a subsequent meeting. Audit Committee pre-approval of non-audit
      services other than review and attest services also is not required if such
      services fall within available exceptions established by the Securities and
      Exchange Commission.




**PART IV**




**ITEM15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES**




(a)(1)      
      Index to Financial Statements




The
      Financial Statements and report of independent auditors required by this item
      are submitted in a separate section beginning on page 62 of this
      Report.





**Page No.**Report
                of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
                Firm
            
            
            65Report
                of Ernst & Young
                LLP, Independent Registered Public Accounting Firm
            
            
            66Consolidated
                Balance
                Sheets
            
            
            67Consolidated
                Statements of
                Operations
            
            
            68Consolidated
                Statements of
                Stockholders’ Equity
            
            
            69Consolidated
                Statements of Cash
                Flows
            
            
            70Notes
                to Consolidated Financial
                Statements
            
            
            71




58




(a)(2)        No
      schedules have been filed, as they were not required or are inapplicable and
      therefore have been omitted.




(a)(3)        Exhibits





**Exhibit**
              **Footnote**
            
            **Exhibit**
              **Number**
            
            **Description
                of Document**(10
            )
            
            3.1
            
            Amended
                and Restated Certificate of Incorporation of the
                Registrant.(1
            )
            
            3.2
            
            Bylaws
                of the Registrant.(3
            )
            
            3.3
            
            Certificate
                of Designations of Series A Convertible Redeemable Preferred
                Stock.(4
            )
            
            3.4
            
            Certificate
                of Amendment to the Bylaws of the Registrant.3.5
            
            Certificate
                of Merger of Valentis, Inc. and Urigen Pharmaceuticals, Inc. filed
                July
                19, 2007**(26
            )
            
            3.6
            
            Amended
                and Restated Certificate of Designation filed July 31,
                20074.1
            
            Reference
                is made to Exhibits 3.1 and 3.2.(1
            )
            
            4.2
            
            Specimen
                stock certificate.(1
            )
            
            4.3
            
            Amended
                and Restated Investor Rights Agreement, dated as of May 23, 1997,
                between the Registrant and the investors named therein.(3
            )
            
            4.4
            
            Form of
                Common Stock Purchase Warrant, Class A.(3
            )
            
            4.5
            
            Form of
                Common Stock Purchase Warrant, Class B.(10
            )
            
            4.6
            
            Stock
                Issuance and Restriction Agreement between the Registrant and The
                Woodlands, dated September 4, 2003.(4
            )
            
            10.1
            
            Amended
                and Restated 1997 Equity Incentive Plan.(1
            )
            
            10.2
            
            Form of
                Incentive Stock Option Grant.(1
            )
            
            10.3
            
            Form of
                Non-Incentive Stock Option.(1
            )
            
            10.4
            
            1997
                Employee Stock Purchase Plan.(1
            )
            
            10.5
            
            Form of
                Indemnification Agreement entered into between the Registrant and
                its
                directors and executive officers.(1
            )
            
            10.6
            
            Letter
                Agreement between the Registrant and Benjamin F. McGraw III,
                Pharm.D.(1
            )
            
            10.7
            
            Lease
                Agreement between the Registrant and Provident Life and Accident
                Insurance
                Company (Provident), dated December 21, 1993.(1
            )
            
            10.8
            
            Lease
                Agreement between the Registrant and SFO Associates LLC (SFO Associates),
                dated March 18, 1997.(14
            )
            
            10.9
            
            Fourth
                Amendment to Lease between the Registrant and ARE-819/863 Mitten
                Road, LLC
                (successor in interest to Provident and SFO Associates), dated
                March 31, 2004.(2
            )*
            
            10.10
            
            First
                Amendment and Restatement of License Agreement between Registrant
                and
                Baylor College of Medicine dated
                March 7, 1994.




59





(2
            )*
            
            10.11
            
            First
                Amendment and Restatement of License Agreement—Woo between Registrant and
                Baylor College of Medicine dated March 7, 1994.(2
            )*
            
            10.12
            
            First
                Amendment and Restatement of License Agreement—GeneSwitch® between
                Registrant and Baylor College of Medicine dated March 7,
                1994.(3
            )
            
            10.13
            
            Form of
                Subscription Agreement between the Registrant and each of the selling
                security holders, dated as of November 20, 2000.(6
            )
            
            10.14
            
            Amended
                and Restated 1998 Non-Employee Directors’ Stock Option
                Plan.(4
            )
            
            10.15
            
            Amended
                and Restated 2001 Nonstatutory Incentive Plan.(5
            )
            
            10.16
            
            Form of
                Amendment, Consent and Waiver Regarding the Subscription Agreement
                and
                Certificate of Designations for the Series A Preferred Stock by and
                among the Company and each holder of the Company’s Series A
                Convertible Redeemable Preferred Stock.(7
            )*
            
            10.17
            
            Form of
                License and Option Agreement, effective as of December 19, 2002, by
                and between the Company and Schering AG.(10
            )
            
            10.18
            
            Lease
                Termination Agreement between the Company and The Woodlands, dated
                September 4, 2003.(6
            )
            
            10.19
            
            Amendment
                to the Amended and Restated 1997 Equity Incentive Plan.(6
            )
            
            10.20
            
            2003
                Employee Stock Purchase Plan.(8
            )
            
            10.21
            
            Securities
                Purchase Agreement, dated as of December 2, 2003, by and among
                Valentis, Inc. and the purchasers identified on the signature
                pages thereto.(8
            )
            
            10.22
            
            Form of
                Warrant to purchase Common Stock.(8
            )
            
            10.23
            
            Registration
                Rights Agreement, dated as of December 2, 2003, by and among
                Valentis, Inc. and the Purchasers signatory
                thereto.(9
            )
            
            10.24
            
            Securities
                Purchase Agreement, dated as of June 7, 2004, by and among
                Valentis, Inc. and the Purchasers signatory
                thereto.(9
            )
            
            10.25
            
            Form of
                Warrant to purchase Common Stock.(9
            )
            
            10.26
            
            Registration
                Rights Agreement, made and entered into as of June 7, 2004, by
                and among Valentis, Inc. and the Purchasers signatory
                thereto.(11
            )
            
            10.27
            
            Securities
                Purchase Agreement, dated as of June 24, 2005, by and among
                Valentis, Inc. and the Purchasers signatory
                thereto.(11
            )
            
            10.28
            
            Form of
                Warrant to purchase Common Stock.(11
            )
            
            10.29
            
            Registration
                Rights Agreement, made and entered into as of June 24, 2005, by
                and among Valentis, Inc. and the Purchasers signatory
                thereto.(12
            )
            
            10.30
            
            Securities
                Purchase Agreement, dated March 21, 2006, by and among
                Valentis, Inc. and the Purchasers signatory
                thereto.(12
            )
            
            10.31
            
            Form of
                Warrant to purchase Common Stock.(12
            )
            
            10.32
            
            Registration
                Rights Agreement, dated March 21, 2006, by and among
                Valentis, Inc. and the Purchasers signatory
                thereto.(13
            )
            
            10.33
            
            Severance
                and Change of Control Agreement, dated May 12, 2006, between
                Valentis, Inc. and Benjamin F. McGraw III.(13
            )
            
            10.34
            
            Severance
                and Change of Control Agreement, dated May 12, 2006, between
                Valentis, Inc. and John J. Reddington.(13
            )
            
            10.35
            
            Severance
                and Change of Control Agreement, dated May 12, 2006, between
                Valentis, Inc. and Joseph A. Markey.(15
            )
            
            
            
            Agreement
                and Plan of Merger with Urigen, N.A and Valentis Holdings, Inc. dated
                as
                of October 5, 2006(16
            )
            
            
            
            Technology
                Transfer Agreement between Valentis, Inc. and Genetronics, Inc. dated
                as
                of October 16, 2006(17
            )
            
            
            
            Asset
                Transfer Agreement, dated as of October 26, 2006, by and between
                Valentis,
                Inc.   and Biolitec,
                Inc.




60




(17
            )
            
            
            
            Asset
                Purchase Agreement, dated as of October 27, 2006, by and between
                Valentis,
                Inc. and Juvaris Biotherapeutics, Inc.(17
            )
            
            
            
            Asset
                Transfer Agreement, dated as of October 27, 2006 by and between Valentis,
                Inc. and Juvaris Biotherapeutics, Inc.(17
            )
            
            
            
            License
                Agreement, dated as of October 27, 2006, by and between Valentis,
                Inc. and
                Juvaris Biotherapeutics, Inc.(18
            )
            
            
            
            Technology
                Transfer Agrement, Inc. dated as of October 24, 2006 by and between
                Valentis, Inc. and Vical Incorporated(18
            )
            
            
            
            License
                Agreement dated as of October 23, 2006, by and between Valentis,
                Inc. and
                Vical Incorporated(19
            )
            
            
            
            Agreement
                for termination of Lease and Voluntary Surrender of Premises, dated
                as of
                October 30, 2006, by and between Valentis, Inc. and ARE 819/863 Mitten
                Road, LLC(20
            )
            
            
            
            Non-Exclusive
                License Agreement dated as of January 8, 2007 by and between Valenits,
                Inc. and Althea Technologies, Inc.(21
            )
            
            
            
            Asset
                Purchase Agreement, effective as of January 26, 2007, as amended
                by and
                between Valentis, Inc. and Medarex, Inc.(22
            )
            
            
            
            Waiver,
                Consent and Amendment to Agreement and Plan of Merger dated as of
                February
                1, 2007 by and among Valentis, Inc, Valentis Holdings, Inc. and Urigen,
                N.A, Inc.(23
            )
            
            
            
            Second
                Amendment to Agreement and Pan of Merger, dated as of March 28, 2007
                by
                and among Valentis, Inc, Valentis Holdings, Inc. and Urigen, N.A,
                Inc.(24
            )
            
            
            
            Exclusive
                License Agreement, dated as of April 12, 2007, by and between Valentis,
                Inc. and Acacia Patent Acquisition Corporation(25
            )
            
            
            
            Third
                Amendment to Agreement and Plan of Merger, dated as of May 14, 2007
                by and
                among Valentis, Inc, Valentis Holdings, Inc. and Urigen, N.A,
                Inc.(26
            )
            
            
            
            Series
                B Convertible Preferred Stock Purchase Agreement dated as of July
                31, 2007
                between Urigen Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences,
                LLC(26
            )
            
            
            
            Registration
                Rights Agreement dated as of August 1, 2007 between Urigen
                Pharmaceuticals, Inc. and Platinum-Montaur Life Sciences,
                LLC(26
            )
            
            
            
            Form
                of Warrant issued to Platinum-Montaur Life Sciences,
                LLC(27
            )
            
            
            
            Amendment
                to Agreement between Valentis, Inc., Acacia Patent  Acquisition
                Corporation and Urigen Pharmaceuticals, Inc.21.1
            
            Subsidiaries
                of the Registrant23.1
            
            Consent
                of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
                Firm.**23.2
            
            Consent
                of Ernst & Young, LLP, Independent Registered Public Accounting
                Firm.**24.1
            
            Power
                of Attorney (included on signature page herewith).31.1
            
            Certification
                of Principal Executive Officer
                Section 302.**




61




31.2
            
            Certification
                of Principal Financial Officer Section 302.**32.1
            
            Certification
                of Principal Executive Officer Section 906.**32.2
            
            Certification
                of Principal Financial Officer
                Section 906.**





(1)
            Filed
                as an exhibit to the Registrant’s Registration Statement on Form S-1
                (No. 333-32593) or amendments thereto and incorporated herein by
                reference.




(2)
            Filed
                as an exhibit to GeneMedicine’s Registration Statement on Form S-1
                (No. 33-77126) or amendments thereto and incorporated herein by
                reference.




(3)
            Filed
                as an exhibit to the Registrant’s Registration Statement on Form S-3
                (No. 333-54066) filed with the SEC on January 19, 2001 and
                incorporated herein by reference.




(4)
            Filed
                as an exhibit to Registrant’s Annual Report on Form 10-K
                (No. 0-22987) for fiscal year ended June 30, 2002 and
                incorporated herein by reference.




(5)
            Incorporated
                by reference to the Company’s Definitive Proxy Statement on Form DEF
                14A (SEC File No. 000-22987), filed with the Securities and
                Exchange Commission on December 12,
                2002.




(6)
            Incorporated
                by reference to the Company’s Definitive Proxy Statement on Form DEF
                14A (SEC File No. 000-22987), filed with the Securities and
                Exchange Commission on May 5,
                2003.




(7)
            Filed
                as Exhibit 10.1 to the Registrant’s Quarterly Report on
                Form 10-Q for the quarter ended December 31, 2002 and
                incorporated herein by reference.




(8)
            Filed
                as an exhibit to the Report on Form 8-K, filed with the Securities
                and Exchange Commission on December 31, 2003 and incorporated herein
                by reference.




(9)
            Filed
                as an exhibit to the Report on Form 8-K, filed with the Securities
                and Exchange Commission on June 14, 2004 and incorporated herein by
                reference.




(10)
            Filed
                as an exhibit to Registrant’s Annual Report on Form 10-K
                (No. 000-22987) for fiscal year ended June 30, 2003 and
                incorporated herein by reference.




(11)
            Filed
                as an exhibit to the Report on Form 8-K, filed with the Securities
                and Exchange Commission on June 27, 2005 and incorporated herein by
                reference.




(12)
            Filed
                as an exhibit to the Report on Form 8-K, filed with the Securities
                and Exchange Commission on March 22, 2006 and incorporated herein by
                reference.




(13)
            Filed
                as an exhibit to the Report on Form 8-K, filed with the Securities
                and Exchange Commission on May 12, 2006 and incorporated herein by
                reference.




(14)
            Filed
                as an exhibit to the Annual Report on Form 10-K, filed with the Securities
                and Exchange Commission September 26, 2005 and incorporated herein
                by
                reference.




(15)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on September 29, 2006 and incorporated herein
                by
                reference.




(16)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on October 16, 2006 and incorporated herein by
                reference.




(17)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on October 26, 2006 and incorporated herein by
                reference.




(18)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on November 2, 2006 and incorporated herein by
                reference.




62




(19)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on November 22, 2006 and incorporated herein
                by
                reference.




(20)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on January 11, 2007 and incorporated herein by
                reference.




(21)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on February 1, 2007 and incorporated herein by
                reference.




(22)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on February 7, 2007 and incorporated herein by
                reference.




(23)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on March 28, 2007 and incorporated herein by
                reference.




(24)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on April 18, 2007 and incorporated herein by
                reference.




(25)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on May 15, 2007 and incorporated herein by
                reference.




(26)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on August 6, 2007 and incorporated herein by
                reference.




(27)
            Filed
                as an exhibit to the Report on Form 8-K filed with the Securities
                and
                Exchange Commission on August 10, 2007 and incorporated herein by
                reference.




*
            Confidential
                treatment granted pursuant to a Confidential Treatment Order for
                portions
                of this document.




**
            Filed
                herewith




†
            Confidential
                treatment has been requested with respect to certain portions of
                this
                Exhibit. The omitted portions have been separately filed with the
                Securities and Exchange Commission.




63





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Act of
      1934, the Registrant has duly caused this Annual Report on Form 10-K to be
      signed on its behalf by the undersigned, thereunto duly authorized, on
      October 5, 2007.










/s/Martin
                Shmagin
            
            
            /s/
                William J. Garner, MDMARTIN
                  E. SHMAGIN
            
            
            WILLIAM
                  J. GARNER, MD*Chief
                  Financial Officer*
            
            
            *President
                  and Chief Executive Officer*






**POWER
      OF ATTORNEY**




KNOW
      ALL
      PERSONS BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints William J. Garner, MD and Martin Shmagin, and each
      or
      any one of them, his true and lawful attorney-in-fact and agent, with full
      power
      of substitution and resubstitution, for him and in his name, place and stead,
      in
      any and all capacities, to sign any and all amendments (including post-effective
      amendments) to this Annual Report, and to file the same, with all exhibits
      thereto, and other documents in connection therewith, with the Securities and
      Exchange Commission, granting unto said attorneys-in-fact and agents, and each
      of them, full power and authority to do and perform each and every act and
      thing
      requisite and necessary to be done in connection therewith, as fully to all
      intents and purposes as he might or could do in person, hereby ratifying and
      confirming all that said attorneys-in-fact and agents, or any of them, or their
      or his substitutes or substitute, may lawfully do or cause to be done by virtue
      hereof.




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            
            
            **Title**
            
            
            
            **Date**/s/
                William J. Garner
            
            President
                and Chief Executive Officer
            
            October 5,
                2007WILLIAM
                J. GARNER, MD
            
            (Principal
                Executive Officer)/s/
                Martin E. Shmagin
            
            Chief
                Financial Officer and Director
            
            October 5,
                2007MARTIN
                E. SHMAGIN
            
            (Principal
                Financial and Accounting Officer)/s/
                George M. Lasezkay
            
            Chairman
                of the Board of Directors
            
            October 5,
                2007GEORGE
                M. LASEZKAY
            
            Director/s/
                C. Lowell Parsons
            
            Director
            
            October 5,
                2007C.
                LOWELL PARSONS






64






**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


Urigen
      Pharmaceuticals, Inc. (formerly Valentis, Inc.)








We
      have
      audited the accompanying consolidated balance sheet of Urigen Pharmaceuticals,
      Inc. (formerly Valentis, Inc.) and its subsidiary (the “Company”) as of June 30,
      2007 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended.  These consolidated
      financial statements are the responsibility of the Company’s
      management.  Our responsibility is to express an opinion on these
      financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  The
      Company is not required to have, nor were we engaged to perform, an audit of
      the
      Company’s internal control over financial reporting.  Our audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting.  Accordingly, we
      express no such opinion.  An audit also includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation.  We believe that our audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Urigen
      Pharmaceuticals, Inc. (formerly Valentis, Inc.) and its subsidiary as of
      June 30, 2007, and the results of their operations and their cash flows for
      the
      year then ended in conformity with accounting principles generally accepted
      in
      the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern.  As discussed in Note 1
      to the consolidated financial statements, the Company’s recurring losses from
      operations, negative cash flow from operations and accumulated deficit raise
      substantial doubt about its ability to continue as a going
      concern.  Management’s plans as to these matters are also described in
      Note 1.  The consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





As
      discussed in Note 16 to the consolidated financial statements, effective July
      13, 2007, the Company completed a reverse merger with Urigen N.A.., Inc. a
      private, development stage company and changed its name to Urigen
      Pharmaceuticals, Inc. on July 30, 2007.




October
                2, 2007
            By:
            /s/ Burr,
              Pilger & Mayer LLP




65





**REPORT
      OF INDEPENDENT REGISTERED**


**PUBLIC
      ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders




Urigen
      Pharmaceuticals, Inc. (formerly Valentis, Inc.)




We
      have
      audited the accompanying consolidated balance sheet of Urigen Pharmaceuticals,
      Inc. (formerly Valentis, Inc.) as of June 30, 2006, and the
      related consolidated statements of operations, stockholders’ equity and cash
      flows for each of the two years in the period ended June 30, 2006.
      These financial statements are the responsibility of the Company’s management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Urigen
      Pharmaceuticals, Inc. (formerly Valentis, Inc.) as of
      June 30, 2006, and the consolidated results of its operations and its
      cash flows for each of the two years in the period ended
      June 30, 2006, in conformity with U.S. generally accepted accounting
      principles.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      Urigen Pharmaceuticals, Inc. (formerly Valentis, Inc.) will continue as a
      going concern. As more fully described in Note 1, the Company has incurred
      losses since inception, including a net loss of $15.3 million for the year
      ended June 30, 2006 and its accumulated deficit was $240 million at
      June 30, 2006. These conditions raise substantial doubt about the
      Company’s ability to continue as a going concern. Management’s plans as to these
      matters are also described in Note 1. The financial statements do not
      include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the outcome of this uncertainty.




As
      discussed in Note 1 to the consolidated financial statements, in fiscal year
      2006, Urigen Pharmaceuticals, Inc. (formerly Valentis, Inc.) changed its
      method of accounting for stock-based compensation in accordance with guidance
      provided in Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment”.







September
                  27, 2006
            By:
            /s/ Ernst &
Young
              LLP




66




**URIGEN
      PHARMACEUTICALS, INC.(formerly Valentis,
      Inc.)**




**CONSOLIDATED
      BALANCE SHEETS**




**(in
      thousands, except share and per share amounts)**




**June 30,****2007**
            
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            478
            
            
            $
            3,598Short-term
                investments
            
            
            ―
            
            
            
            750Interest
                and other receivables
            
            
            ―
            
            
            
            87Prepaid
                expenses and other current assets
            
            
            217
            
            
            
            280Total
                current assets
            
            
            695
            
            
            
            4,715Property
                and equipment, net
            
            
            5
            
            
            
            37Goodwill
            
            
            409
            
            
            
            409Other
                assets
            
            
            ―
            
            
            
            97Total
                assets
            
            $
            1,109
            
            
            $
            5,258**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            ―
            
            
            $
            91Accrued
                compensation
            
            
            174
            
            
            
            889Accrued
                clinical trial costs
            
            
            12
            
            
            
            730Other
                accrued liabilities
            
            
            312
            
            
            
            705Note
                payable to related party
            
            
            176
            
            
            
            ―Total
                current liabilities
            
            
            674
            
            
            
            2,415Commitments
                and contingencies (Note 14)Stockholders’
                equity:Common
                stock, $.001 par value, 190,000,000 shares authorized; 17,062,856
                and
                17,087,737 shares issued and outstanding at June 30, 2007 and 2006,
                respectively
            
            
            17
            
            
            
            17Additional
                paid-in capital
            
            
            244,818
            
            
            
            243,493Accumulated
                other comprehensive loss
            
            
            (693
            )
            
            
            (693
            )Accumulated
                deficit
            
            
            (243,707
            )
            
            
            (239,974
            )Total
                stockholders’ equity
            
            
            435
            
            
            
            2,843Total
                liabilities and stockholders’ equity
            
            $
            1,109
            
            
            $
            5,258




See
        notes
        to accompanying financial statements


67




**URIGEN
      PHARMACEUTICALS, INC. (formerly Valentis,
      Inc.)**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**(in
      thousands, except per share amounts)**




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**License
                and milestone revenue
            
            $
            571
            
            
            $
            627
            
            
            $
            1,640Contract
                research revenue
            
            
            ―
            
            
            
            100
            
            
            
            476Other
                revenue
            
            
            —
            
            
            
            —
            
            
            
            61Total
                revenue
            
            
            571
            
            
            
            727
            
            
            
            2,177Costs
                and operating expenses:Cost
                of contract research revenue
            
            
            ―
            
            
            
            93
            
            
            
            521Research
                and development
            
            
            872
            
            
            
            10,847
            
            
            
            8,823General
                and administrative
            
            
            4,783
            
            
            
            5,368
            
            
            
            4,109Restructuring
                charges
            
            
            1,029
            
            
            
            ―
            
            
            
            ―Total
                operating expenses
            
            
            6,684
            
            
            
            16,308
            
            
            
            13,453Loss
                from operations
            
            
            (6,113
            )
            
            
            (15,581
            )
            
            
            (11,276
            )Interest
                income
            
            
            39
            
            
            
            279
            
            
            
            285Other
                income and expense, net
            
            
            2,341
            
            
            
            (35
            )
            
            
            (92
            )Net
                loss
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )Basic
                and diluted net loss per share
            
            $
            (0.22
            )
            
            $
            (0.99
            )
            
            $
            (0.85
            )Shares
                used in computing basic and diluted net loss per common
                share
            
            
            17,052
            
            
            
            15,453
            
            
            
            13,028




See
      notes
      to accompanying financial statements




68




**URIGEN
      PHARMACEUTICALS, INC.(formerly Valentis,
      Inc.)**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**




**(in
      thousands, except share amounts)**




**Accumulated****Additional**
            
            
            **Other**
            
            
            
            
            
            **Total****Common Stock**
            
            
            **Paid-In**
            
            
            **Comprehensive**
            
            
            **Accumulated**
            
            
            **Stockholders’****Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Loss**
            
            
            **Deficit**
            
            
            **Equity****Balances
                at June 30, 2004**
            
            
            12,996,607
            
            
            $
            13
            
            
            $
            232,137
            
            
            $
            (706
            )
            
            $
            (213,554
            )
            
            $
            17,890Issuance
                of common stock pursuant to Employee Stock Purchase Plan
                and 401(k) Plan
            
            
            34,981
            
            
            
            —
            
            
            
            80
            
            
            
            —
            
            
            
            —
            
            
            
            80Stock
                options and warrants granted to non-employees for services
                rendered
            
            
            —
            
            
            
            —
            
            
            
            516
            
            
            
            —
            
            
            
            —
            
            
            
            516Stock
                issued to non-employees for services rendered
            
            
            18,796
            
            
            
            —
            
            
            
            52
            
            
            
            —
            
            
            
            —
            
            
            
            52Disgorgement
                of Short-Swing Profits
            
            
            —
            
            
            
            —
            
            
            
            29
            
            
            
            —
            
            
            
            —
            
            
            
            29Exercise
                of warrants
            
            
            102,155
            
            
            
            —
            
            
            
            198
            
            
            
            —
            
            
            
            —
            
            
            
            198Private
                placement of common stock and warrants, net of issuance costs of
                $324
            
            
            1,680,840
            
            
            
            2
            
            
            
            3,877
            
            
            
            —
            
            
            
            —
            
            
            
            3,879Comprehensive
                loss:Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (11,083
            )
            
            
            (11,083
            )Net
                unrealized gain on available for sale securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8
            
            
            
            —
            
            
            
            8Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11,075
            )**Balances
                at June 30, 2005**
            
            
            14,833,379
            
            
            
            15
            
            
            
            236,889
            
            
            
            (698
            )
            
            
            (224,637
            )
            
            
            11,569Issuance
                of common stock pursuant to Stock Plans and 401(k) Plan,
                net
            
            
            154,358
            
            
            
            —
            
            
            
            85
            
            
            
            —
            
            
            
            —
            
            
            
            85Stock-based
                compensation expenses—non-employees
            
            
            —
            
            
            
            —
            
            
            
            63
            
            
            
            —
            
            
            
            —
            
            
            
            63Stock-based
                compensation expenses—employees
            
            
            —
            
            
            
            —
            
            
            
            1,447
            
            
            
            —
            
            
            
            —
            
            
            
            1,447Private
                placement of common stock and warrants, net of issuance costs of
                $239
            
            
            2,100,000
            
            
            
            2
            
            
            
            5,009
            
            
            
            —
            
            
            
            —
            
            
            
            5,011Comprehensive
                loss:Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (15,337
            )
            
            
            (15,337
            )Net
                unrealized gain on available for sale securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5
            
            
            
            —
            
            
            
            5Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,332
            )**Balances
                at June 30, 2006**
            
            
            17,087,737
            
            
            
            17
            
            
            
            243,493
            
            
            
            (693
            )
            
            
            (239,974
            )
            
            
            2,843Stock-based
                compensation expenses—non-employees
            
            
            —
            
            
            
            —
            
            
            
            1
            
            
            
            —
            
            
            
            —
            
            
            
            1Stock-based
                compensation expenses—employees
            
            
            —
            
            
            
            —
            
            
            
            1,335
            
            
            
            —
            
            
            
            —
            
            
            
            1,335Repurchases
            
            
            (24,881
            )
            
            
            —
            
            
            
            (11
            )
            
            
            —
            
            
            
            —
            
            
            
            (11
            )Comprehensive
                loss:Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,733
            )
            
            
            (3,733
            )Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,733
            )**Balances
                at June 30, 2007**
            
            
            17,062,856
            
            
            $
            17
            
            
            $
            244,818
            
            
            $
            (693
            )
            
            $
            (243,707
            )
            
            $
            435




See
        notes
        to accompanying financial statements




69




**URIGEN
      PHARMACEUTICALS, INC. (formerly Valentis,
      Inc.)**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**(in
      thousands)**




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )Adjustments
                to reconcile net loss to net cash used in operations:Depreciation
            
            
            10
            
            
            
            35
            
            
            
            48Gain
                on disposal of assets
            
            
            (582
            )
            
            
            —
            
            
            
            —Stock
                options, stock and warrants granted to non-employees for services
                rendered
            
            
            1
            
            
            
            63
            
            
            
            529Employee
                stock-based compensation
            
            
            1,335
            
            
            
            1,447
            
            
            
            —401(k) stock
                contribution matching expense
            
            
            ―
            
            
            
            62
            
            
            
            55Changes
                in operating assets and liabilities:Interest
                and other receivables
            
            
            87
            
            
            
            270
            
            
            
            (167
            )Prepaid
                expenses and other current assets
            
            
            63
            
            
            
            57
            
            
            
            (32
            )Deferred
                revenue
            
            
            —
            
            
            
            —
            
            
            
            (100
            )Other
                assets
            
            
            97
            
            
            
            400
            
            
            
            —Accounts
                payable
            
            
            (91
            )
            
            
            (174
            )
            
            
            58Accrued
                liabilities
            
            
            (1,650
            )
            
            
            6
            
            
            
            (1,376
            )Net
                cash used in operating activities
            
            
            (4,463
            )
            
            
            (13,171
            )
            
            
            (12,068
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            ―
            
            
            
            (33
            )
            
            
            (8
            )Proceeds
                from sale of property and equipment
            
            
            604
            
            
            
            —
            
            
            
            —Purchases
                of available-for-sale investments
            
            
            ―
            
            
            
            (5,522
            )
            
            
            (10,474
            )Maturities
                of available-for-sale investments
            
            
            750
            
            
            
            8,425
            
            
            
            17,768Net
                cash provided by investing activities
            
            
            1,354
            
            
            
            2,870
            
            
            
            7,286Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            ―
            
            
            
            5,034
            
            
            
            4,131Common
                stock repurchases
            
            
            (11
            )
            
            
            ―
            
            
            
            ―Net
                cash provided by (used in) financing activities
            
            
            (11
            )
            
            
            5,034
            
            
            
            4,131Net
                decrease in cash and cash equivalents
            
            
            (3,120
            )
            
            
            (5,267
            )
            
            
            (651
            )Cash
                and cash equivalents, beginning of year
            
            
            3,598
            
            
            
            8,865
            
            
            
            9,516Cash
                and cash equivalents, end of year
            
            $
            478
            
            
            $
            3,598
            
            
            $
            8,865*Supplemental
                disclosure of cash flow information:*Income
                taxes and Interest paid
            
            $
            —
            
            
            $
            —
            
            
            $
            —*Schedule
                of non-cash transactions:*Pre-paid
                expenses recorded for stock issued to a non-employee for services
                rendered
            
            $
            —
            
            
            $
            —
            
            
            $
            39Conversion
                of accrued bonus liability to a note payable
            
            $
            176
            
            
            $
            —
            
            
            $
            —


See
        notes
        to accompanying financial statements


70




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**









**June 30, 2007**




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




***Organization
      and Basis of Presentation***




On
      October 5, 2006, Valentis, Inc. (“Valentis” or “the Company”) entered into an
      Agreement and Plan of Merger, as subsequently amended (the “ Merger Agreement ”)
      with Urigen N.A., Inc., a Delaware corporation (“ Urigen N.A.”), and Valentis
      Holdings, Inc., our newly formed wholly-owned subsidiary (“Valentis Holdings ”).
      Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged
      with and into Urigen N.A., (“the Merger”) with Urigen N.A. surviving as
      Valentis, Inc.’s wholly-owned subsidiary. In connection with the Merger, an
      aggregate of 51,226,679 shares of Valentis common stock were issued to the
      Urigen N.A. stockholders.  On July 30, 2007 Valentis, Inc. changed its
      name to Urigen Pharmaceuticals, Inc.




From
      and
      after the Merger, the business of the combined company is principally conducted
      through Urigen N.A.  The accompanying consolidated financial
      statements reflect the accounts of Valentis, Inc. and its wholly owned
      subsidiary PolyMASC Pharmaceuticals plc. (“PolyMASC”).  All
      significant intercompany transactions have been eliminated.




Valentis
      was previously formed as the result of the merger of Megabios Corp. and
      GeneMedicine, Inc. in March 1999. Valentis was incorporated in
      Delaware. In August 1999, the Company acquired U.K.-based
      PolyMASC.  The Company is located in Burlingame, California, where its
      headquarters and business operations are located.




Valentis
      was a biotechnology company that was previously engaged in the development
      of
      innovative products for peripheral artery disease, or PAD. PAD is due to chronic
      inflammation of the blood vessels of the legs leading to the formation of
      plaque, which obstructs blood flow.




On
      July 11, 2006 Valentis announced negative results for its
      Phase IIb clinical trial of VLTS 934 in PAD. Valentis also announced
      that it has no plans for further development of the product.




Except
      for the quarter ended September 30, 2003, in which the Company
      reported net income of approximately $3.4 million resulting principally
      from the $6.5 million non-recurring license revenue recognized under the
      license and settlement agreement with ALZA Corporation, Valentis has experienced
      net losses since its inception through June 30, 2007, and reported a
      net loss of $3.7 million for the fiscal year ended June 30, 2007.
      The accumulated deficit was $243.7 million at June 30, 2007. At
      June 30, 2007, Valentis had $478,000 in cash and cash
      equivalents.  Management’s plans for future funding of the Company
      include raising additional financing (see Note 16) and raising funds through
      sale of a current license and entering licensing and distribution agreements
      outside the United States.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. The financial statements do not
      include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the matters discussed above.




***Foreign
      Currency Translation***




The
      Company translates the assets and liabilities of its foreign subsidiary stated
      in local functional currency to U.S. dollars at the rates of exchange in effect
      at the end of the period. Revenues and expenses are translated using rates
      of
      exchange in effect during the period. Gains and losses from currency translation
      are included in other comprehensive income (loss).




***Revenue
      Recognition***




Revenue
      arrangements with multiple elements are divided into separate units of
      accounting if certain criteria are met, including whether the delivered item
      has
      value to the customer on a stand-alone basis and whether there is objective
      and
      reliable evidence of the fair value of the undelivered items. Consideration
      received is allocated among the separate units of accounting based on their
      respective fair values, and the applicable revenue recognition criteria are
      considered separately for each of the separate units.




Non-refundable
      up-front payments received in connection with research and development
      collaboration agreements, including technology advancement funding that is
      intended for the development of the Company’s core technology, are deferred and
      recognized on a straight-line basis over the relevant period specified in the
      agreement, generally the research term.




71




Revenue
      related to research with the Company’s corporate collaborators is recognized as
      research services are performed over the related funding periods for each
      contract. Under these agreements, the Company is required to perform research
      and development activities as specified in each respective agreement. The
      payments received under each respective agreement are not refundable and are
      generally based on a contractual cost per full-time equivalent employee working
      on the project. Research and development expenses under the collaborative research
      agreements approximate or exceed the revenue recognized under such agreements
      over the terms of the respective agreements. Deferred revenue may result when
      the Company does not incur the required level of effort during a specific period
      in comparison to funds received under the respective contracts. Payments
      received relative to substantive, at-risk incentive milestones, if any, are
      recognized as revenue upon achievement of the incentive milestone event because
      the Company has no future performance obligations related to the payment.
      Incentive milestone payments are triggered either by results of the Company’s
      research efforts or by events external to the Company, such as regulatory
      approval to market a product.




The
      Company also had licensed technology to various biotechnology, pharmaceutical
      and contract manufacturing companies. Under these arrangements, the Company
      received nonrefundable license payments in cash. These payments are recognized
      as revenue when received, provided the Company has no future performance or
      delivery obligations under these agreements. Otherwise, revenue is deferred
      until performance or delivery is satisfied. Certain of these license agreements
      also provided the licensee an option to acquire additional licenses or
      technology rights for a fixed period of time. Fees received for such options
      were deferred and recognized at the time the option is exercised or expires
      unexercised. Additionally, certain of these license agreements involved
      technology that the Company has licensed or otherwise acquired through
      arrangements with third parties pursuant to which the Company was required
      to pay a royalty equal to a fixed percentage of amounts received by the Company
      as a result of licensing this technology to others. Such royalty obligations
      were recorded as a reduction of the related revenue. Furthermore, the Company
      received royalty and profit sharing payments under a licensing agreement with
      a
      contract manufacturing company. Royalty and profit sharing payments were
      recognized as revenue when received. The Company also provided contract research
      services for research and development manufacturing of biological materials
      for
      other companies. Under these contracts, the Company generally received payments
      based on a contractual cost per full-time equivalent employee working on the
      project. Revenue was recognized for actual research work performed during the
      period.




***Critical
      Accounting Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the amounts reported in the financial statements
      and
      accompanying notes. Actual results could differ from those
      estimates.




The
      Company believes the accrual for clinical trial expense represents its most
      significant estimate used in the preparation of its consolidated financial
      statements. The Company’s accruals for clinical trial expenses are based in part
      on estimates of services received and efforts expended pursuant to agreements
      established with clinical research organizations and clinical trial sites.
      The
      Company has a history of contracting with third parties that perform various
      clinical trial activities on behalf of the Company in the ongoing development
      of
      its biopharmaceutical drugs. The financial terms of these contracts are subject
      to negotiations and may vary from contract to contract and may result in uneven
      payment flows. The Company determines its estimates through discussion with
      internal clinical personnel and outside service providers as to progress or
      stage of completion of trials or services and the agreed upon fee to be paid
      for
      such services. The objective of the Company’s clinical trial accrual policy is
      to reflect the appropriate trial expenses in its consolidated financial
      statements by matching period expenses with period services and efforts
      expended. In the event of early termination of a clinical trial, the Company
      accrues expenses associated with an estimate of the remaining, non-cancelable
      obligations associated with the winding down of the trial.




***Stock-Based
      Compensation***




In
      December 2004, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards No. 123 (revised 2004) or (“FAS
      123R”), “Share-Based Payment”. FAS 123R supersedes Accounting Principles
      Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      requires companies to recognize compensation expense, using a fair-value based
      method, for costs related to share-based payments, including stock options
      and
      employee stock purchase plans. FAS 123R permits public companies to adopt
      its requirements using either the modified prospective or modified retrospective
      transition method.




The
      Company adopted FAS 123R on July 1, 2005 using the modified
      prospective transition method, which requires that stock-based compensation
      cost
      be recognized for all awards granted, modified or settled after the effective
      date as well as for all awards granted to employees prior to the effective
      date
      that remain unvested as of the effective date (see Note 11 for more
      information).




***Research
      and Development Expenses***




Research
      and development expenses, which consist of costs incurred for independent and
      collaborative research and development and include direct and research- related
      overhead expenses and the costs of funding clinical studies, are expensed as
      incurred.




***Cash,
      Cash Equivalents and Investments***




Cash
      equivalents consist of highly liquid investments with original maturities at
      the
      date of purchase of three months or less. Short-term investments mature in
      less
      than one year from the balance sheet date.




The
      Company classifies its cash equivalents and investments as “available-for-sale.”
Such investments are recorded at fair value, determined based on quoted market
      prices, and unrealized gains and losses, which are considered to be temporary,
      are recorded as other comprehensive income (loss) in a separate component of
      stockholders’ equity until realized. The cost of securities sold is based on the
      specific identification method.




The
      Company places its cash, cash equivalents, and investments with financial
      institutions with high credit quality, in commercial paper and corporate debt
      with high credit ratings, and in U.S. government and government agency
      securities. Therefore, the Company believes that its exposure due to
      concentration of credit risk is minimal and has not experienced credit losses
      on
      investments in these instruments to date.




72




***Depreciation
      and Amortization***




Property
      and equipment are stated at cost, less accumulated depreciation and
      amortization. Depreciation is provided using the straight-line method over
      the
      estimated useful lives of the respective assets (generally three to seven
      years). Leasehold improvements are amortized over the shorter of the estimated
      useful lives of the assets or the applicable lease term.




***Goodwill
      and Intangible Assets***




Goodwill
      consists of the goodwill related to the Company’s acquisition of PolyMASC. Prior
      to July 1, 2002, amortization of goodwill and purchased intangibles
      was calculated on the straight-line basis over the estimated useful lives of
      the
      intangible assets of three years, and amortization of assembled workforce and
      goodwill was included as a separate item on the Consolidated Statements of
      Operations. Effective July 1, 2002, assembled workforce and goodwill
      are no longer being amortized but are subject to an impairment analysis on
      at
      least an annual basis in accordance with the requirements of Statement of
      Financial Accounting Standards No. 142, (“SFAS 142”) “Goodwill and
      Other Intangible Assets”. The Company performed impairment analyses in
      accordance with SFAS 142 at June 30, 2007, 2006 and 2005, and
      determined that in each case goodwill was not impaired.




***Long-Lived
      Assets***




The
      Company accounts for its long-lived assets under Statement of Financial
      Accounting Standards No. 144 (“SFAS 144”), “Accounting for the
      Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS 144,
      the Company identifies and records impairment losses, as circumstances dictate,
      on long-lived assets used in operations when events and circumstances indicate
      that the assets might be impaired and the undiscounted cash flows estimated
      to
      be generated by those assets are less than the carrying amounts of those assets.
      The Company’s long-lived assets consist primarily of machinery and
      equipment.




***Net
      Loss Per Share***




Basic
      loss per share is computed by dividing loss applicable to common stockholders
      by
      the weighted-average number of shares of common stock outstanding during the
      period, net of certain common shares outstanding that are held in escrow or
      subject to the Company’s right of repurchase. Diluted earnings per share include
      the effect of options and warrants, if dilutive. Diluted net loss per share
      has
      not been presented separately as, given our net loss position for all periods
      presented, the result would be anti-dilutive.




A
      reconciliation of shares used in the calculation of basic and diluted net loss
      per share follows (in thousands, except per share amounts):




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**Net
                loss
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )Basic
                and Diluted:Weighted
                average shares of common stock outstanding
            
            
            17,078
            
            
            
            15,537
            
            
            
            13,123Less:
                Shares in escrow, subject to return
            
            
            ―
            
            
            
            (2
            )
            
            
            (2
            )Less:
                Shares subject to repurchase
            
            
            —
            
            
            
            —
            
            
            
            (93
            )Less:
                Shares subject to forfeiture
            
            
            (26
            )
            
            
            (82
            )
            
            
            —Weighted-average
                shares of common stock used in computing net loss per
                share
            
            
            17,052
            
            
            
            15,453
            
            
            
            13,028Basic
                and diluted net loss per share
            
            $
            (0.22
            )
            
            $
            (0.99
            )
            
            $
            (0.85
            )







The
      computation of basic net loss per share excludes the following shares of common
      stock, which were outstanding but held in escrow or subject to the Company’s
      right to repurchase or forfeiture:




·
            A
                total of 2,106 shares of common stock issued in December 2002 in
                partial consideration for a license agreement. The 2,106 shares of
                common
                stock were returned to the Company and cancelled upon termination
                of the
                license agreement in
                October 2006.




·
            92,500
                weighted average shares of common stock that were subject to a repurchase
                option of the Company as of
                June 30, 2005.




·
            A
                weighted average total of 26,308 and 82,330 shares of common stock
                that
                were subject to shares vesting based on continued employment during
                the
                year ended June 30, 2007 and 2006,
                respectively.




The
      following options and warrants have been excluded from the calculation of
      diluted net loss per share because the effect of inclusion would be
      antidilutive.




·
            Options
                to purchase 2,569,409 shares of common stock at a weighted average
                price
                of $5.76 per share, options to purchase 3,717,787 shares of common
                stock
                at a weighted average price of $6.14 per share and options to purchase
                2,319,674 shares of common stock at a weighted average price of $8.45
                per
                share at June 30, 2007, 2006 and 2005,
                respectively.




·
            Warrants
                to purchase 4,724,944 shares of common stock at a weighted average
                price
                of $3.84 per share at June 30, 2007 and 2006 and warrants to
                purchase 3,666,575 shares of common stock at a weighted average price
                of
                $4.09 per share at
                June 30, 2005.




73




The
      options, common stock warrants, and shares of outstanding common stock subject
      to share vesting will be included in the calculation of loss per share at such
      time as the effect is no longer antidilutive, as calculated using the treasury
      stock method for options and warrants.




***401(k) Plan***




In
      April 1997, the Board of Directors adopted the 1997 Valentis, Inc.
      401(k) Plan (the “401(k) Plan”) in accordance with
      Section 401(k) of the Internal Revenue Code. All employees who
      complete at least 1,000 hours of service during the year are eligible to
      participate in the 401(k) Plan. Participants may elect to have up to 75% of
      their annual salary, not to exceed the annual dollar limit set by law, deferred
      and contributed to the 401(k) Plan. The Company has the discretion to make
      a matching contribution in common stock each year for every dollar contributed
      to the 401(k) Plan. The stock match vests according to the employee’s years
      of employment with the Company. In August 2006, The Company terminated the
      401(k) Plan and the assets of the 401(k) Plan were liquidated and distributed
      to
      each participant.




***Recent
      Accounting Pronouncements***




In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No. 155, *Accounting for Certain Hybrid Financial Instruments — an
      amendment of FASB Statements No. 133 and 140*(“SFAS No. 155”).
      SFAS No. 155 permits an entity to measure at fair value any financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation. This statement is effective for all financial instruments acquired,
      issued, or subject to a remeasurement event occurring after the beginning of
      an
      entity’s first fiscal year that begins after September 15, 2006. The
      Company does not expect the adoption of SFAS No. 155 to have a material
      impact on its consolidated financial statements.




In
      June 2006, the FASB issued FASB Interpretation No. (FIN) 48,
*Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
      Statement No. 109*(“FIN48”), which prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 will be effective for fiscal years beginning after December 15, 2006.
      The Company does not expect the adoption of FIN48 to have a material impact
      on
      its consolidated financial statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, *Fair Value Measurements “*(SFAS No. 157)”, which
      defines fair value, establishes a framework for measuring fair value under
      Generally Accepted Accounting Principles (“GAAP”), and expands disclosures about
      fair value measurements. SFAS No. 157 will be effective for fiscal years
      beginning after November 15, 2007. The Company does not expect the adoption
      of SFAS No. 157 to have a material impact on its consolidated financial
      statements.




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
      108”), “Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB 108 is effective for
      fiscal years ending on or after November 15, 2006 and addresses how
      financial statement errors should be considered from a materiality perspective
      and corrected. The literature provides interpretive guidance on how the effects
      of the carryover or reversal of prior year misstatements should be considered
      in
      quantifying a current year misstatement. Historically there have been two common
      approaches used to quantify such errors: (i) the “rollover” approach, which
      quantifies the error as the amount by which the current year income statement
      is
      misstated, and (ii) the “iron curtain” approach, which quantifies the error
      as the cumulative amount by which the current year balance sheet is misstated.
      The SEC Staff believes that companies should quantify errors using both
      approaches and evaluate whether either of these approaches results in
      quantifying a misstatement that, when all relevant quantitative and qualitative
      factors are considered, is material. The Company adopted the provisions of
      SAB
      108 in fiscal year ended June 30, 2007 and it had no impact on its
      consolidated financial statements.




In
      February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 creates a “fair value option” under
      which an entity may elect to record certain financial assets or liabilities
      at
      fair value upon their initial recognition. Subsequent changes in fair value
      would be recognized in earnings as those changes occur. The election of the
      fair
      value option would be made on a contract-by contract basis and would need to
      be
      supported by concurrent documentation or a preexisting documented policy. SFAS
      159 requires an entity to separately disclose the fair value of these items
      on
      the balance sheet or in the footnotes to the financial statements and to provide
      information that would allow the financial statement user to understand the
      impact on earnings from changes in the fair value. SFAS 159 is effective as
      of
      the beginning of an entity’s first fiscal year that begins after
      November 15, 2007. The Company does not expect the adoption of SFAS
      No. 159 to have a material impact on its consolidated financial
      statements.




***Business
      Segments***




The
      Company has no product revenue and operated in one business segment, the
      research and development of cardiovascular therapeutics and associated delivery
      systems. Following the announcement of negative results in its Phase IIb
      clinical trial of VLTS 934 in PAD in July 2006, the Company ceased all
      activities on the research and development of cardiovascular therapeutics and
      associated delivery systems and sold most of the related potential products
      and
      technologies.  The Company currently operates in one business segment,
      the design and implementation of innovative products for patients with
      urological ailments.




74




***Reclassifications***




In
      fiscal
      year 2007, the Company changed its classification of patent costs to be a
      general and administrative expense, which had previously been classified as
      a
      research and development expense. This is consistent with Statement of Financial
      Accounting Standard No. 2 (“SFAS No. 2”) on Accounting for Research
      and Development Costs”. SFAS No. 2 requires that research and development costs
      exclude legal work in connection with patent applications, litigation and the
      sale or licensing of patents. The Company made the reclassification to better
      reflect the legal expenses incurred related to active research and development
      activities as legal expenses which are more administrative in nature and
      accordingly should be charged to general and administrative expense. The impact
      of this reclassification on the Company’s previously reported research and
      development and general and administrative expenses in the years ended June
      30,
      2006 and 2005 is as follows:




Year
                ended
            
            
            Year
                ended(in
                thousands)
            
            June
                30, 2006
            
            
            June
                30, 2005Research
                and development as previously reported
            
            $
            11,228
            
            
            $
            9,169Reclassification
                of patent expense
            
            
            (381
            )
            
            
            (346
            )Research
                and development as currently reported
            
            $
            10,847
            
            
            $
            8,823General
                and administrative as previously reported
            
            $
            4,987
            
            
            $
            3,763Reclassification
                of patent expense
            
            
            381
            
            
            
            346General
                and administrative as currently reported
            
            $
            5,368
            
            
            $
            4,109




**2.**
            **FINANCIAL
                INSTRUMENTS**




At
      June 30, 2007 and 2006, financial instruments held by the Company
      consist of the following (in thousands):




**Amortized**
              **Cost**
            
            **Unrealized**
              **Gain/(Loss)**
            
            **Estimated**
              **Fair Value****June 30,
                2007**Money
                market mutual funds
            
            $
            1
            
            
            $
            —
            
            
            $
            1Commercial
                paper
            
            
            ―
            
            
            
            —
            
            
            
            ―Corporate
                debt securities
            
            
            ―
            
            
            
            —
            
            
            
            ―1
            
            
            
            —
            
            
            
            1Less
                amounts classified as cash equivalents
            
            
            (1
            )
            
            
            —
            
            
            
            (1
            )Total
                short-term investments
            
            $
            ―
            
            
            $
            —
            
            
            $
            ―**June 30,
                2006**Money
                market mutual funds
            
            $
            2,936
            
            
            $
            —
            
            
            $
            2,936Commercial
                paper
            
            
            699
            
            
            
            —
            
            
            
            699Corporate
                debt securities
            
            
            750
            
            
            
            —
            
            
            
            7504,385
            
            
            
            —
            
            
            
            4,385Less
                amounts classified as cash equivalents
            
            
            (3,635
            )
            
            
            —
            
            
            
            (3,635
            )Total
                short-term investments
            
            $
            750
            
            
            $
            —
            
            
            $
            750







Unrealized
      gains or losses have not been material and have been presented net. There were
      no realized gains or losses in any period presented. The Company’s cash and cash
      equivalents, interest and other receivables, accounts payable and note payable
      are carried at historical cost, which approximates fair value because of the
      short-term nature of these accounts.




**3.**
            **PROPERTY****AND
                EQUIPMENT**




Property
      and equipment consist of the following (in thousands):




**June 30,****2007**
            
            
            **2006**Machinery
                and equipment
            
            $
            205
            
            
            $
            6,309Furniture
                and fixtures
            
            
            43
            
            
            
            1,262Leasehold
                improvements
            
            
            ―
            
            
            
            9,868248
            
            
            
            17,439Less
                accumulated depreciation and amortization
            
            
            (243
            )
            
            
            (17,402
            )Property
                and equipment, net
            
            $
            5
            
            
            $
            37




75




**4.**
            **GOODWILL**




At
      June 30, 2007 and 2006, goodwill is associated with the acquisition of
      PolyMASC Pharmaceuticals, plc. in fiscal 2000. The Company performed
      impairment analyses in accordance with SFAS 142 and determined that
      goodwill was not impaired during any of the periods presented.




**5.**
            **OTHER
                ACCRUED LIABILITIES**




Other
      accrued liabilities consist of the following (in thousands):




**June 30,****2007**
            
            
            **2006**Accrued
                research and development expenses
            
            $
            ―
            
            
            $
            172Accrued
                rent
            
            
            ―
            
            
            
            50Accrued
                property and use taxes
            
            
            ―
            
            
            
            98Accrued
                legal expenses
            
            
            11
            
            
            
            124Accrued
                accounting fees
            
            
            100
            
            
            
            194Accrued
                SEC filing related costs
            
            
            181
            
            
            
            ―Other
            
            
            20
            
            
            
            67Total
            
            $
            312
            
            
            $
            705







**6.**
            **NOTE
                PAYABLE TO RELATED PARTY**




In
      June,
      2007, Valentis, upon approval of its Board of Directors, issued Benjamin F.
      McGraw, III, Pharm.D., Valentis’ Chief Executive Officer, President and
      Treasurer, a promissory note in the amount of $176,000 in lieu of accrued bonus
      compensation owed to Dr. McGraw. The note bears interest at the rate of 5.0%
      per
      annum, may be prepaid by Valentis in full or in part at any time without premium
      or penalty and is due and payable in full on December 25, 2007.




**7.**
            **ACCUMULATED
                OTHER COMPREHENSIVE LOSS**




Comprehensive
      loss is comprised of net loss and other comprehensive loss. Other comprehensive
      loss includes certain changes to stockholders’ equity of the Company that are
      excluded from net loss. The components of accumulated other comprehensive loss
      are as follows (in thousands):




**June 30, 2007**
            
            **June 30, 2006**Unrealized
                loss on available-for-sale securities
            
            
            $—
            
            
            
            $―Foreign
                currency translation adjustments
            
            
            (693
            )
            
            
            (693
            )Accumulated
                other comprehensive loss
            
            
            $(693
            )
            
            
            $(693
            )







The
      Company’s wholly owned subsidiary has been inactive in June 30, 2007 and 2006
      which is why there is no change in foreign currency translation adjustments
      during these years.




**8.**
            **STOCKHOLDERS’
                EQUITY**




***Common
      Stock***




In
      June 2005, the Company completed a private placement, in which the Company
      issued and sold 1,680,840 shares of the Company’s common stock and warrants,
      exercisable for a five-year period, to purchase up to 840,420 additional shares
      of the Company’s common stock at $2.50 per unit, for net proceeds of
      approximately $3.9 million. The warrants are exercisable at $3.51 per
      share. In addition, the Company issued to the designees of Reedland Capital
      Partners, the placement agent of the private placement, warrants to purchase
      63,000 shares of common stock at $3.29 per share, exercisable for a five-year
      period.




In
      March 2006, the Company completed an additional private placement, in which
      the Company issued and sold 2,100,000 shares of the Company’s common stock and
      warrants, exercisable for a five-year period, to purchase up to 1,050,000
      additional shares of the Company’s common stock at $2.50 per unit, for net
      proceeds of approximately $5.0 million. The warrants are exercisable at
      $3.00 per share. In addition, the Company issued to the designees of Griffin
      Securities, Inc., the placement agent of the private placement, warrants to
      purchase 22,500 shares of common stock at $3.00 per share, exercisable for
      a
      five-year period.




In
      August 2004, the Company issued warrants, exercisable at any time for a
      five-year period, to purchase a total of 100,000 shares of common stock to
      four
      individuals who are non-employees of Valentis. These warrants are exercisable
      at
      $6.30 per share. The Company estimated the fair value of the warrants using
      the
      Black-Scholes option-pricing model and recorded the resulting general and
      administrative expense of $454,000 in the year ended June 30, 2005.
      Assumptions used for valuing these warrants were an estimated volatility of
      96%,
      risk free interest rate of 3.64%, no dividend yield and an expected life of
      5 years.




76




***Stock
      Issued Under the Valentis Inc. 401(k) Plan***




Pursuant
      to the Valentis, Inc. 401(k) Plan (the “401(k) Plan”), the
      Company made matching contributions to all eligible participants who had
      elective deferrals during calendar year 2005 and 2004, equal to 25% of each
      such
      eligible participant’s elective deferrals during such year in the form of shares
      of the Company’s common stock. In fiscal year 2006, Valentis contributed
      24,336 shares of its common stock to the 401(k) Plan as the Company’s
      fiscal year 2006 matching contributions. In fiscal year 2005, Valentis
      contributed 20,016 shares of its common stock to the 401(k) Plan as the
      Company’s fiscal year 2005 matching contributions. Compensation expense
      related to this match was approximately $62,000 and $55,000 in fiscal year
      2006 and 2005, respectively.  In August 2006, the Company
      terminated the 401(k) Plan and the assets of the 401(k) Plan were liquidated
      and
      distributed to each participant.  The Company did not make any
      matching contributions in fiscal year 2007.




***Shares
      of Common Stock Reserved for Issuance***




At
      June 30, 2007, shares of common stock reserved for future issuance are
      as follows:




**Number of**
              **shares**Common
                stock warrants
            
            
            4,749,075Employee
                stock purchase plan
            
            
            515,500Stock
                option plans
            
            
            4,858,190Total
            
            
            10,122,765







**9.**
            **COLLABORATIVE,
                LICENSE AND RESEARCH
                AGREEMENTS**




Revenue
      recognized in the fiscal years ended June 30, 2007, 2006 and 2005 is
      as follows (in thousands):




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**License
                and milestone revenue:GeneSwitch®
                gene regulation licenses
            
            $
            83
            
            
            $
            393
            
            
            $
            1,021PINCTM
                gene delivery technology licenses
            
            
            33
            
            
            
            114
            
            
            
            619PEGylation
                technology licenses
            
            
            85
            
            
            
            120
            
            
            
            —Manufacturing
                technology license
            
            
            370
            
            
            
            —
            
            
            
            —571
            
            
            
            627
            
            
            
            1,640Contract
                research revenue
            
            
            —
            
            
            
            100
            
            
            
            476Other
                revenue
            
            
            —
            
            
            
            —
            
            
            
            61Total
            
            $
            571
            
            
            $
            727
            
            
            $
            2,177







To
      date,
      substantially all revenue has been generated by collaborative research and
      development agreements, from corporate partners, and from licensees, and only
      minimal revenue has been generated from royalties on sales of the GeneSwitch®
gene regulation system to the research market. Under the terms of corporate
      collaborations, the Company historically received research and development
      funding on a quarterly basis in advance of associated research and development
      costs.




***License-out
      agreements***




The
      Company had licensed-out its proprietary GeneSwitch® gene regulation technology
      on a non-exclusive basis to Wyeth-Ayerst Laboratories, GlaxoSmithKline, LARNAX
      GmbH, Schering AG and Organon Laboratories, LTD for research purposes. In
      addition, the Company had licensed its gene delivery technology on a
      non-exclusive basis to IDM Pharma, Inc and on a exclusive basis to Juvaris
      BioTherapeutics. Further, the Company had licensed to Schering AG the exclusive,
      worldwide rights to its GeneSwitch® gene regulation and gene delivery
      technologies to develop and commercialize two gene-based therapeutic products.
      These agreements generally included (i) up front payments and annual
      maintenance fees; and, (ii) milestone and royalty payments. The Company had
      also established a non-exclusive cross license with Genzyme Corporation in
      which
      Genzyme receives rights to GeneSwitch® gene regulation technology for research
      use and the Company receives certain rights to Genzyme’s plasmid DNA
      manufacturing technology.




As
      part
      of its efforts seeking strategic opportunities following the announcement of
      negative results in its Phase IIb clinical trial of VLTS 934 in PAD in
      July 2006, Valentis sold its intellectual property rights related to all of
      the above technologies.




During
      fiscal 2007, the Company licensed-out its manufacturing plasmid DNA technologies
      to several companies on a non-exclusive, worldwide, royalty-free, fully paid
      up
      basis. In addition, the Company granted a license to Acacia Patent Acquisition
      Corporation (“APAC”) for the purpose of asserting Valentis’ patents related to
      its plasmid DNA manufacturing technologies. APAC agreed to pay Valentis a
      continuing royalty equal to fifty percent of all amounts and other consideration
      actually received by APAC from its exercise of rights granted in the license,
      less APAC costs incurred.




Revenues,
      in aggregate, recognized from license agreements were approximately $571,000,
      $627,000 and $1.6 million for the fiscal year ended
      June 30, 2007, 2006 and 2005, respectively.




77




***Contract
      research agreements***




Valentis
      had entered into contract research agreements with other companies. Under the
      agreements, we were required to conduct research on the manufacturing of certain
      biological materials for other companies. For the years ended
      June 30, 2006 and 2005, we recognized approximately $100,000 and
      $476,000 of contract research revenue, respectively, based on research performed
      during the years, and recorded approximately $93,000 and $521,000 of costs
      of
      contract research, respectively, which included direct and related overhead
      expenses incurred and costs of general and administrative support. The Company
      did not conduct any contract research for other companies during the year ended
      June 30, 2007.




***Sponsored
      research agreements***




Valentis
      had entered into several sponsored research agreements with universities. These
      agreements were generally cancelable by either party upon written notice and
      may
      be extended by mutual consent of both parties. Research and development expenses
      were recognized as the related services were performed, generally ratably over
      the period of service. The Company cancelled these agreements following the
      announcement of negative results in its Phase IIb clinical trial of VLTS 934
      in
      PAD in July 2006.  There was no expense incurred under these
      agreements during the fiscal year ended June 30, 2007. Expenses under
      these agreements were approximately $57,000 and $74,000 for the fiscal years
      ended June 30, 2006 and 2005, respectively.




**10.**
            **RESTRUCTURING
                CHARGES**




Following
      Valentis’ announcement regarding the results of its clinical trial for
      VLTS 934 in July 2006, Valentis announced restructuring activities,
      including a workforce reduction of approximately 55% of its employees on
      August 18, 2006. Further reductions of approximately 55% of Valentis’
remaining workforce occurred through the end of August and October 2006,
      including the termination of employment of John J. Reddington, Ph.D., DVM.,
      the
      Company’s Chief Operating Officer, and Joseph A. Markey, the Vice President of
      Finance and Administration on October 31, 2006. In July 2007, Valentis
      terminated the employment of Benjamin F. McGraw, III, its President, Chief
      Executive Officer and Treasurer.  The total costs associated with the
      reduction in workforce were approximately $1.03 million, related to severance
      benefits which have been recognized as restructuring charges and $921,000 has
      been paid as of June 30, 2007. The remaining unpaid amount of $108,000
      as of June 30, 2007 was paid in July 2007.




**11.**
            **STOCK-BASED
                COMPENSATION**




In
      accordance with FAS 123R, the Company recorded approximately
      $1.3 million of stock-based compensation expenses for the year ended
      June 30, 2007, of which $164,000 was included in research and
      development expense and $1.17 million was included in general and administrative
      expense, and the Company recorded approximately $1.4 million of employee
      stock-based compensation expenses for the year ended June 30, 2006, of
      which $503,000 was included in research and development expense and $944,000
      was
      included in general and administrative expense. The adoption of FAS 123R
      had the impact of a loss of $0.08 and $0.09 on the Company’s net loss per share
      for the year ended June 30, 2007 and 2006, respectively. The adoption
      of FAS 123R had no impact on cash flow from operations and cash flow from
      financing activities for the year ended June 30, 2007 and 2006. As of
      June 30, 2007, unamortized stock-based compensation expenses of
      approximately $910,000 remain to be recognized over a weighted-average period
      of
      2.1 years. The Company amortizes stock-based compensation expenses on a
      straight-line basis over the vesting period.




In
      October, 2006, the Company terminated the employment of John J. Reddington,
      Ph.D., DVM., our Chief Operating Officer, and Joseph A. Markey, our Vice
      President of Finance and Administration.  In accordance with the
      termination agreements, all outstanding share-based awards held by them became
      fully vested and the period of time during which they can exercise their stock
      options was extended to 14 months after the date of termination from 3 months
      as
      stated in the stock option grant agreements.  Pursuant to FAS 123R,
      the Company recorded aggregate incremental costs of approximately $116,000
      resulting from the accelerated vesting and the extension of exercise period.
      The
      incremental costs of approximately $116,000 were reflected in the stock-based
      compensation of $1.3 million that was included in the consolidated statement
      of
      operations for the year ended June 30, 2007.




The
      Company did not grant any stock-based awards during the year ended
      June 30, 2007. The Company estimated the fair value of stock options
      granted during the year ended June 30, 2006 using the
      Black-Scholes-Merton option pricing model. The weighted-average assumptions
      used
      under this model are as follows: 1) Due to insufficient relevant historical
      option exercise data, the expected term of the options was estimated to be
      6.1 years using the “simplified” method suggested in the Securities and
      Exchange Commission’s Staff Accounting Bulletin No. 107; 2) Expected
      volatility was estimated to be 143% based on the Company’s historical volatility
      that matched the expected term; 3) Risk-free interest rate of 4.5% is based
      on
      the U.S. Treasury yield curve in effect at the time of grant for periods
      corresponding with the expected term of the option; 4) The Company assumed
      a
      zero percent dividend yield. In addition, under FAS 123R, fair value of
      stock options granted is recognized as expense over the vesting period, net
      of
      estimated forfeitures. Estimated annual forfeiture rate was based on historical
      data and anticipated future conditions. The estimation of forfeitures requires
      significant judgment, and to the extent actual results or updated estimates
      differ from our current estimates, such amounts will be recorded in the period
      estimates are revised.




78




Prior
      to
      the adoption of FAS 123R on July 1, 2005, the Company accounted
      for its stock-based employee compensation expenses under the recognition and
      measurement provision of APB 25, “Accounting for Stock Issued to Employees,” and
      related interpretations. Under APB 25, if the exercise price of the
      Company’s employee stock options equaled or exceeded the market price of the
      underlying stock on the date of grant, no compensation expense was recognized.
      The following table illustrates the effect on net loss and net loss per share
      if
      the fair value method of FAS 123 had been applied to the year ended
      June 30, 2005.




**Year
                Ended****June 30,
                2005**Net
                loss applicable to common stockholders—as reported
            
            $
            (11,083
            )Deduct:
                Stock-based employee stock compensation expense determined under
                SFAS 123
            
            
            (3,195
            )Net
                loss applicable to common stockholders—pro forma
            
            $
            (14,278
            )Net
                loss applicable to common stockholders per share—as
                reported
            
            $
            (0.85
            )Net
                loss applicable to common stockholders per
                share—pro forma
            
            $
            (1.10
            )







The
      weighted-average assumptions used for the valuation of options granted during
      the years ended June 30, 2005 were as follows: expected term of 4.2
      years; risk-free interest rate of 4.22%; expected volatility of 120%; and
      expected dividend yield of zero percent.




At
      June 30, 2007, the Company has the following stock-based compensation
      plans:




The
      1997
      Equity Incentive Plan, as amended and restated in December 2005 (the
“Incentive Plan”), provides for grants of stock options and awards to employees,
      directors and consultants of the Company. The exercise price of options granted
      under the Incentive Plan is determined by the Board of Directors but cannot
      be
      less than 100% of the fair market value of the common stock on the date of
      the
      grant. Generally, options under the Incentive Plan vest 25% one year after
      the
      date of grant and on a pro rata basis over the following 36 months and expire
      upon the earlier of ten years after the date of grant or 90 days after
      termination of employment. Options granted under the Incentive Plan cannot
      be
      repriced without the prior approval of the Company’s stockholders. As of
      June 30, 2007, an aggregate of 3.7 million shares have been authorized for
      issuance and options to purchase approximately 2.4 million shares of common
      stock had been granted under the Incentive Plan.




Pursuant
      to the terms of the 1998 Non-Employee Directors’ Plan, as amended and restated
      in December 2004 (the “Director’s Plan”), each non-employee director, other
      than a non-employee director who currently serves on the Board of Directors,
      automatically shall be granted, upon his or her initial election or appointment
      as a non-employee director, an option to purchase 26,000 shares of common stock,
      and each person who is serving as a non-employee director on the day following
      each Annual Meeting of Stockholders automatically shall be granted an option
      to
      purchase 10,000 shares of common stock. Generally, options under the 1998
      Non-Employee Directors’ Plan vest monthly over 4 years and expire upon the
      earlier of ten years after the date of grant or 90 days after termination of
      employment. As of June 30, 2007, an aggregate of 575,000 shares have
      been authorized for issuance under the Directors’ Plan, and options to purchase
      approximately 222,000 shares of common stock had been granted to non-employee
      directors under the Directors’ Plan.




The
      2001
      Nonstatutory Incentive Plan, as amended and restated in May 2003 (the “NQ
      Plan”), provides for grants of nonstatutory stock options to employees,
      directors and consultants of the Company. The exercise price of options granted
      under the NQ Plan is determined by the Board of Directors but cannot be less
      than 100% of the fair market value of the common stock on the date of the grant.
      Generally, options under the NQ Plan vest 25% one year after the date of grant
      and on a pro rata basis over the following 36 months and expire upon the
      earlier of ten years after the date of grant or 90 days after termination of
      employment. Options granted under the NQ Plan cannot be repriced without the
      prior approval of the Company’s stockholders. As of June 30, 2007, an
      aggregate of 690,000 shares have been authorized for issuance and options to
      purchase approximately 77,000 shares had been granted under the NQ
      Plan.




In
      May 2003, the Board of Directors adopted the 2003 Employee Stock Purchase
      Plan (the “Purchase Plan”) covering an aggregate of 600,000 shares of common
      stock. The Purchase Plan was approved by stockholders in May 2003 and is
      qualified under Section 423 of the Internal Revenue Code. The Purchase Plan
      is designed to allow eligible employees of the Company to purchase shares of
      common stock through periodic payroll deductions. The price of common stock
      purchased under the Purchase Plan must be equal to at least 85% of the lower
      of
      the fair market value of the common stock on the commencement date of each
      offering period or the specified purchase date. 515,500 shares reserved under
      the Purchase Plan remain available for issuance as of June 30, 2007.
      Currently none of our employees are participating in the Purchase Plan and
      there is no remaining employee payroll contributions left in the Purchase
      Plan.




In
      fiscal
      year 2006, the Company granted options to consultants to purchase
      50,000 shares of common stock. There were no options granted to consultants
      in fiscal year 2007 and 2005. Options granted to consultants are periodically
      revalued as they vest in accordance with SFAS 123 and EITF 96-18,
      "Accounting for Equity Instruments That Are Issued to Other Than Employees
      for
      Acquiring, or in Conjunction with Selling, Goods or Services",  using
      the Black-Scholes option-pricing model. Assumptions used for valuing the options
      for fiscal 2007 were an estimated volatility of 162%, risk free interest
      rate of 4.99%, no dividend yield and an expected life of each option of
      7.25 years. Assumptions used for valuing the options for fiscal 2006
      were an estimated volatility of 133%, risk free interest rate of 4.61%, no
      dividend yield and an expected life of each option of 7.72 years.
      Assumptions used for valuing the options for fiscal 2005 were an estimated
      volatility of 115%, risk free interest rate of 4.26%, no dividend yield and
      an
      expected life of each option of 8.74 years. Expenses of approximately
      $1,000, $63,000, and $63,000 were recognized in fiscal 2007, 2006 and 2005,
      respectively, related to these grants. All of  the unvested shares
      related to these options granted to consultants were cancelled in
      September 2006 due to the termination of consulting
      agreements.




79




In
      August 2004, the Company issued warrants, exercisable at any time for a
      five-year period, to purchase a total of 100,000 shares of common stock to
      four
      individuals who are non-employees of the Company. These warrants are exercisable
      at $6.30 per share. The Company estimated the fair value of the warrants using
      the Black-Scholes option-pricing model and recorded the resulting general and
      administrative expense of $454,000 in the year ended June 30, 2005.
      Assumptions used for valuing these warrants were an estimated volatility of
      96%,
      risk free interest rate of 3.64%, no dividend yield and an expected life of
      5 years.




In
      April 2005, the Company obtained the consulting services of an investor
      relations company. Pursuant to a services agreement, the Company paid a cash
      fee
      of $100,000 and issued 18,796 shares of the Company’s common stock, at an
      aggregated fair value of approximately $52,000, to the investor relations
      company. The total compensation of approximately $152,000 for consulting
      services was expensed ratably over the term of the agreement of one year. For
      the year ended June 30, 2006 and 2005, the company recorded $38,000
      and $114,000 of general and administrative expenses under this agreement,
      respectively.




Activity
      under all option plans for the year ended June 30, 2007, 2006 and 2005
      is as follows:




**Number**
              **of**
              **Shares**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            
            **Aggregate**
              **Intrinsic**
              **Value****(in 000s)**Options
                outstanding at June 30, 2004
            
            
            1,744,280
            
            
            $
            11.24
            
            
            
            9.14
            
            
            $
            4,832Options
                granted
            
            
            692,354
            
            
            $
            6.09Options
                forfeited
            
            
            (116,960
            )
            
            $
            36.20Options
                outstanding at June 30, 2005
            
            
            2,319,674
            
            
            $
            8.45
            
            
            
            8.45
            
            
            $
            66Options
                granted
            
            
            1,500,250
            
            
            $
            2.91Options
                forfeited
            
            
            (41,428
            )
            
            $
            3.91Options
                expired
            
            
            (60,709
            )
            
            $
            15.64Options
                outstanding at June 30, 2006
            
            
            3,717,787
            
            
            $
            6.14
            
            
            
            8.29
            
            
            $
            761Options
                forfeited
            
            
            (683,188
            )
            
            $
            3.30Options
                expired
            
            
            (465,190
            )
            
            $
            12.47Options
                outstanding at June 30, 2007
            
            
            2,569,409
            
            
            $
            5.76
            
            
            
            7.25
            
            
            $
            0.00Options
                exercisable at June 30, 2007
            
            
            2,097,834
            
            
            $
            6.26
            
            
            
            7.02
            
            
            $
            0.00







The
      weighted average fair value of options granted during the years ended
      June 30, 2006 and 2005 was $2.69 and $4.76, respectively. Unrecognized
      compensation with respect to options that will be recognized in future periods
      was approximately $910,000 at June 30, 2007.




The
      options outstanding at June 30, 2007 have been segregated into ranges for
      additional disclosure as follows:




**Exercise**
              **Price**
              **Per Share**
            
            **Options**
              **Outstanding**
            
            **Weighted Average**
              **Remaining**
              **Contractual Life**
              **(in years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options Vested**
              **and**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$1.97
                – $    2.75
            
            
            215,000
            
            
            
            8.06
            
            
            $2.28
            
            
            149,375
            
            
            $
                   2.27$2.80
                – $    2.80
            
            
            371,875
            
            
            
            8.00
            
            
            $2.80
            
            
            249,479
            
            
            $   
                2.80$3.14
                – $    3.14
            
            
            449,875
            
            
            
            8.96
            
            
            $3.14
            
            
            241,750
            
            
            $   
                3.14$3.19
                – $    3.39
            
            
            177,000
            
            
            
            5.92
            
            
            $3.27
            
            
            177,000
            
            
            $   
                3.27$3.52
                – $    3.52
            
            
            451,000
            
            
            
            5.93
            
            
            $3.52
            
            
            451,000
            
            
            $   
                3.52$4.70
                – $    4.80
            
            
            69,000
            
            
            
            6.90
            
            
            $4.76
            
            
            63,041
            
            
            $    4.77$5.35
                – $    5.35
            
            
            425,000
            
            
            
            6.75
            
            
            $5.35
            
            
            425,000
            
            
            $    5.35$6.94
                – $    6.94
            
            
            21,628
            
            
            
            7.00
            
            
            $6.94
            
            
            16,618
            
            
            $    6.94$7.02
                – $    7.02
            
            
            361,000
            
            
            
            7.11
            
            
            $7.02
            
            
            296,540
            
            
            $    7.02$21.00
                – $465.00
            
            
            28,031
            
            
            
            3.44
            
            
            $156.66
            
            
            28,031
            
            
            $156.662,569,409
            
            
            
            7.25
            
            
            $5.76
            
            
            2,097,834
            
            
            $6.26




80




There
      was
      no nonvested share activity under our stock option plans during the year ended
      June 30, 2005. Nonvested share activity under our stock option plans
      for the years ended June 30, 2006 and 2007 was as
      follows:




**Nonvested**
              **Number**
              **of**
              **Shares**
            
            
            **Weighted**
              **Average**
              **Grant Date**
              **Fair Value**Beginning
                balance at July 1, 2005
            
            
            —
            
            
            
            —Grants
            
            
            106,810
            
            
            $
            2.80Shares
                vested
            
            
            (44,508
            )
            
            $
            2.80Ending
                balance at June 30, 2006
            
            
            62,302
            
            
            $
            2.80Shares
                vested
            
            
            (62,302
            )
            
            $
            2.80Ending
                balance at June 30, 2007
            
            
            ―
            
            
            
            ―







There
      was
      no unrecognized compensation with respect to nonvested shares at
      June 30, 2007.




During
      the year ended June 30, 2006, the Company issued 38,613 shares of
      common stock to employees under the 2003 Employee Stock Purchase Plan and
      recorded approximately $43,000 of compensation expenses. The Company did not
      issue any common stock to employees under the 2003 Employee Stock Purchase
      Plan
      during the year ended June 30, 2007 and there was no unrecognized
      compensation related to common stock issued to employees under the 2003 Employee
      Stock Purchase Plan at June 30, 2007.




**12.**
            **OTHER
                INCOME AND EXPENSE, NET**




For
      the
      year ended June 30, 2007, other income and expense, net primarily
      reflected nonrefundable proceeds received from the sale of most of the Company’s
      remaining potential products and technologies related to cardiovascular
      therapeutics and gene delivery and expression  systems and gains from
      sale of most of our remaining machinery, equipment, furniture and fixtures
      totaling approximately $2.3 million. These proceeds received or gains were
      recognized when payments were received, provided Valentis had no future
      performance or delivery obligations under the agreements. In addition, these
      proceeds received or gains were classified in other income and expense, net
      because asset sales were part of the Company’s efforts to pursue strategic
      opportunities, which include the merger with Urigen N.A.  During the
      year ended June 30, 2007, the Company sold substantially all of its fixed assets
      and recognized a gain on the sale of fixed assets of $582,000 that is included
      in other income.  A summary of the various transactions are as
      follows:




·
            In
                August 2006, the Company entered into an asset sale agreement with
                Cobra
                Biologics Ltd.(“Cobra”).  Pursuant to the agreement, the Company
                sold to Cobra certain biomanufacturing rights and intellectual property
                for a purchase price of $300,000. The Company and Cobra completed
                the
                transaction in August 2006 and payment of $300,000 was received by
                the Company and recognized as other income in the quarter ended September
                30, 2006.




·
            On
                October 24, 2006, the Company entered into a technology transfer
                agreement
                with Vical. Pursuant to the agreement, the Company sold to Vical
                (i)
                certain patents and patent applications regarding (a) formulations
                and
                methods for the treatment of inflammatory diseases and (b) gene delivery
                for ischemic conditions, (ii) all intellectual and industrial property
                owned by the Companys and related to, and reasonably necessary for
                Vical
                to take certain actions with respect to, any of the foregoing patents
                and
                patent applications and (iii) all rights owned or controlled by the
                Company relating exclusively to any of the foregoing patents and
                patent
                applications, for an aggregate cash purchase price of $30,000. In
                addition, Vical agreed to assume certain liabilities of the Company
                relating to the transferred assets. The Company and Vical completed
                the
                transaction in October 2006 and payment of $30,000 was received by
                the Company and recognized as other income in the quarter ended December
                31, 2006.




·
            On
                October 26, 2006, the Company entered into an asset transfer agreement
                with Biolitec, Inc. (“Biolitec”). Pursuant to the agreement, the Company
                sold to Biolitec (i) the Company’s PEG liposome patent, (ii) any patents
                upon which the Company’s PEG liposome patent claims priority, (iii) any
                corresponding foreign patents, (iv) all files of Valentis and its
                affiliates relating to any of the foregoing patents and (v) all rights
                owned or controlled by the Company and its affiliates relating to
                any of
                the foregoing patents, for an aggregate cash purchase price of $110,000.
                In connection with the assets transfer, Biolitec agreed to assume
                certain
                liabilities of the Company relating to the transferred assets. The
                Company
                and Biolitec completed the transaction in October 2006 and payment of
                $110,000 was received by the Company and recognized as other income
                in the
                quarter ended December 31, 2006.




·
            On
                October 27, 2006, the Company entered into an asset transfer agreement
                with Juvaris Biotherapeutics, Inc. (“Juvaris”). Pursuant to the agreement,
                the Company sold to Juvaris (i) the Company’s DOTIM lipid composition
                patents, (ii) all rights owned or controlled by the Company and its
                affiliates relating to the Company’s DOTIM lipid composition patents,
                (iii) any patents or know-how referring to the Company’s DOTIM lipid
                composition, (iv) certain cell lines and (v) all pre-clinical and
                clinical
                data and regulatory filings related to the foregoing assets, for
                an
                aggregate cash purchase price of $550,000. In connection with the
                assets
                transfer, Juvaris agreed to assume certain liabilities of the Company
                relating to the transferred assets, and Valentis and Juvaris agreed,
                as of
                October 28, 2006, to terminate an existing license agreement between
                the
                Company and Juvaris. The Company received a fully non-recoupable
                and
                non-refundable deposit of $250,000 in October 2006. The remaining
                amount
                of $300,000 was received by the Company upon the completion of the
                asset
                transfer agreement in the quarter ended December 31, 2006. The
                Company recognized $550,000 as other income in the quarter ended
                December
                31, 2006.




81




·
            On
                October 27, 2006, the Company entered into an asset purchase agreement
                with Juvaris. Pursuant to the agreement, the Company sold to Juvaris
                certain of the Company’s machinery, equipment, furniture and other related
                assets, for an aggregate cash purchase price of $500,000. On
                December 20, 2006, Valentis entered into an additional asset
                purchase agreement with Juvaris. Pursuant to the agreement, the Company
                sold to Juvaris certain of Valentis’ equipment, furniture and other
                related assets, for an aggregate cash purchase price of $25,000.
                Valentis
                and Juvaris completed these two transactions and payments in full
                were
                received by the Company in the quarter ended December 31, 2006. In
                addition, the Company sold certain of its machinery, equipment, furniture
                and other related assets in an auction conducted in November 2006,
                from which the Company received net proceeds of $79,000. Based on
                payments
                received for the two asset purchase agreements with Juvaris and the
                net
                proceeds received from the auction, totaling $604,000, the Company
                recognized an aggregated gain on sale of assets of $581,000 as other
                income in the quarter ended
                December 31, 2006.




·
            On
                October 16, 2006, the Company entered into a technology transfer
                agreement
                with Genetronics, Inc. (“Genetronics”). Pursuant to the agreement, the
                Company (i) sold to Genetronics certain patents, trademarks and
                intellectual property rights relating to the Company’s PINCTM polymer
                delivery system, GeneSwitch® gene regulation technology, cationic lipids
                and gene expression technologies, (ii) sold to Genetronics the
                Company’s GeneSwitch® product inventory and (iii) sold and assigned
                to Genetronics a number of existing license agreements between the
                Company
                and certain third parties relating to the Company’s PINCTM polymer delivery
                system and GeneSwitch® gene regulation technology, for an aggregate
                purchase price of $860,000, of which a portion was offset by an
                outstanding debt Valentis owed to Genetronics in the amount of $320,000
                relating to a 2001 license agreement between the parties. In connection
                with the technology transfer, Genetronics agreed to assume certain
                liabilities of the Company relating to the transferred assets, and
                the
                Company and Genetronics agreed, as of October 16, 2006, to terminate
                in
                its entirety a license agreement between the Company and Genetronics,
                dated November 14, 2001. The Company received net proceeds of
                $480,000 in November 2006 and $60,000 in February 2007. Valentis
                and Genetronics completed the transactions and the Company recognized
                $540,000 of other income in the quarter ended
                March 31, 2007.




·
            In
                January 2007, the Company entered into an asset purchase agreement
                with Medarex, Inc. Pursuant to the agreement, the Company sold to
                Medarex
                certain of the Company’s technologies related to the Del-1 gene, Del-1
                protein and certain Del-1 antibodies  and related obligations
                and liabilities for an aggregate purchase price of $250,000. The
                Company
                and Medarex completed the transaction in January 2007 and payment of
                $250,000 was received by the Company and recognized as other income
                in the
                quarter ended March 31, 2007.




**13.**
            **INCOME
                TAXES**




For
      financial reporting purposes, loss before taxes includes the following
      components (in thousands):




**Year ended June 30,****2007**
            
            
            **2006**
            
            
            **2005**Pre-tax
                loss:United
                States
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )Foreign
            
            
            —
            
            
            
            —
            
            
            
            —Total
                pre-tax loss
            
            $
            (3,733
            )
            
            $
            (15,337
            )
            
            $
            (11,083
            )









There
      is
      no provision for income taxes because the Company has incurred operating losses.
      Deferred income taxes reflect the net tax effects of operating loss and tax
      credit carryovers and temporary differences between the carrying amounts of
      assets and liabilities for financial reporting purposes and the amounts used
      for
      income tax purposes. Significant components of the Company’s deferred tax assets
      are as follows (in thousands):




**June 30,****2007**
            
            
            **2006**Deferred
                tax assets:Net
                operating loss
            
            $
            84,683
            
            
            $
            77,855Research
                and development credits
            
            
            3,993
            
            
            
            3,908Capitalized
                research and development
            
            
            20,205
            
            
            
            23,292Other
            
            
            4
            
            
            
            129Total
                deferred tax assets
            
            
            108,885
            
            
            
            105,184Valuation
                allowance
            
            
            (108,885
            )
            
            
            (105,184
            )Net
                deferred tax assets
            
            $
            —
            
            
            $
            —




82




Realization
      of deferred tax assets is dependent upon future earnings, if any, the timing
      and
      amount of which are uncertain. Accordingly, the net deferred tax assets have
      been fully offset by a valuation allowance. The valuation allowance reflected
      increases of approximately $3.7 million and $6.1 million during 2007
      and 2006, respectively.




As
      of
      June 30, 2007, the Company had net operating loss carryforwards for
      federal income tax purposes of approximately $220.7 million, which expire
      in the years 2008 through 2027, and federal research and development tax credits
      of approximately $3.0 million, which expire in the years 2008 through
      2027.




As
      of
      June 30, 2007, the Company had net operating loss carryforwards for
      state income tax purposes of approximately $129.4 million, which expire in
      the years 2008 through 2017, and state research, and development tax credits
      of
      approximately $1.6 million, which do not expire.




Utilization
      of the net operating losses and credit carryforwards may be subject to a
      substantial annual limitation due to the “change in ownership” provisions of the
      Internal Revenue Code of 1986. The annual limitation may result in the
      expiration of net operating losses and credits before utilization.




**14.**
            **COMMITMENTS
                AND CONTINGENCIES**




***Operating
      Lease***




In
      January 2007, Valentis terminated its existing property leases without any
      material adverse effect and moved to a nearby office space on a month-to-month
      basis. Upon the completion of the merger with Urigen N.A. in July 2007, the
      Company relocated to Urigen N.A.’s office facilities in Burlingame, California.
      The combined company currently subleases office facilities on a month-to-month
      basis at a rate of $2,683 per month from EGB Advisors, LLC. EGB Advisors, LLC
      is
      owned solely by William J. Garner, President and CEO of Urigen Pharmaceuticals,
      Inc.  The sublease is terminable upon 30 days’ notice.




Gross
      rent expense for the fiscal years ended June 30, 2007, 2006 and 2005
      was approximately $780,000, $1.5 million and $1.2 million,
      respectively. Gross sublease income for the fiscal years ended
      June 30, 2007, 2006 and 2005 was approximately $462,000, $652,000 and
      $517,000, respectively.




***Restricted
      Cash***




Included
      in other assets in the consolidated balance sheet as of June 30, 2006
      was approximately $58,000 of restricted cash, which was required by Valentis’
bank for the establishment of a standby letter of credit related to the
      Company’s utility services. In March 2007, the bank released the restrictions on
      the amount as the standby letter of credit was no longer required by the utility
      company. Thus, no restricted cash existed at
      June 30, 2007.




***Guarantees***




In
      the
      ordinary course of its business, the Company makes certain indemnities,
      commitments and guarantees under which it may be required to make payments
      in
      relation to certain transactions. These include indemnities of clinical
      investigators and contract research organizations involved in the development
      of
      the Company’s clinical stage products, indemnities of contract manufacturers and
      indemnities to directors and officers of the Company to the maximum extent
      permitted under the laws of the State of Delaware. The duration of these
      indemnities, commitments and guarantees varies, and in certain cases, is
      indefinite. The majority of these indemnities, commitments and guarantees do
      not
      provide for any limitation of the maximum potential future payments the Company
      could be obligated to make. The Company has not recorded any liability for
      these
      indemnities, commitments and guarantees in the accompanying consolidated balance
      sheets. However, the Company accrues for losses for any known contingent
      liability, including those that may arise from indemnification provisions,
      when
      future payment is probable and in accordance with SFAS No. 5,
      Accounting for Contingencies. No such losses have been recorded to
      date.




***Liquidated
      Damages Contingencies***




In
      January and June 2004, June 2005 and March 2006, the Company
      completed four separate private placements of common stock for gross proceeds
      of
      approximately $10.0 million, $12.0 million, $4.2 million and $5.3
      million, respectively.




The
      Company entered into registration rights agreements with the purchasers in
      these
      four private placements of common stock. Pursuant to the registration rights
      agreements, the Company filed with the Securities and Exchange Commission
      registration statements related to the shares issued to the purchasers and
      shares issuable upon the exercise of the warrants under the private placements.
      In the event the Company must suspend use of the registration statements for
      greater than 20 consecutive days or a total of 40 days in the
      aggregate during the time the Company is required to keep the registration
      statement effective under the registration rights agreements, then the Company
      must pay to each purchaser in cash 1.0% of the purchaser’s aggregate purchase
      price of the shares for the first month, as well as an additional 1.5% of the
      purchaser’s aggregate purchase price for each additional month thereafter, while
      the use of the registration statements has been suspended. The Company currently
      expects to be required to maintain availability of the registration statement
      for at least two years following the applicable closing.




83




In
      addition, under the securities purchase agreement entered into in connection
      with the private placements completed in June 2005 and March 2006,
      while there is an effective registration statement and if the Company fails
      to
      deliver a stock certificate that is free of restrictive legends within three
      trading days upon delivery of such a request by a purchaser, the Company is
      required to pay to the purchaser, for each $1,000 of shares of stock or shares
      issuable upon exercise of warrants requested, $10 per trading day for each
      trading day beginning five trading days after the delivery of the request,
      increasing to $20 per trading day after the first five trading days for which
      such damages have begun to accrue, until such certificate is delivered without
      restrictive legends.




***Other
      Acquired Technology***




In
      April 1999, the Company acquired rights to intellectual property related to
      the DEL-1 gene and protein. DEL-1 is a novel extracellular matrix protein
      involved in early growth and development of blood vessels and bone that has
      been
      demonstrated to have potential application in the treatment of certain vascular
      diseases by stimulating angiogenesis. The Company was obligated to make payments
      to Vanderbilt University upon the achievement of certain milestones, to share
      revenue received from sublicensing at a specified rate, and to make royalty
      payments on sales of products, if any. As of June 30, 2007, no
      revenues have been derived from the license of this technology.




In
      January 2007, Valentis entered into an asset purchase agreement with
      Medarex, Inc. Pursuant to the agreement, the Company sold to Medarex
      certain of Valentis’ technologies related to the Del-1 gene, Del-1 protein and
      certain Del-1 antibodies and related obligations and liabilities. As a result,
      Valentis is no longer obligated to make any additional payments to Vanderbilt
      University related to these technologies.




**15.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**




For
      the
      fiscal year ended June 30, 2007, Valentis paid an aggregate of
      approximately $229,000******to the law firm of
      Latham & Watkins LLP for the provision of legal services. Mr. Alan
      C. Mendelson, a former director of Valentis, is a partner of Latham &
Watkins LLP.  Mr. Mendelson resigned from the Board of Directors of
      Valentis in August 2006.




During
      the fiscal year ended June 30, 2007, the spouse of Joseph A. Markey,
      Valentis’ former Vice President of Finance and Administration, provided services
      to Valentis for which she was paid approximately $74,000.




Valentis
      has entered into indemnity agreements with each of its executive officers and
      directors which provide, among other things, that Valentis will indemnify such
      officer or director, under the circumstances and to the extent provided for
      therein, for expenses, damages, judgments, fines and settlements he may be
      required to pay in actions or proceedings, which he is or may be made a party
      by
      reason of his position as a director, officer or other agent of Valentis, and
      otherwise to the full extent permitted under Delaware law and Valentis’
Bylaws.




**16.**
            **SUBSEQUENT
                EVENTS**




On
      October 5, 2006, Valentis, Inc., a Delaware corporation, entered into an
      Agreement and Plan of Merger with Urigen N.A., Inc., a Delaware corporation,
      and
      Valentis Holdings, Inc., (“Valentis Holdings”) a Delaware corporation and newly
      formed wholly-owned subsidiary of Valentis (“ Merger Sub ”), as subsequently
      amended. Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings
      was merged with and into Urigen N.A. with Urigen N.A. surviving as a
      wholly-owned subsidiary of Valentis. In connection with the Merger, each Urigen
      N.A. stockholder received, in exchange for each share of Urigen N.A. common
      stock held by such stockholder immediately prior to the closing of the Merger,
      2.2554 shares of Valentis common stock. At the effective time of the Merger,
      each share of Urigen N.A. Series B preferred stock was exchanged for 11.277
      shares of Valentis common stock. An aggregate of 51,226,679 shares of Valentis
      common stock were issued to the Urigen N.A. stockholders.




The
      Merger Agreement was approved by the stockholders of Urigen N.A. at a meeting
      of
      the Urigen N.A.’s stockholders on June 28, 2007.  At the meeting, the
      Urigen N.A.’s Series A shareholders voted to convert the 4,358,938 outstanding
      shares of Series A preferred stock to common stock at a ratio of one to
      one.   In addition, the Board of Directors of Urigen N.A. agreed
      to waive the requirement of approval by the shareholders of Valentis as required
      by the Merger Agreement.




From
      and
      after the Merger, the business of Valentis is principally conducted through
      Urigen N.A.




On
        July
        26, 2007, the Board of Directors authorized the creation of a series of
        Preferred Stock of the Company to be named Series B Convertible Preferred
        Stock,
        consisting of 210 shares, which have the designation, powers, preferences
        and
        relative other special rights and the qualifications, limitations and
        restrictions as set forth in the Certificate of Designation filed on July
        31,
        2007.





On
      July
      30, 2007, the Company changed its name to Urigen Pharmaceuticals, Inc. and
      began
      trading on the OTC Bulletin Board under the stock symbol URGP.





On
      July
      31, 2007, Urigen Pharmaceuticals, Inc. entered into a Series B Convertible
      Preferred Stock Purchase Agreement (the “Purchase Agreement”) with
      Platinum-Montaur Life Science, LLC (“Platinum”) for the sale of 210 shares of
      its Series B Convertible Preferred Stock, par value $.001 per share, at a
      purchase price of $10,000 per share. The Company received aggregate proceeds
      of
      $1,817,000 net of issuance costs of $283,000.





The
      Certificate of Designation, as amended and restated, setting forth the rights
      and preferences of the Series B Preferred Stock, provides for the payment of
      dividends equal to 5% per annum payable on a quarterly basis. The Company has
      the option to pay dividends in shares of common stock if the shares are
      registered in an effective registration statement and the payment would not
      result in the holder exceeding any ownership limitations. The Series B Preferred
      Stock is convertible at maximum price of $0.15 per share, subject to certain
      adjustments, other than for increase in the conversion price in connection
      with
      a reverse stock split by the Company.





The
      Series B Preferred Stock also carries a liquidation preference of $10,000 per
      share.




84




The
      Holders of Series B Preferred stock have no voting rights except that the
      Company may not without the consent of a majority of the holders of Series
      B
      Preferred Stock (i) incur any indebtedness, as defined in the Purchase
      Agreement, or authorize, create or issue any shares having rights superior
      to
      the Series B preferred stock; (ii) amend its Articles of Incorporation or Bylaws
      or in anyway alter the rights of the Series B Preferred stock, so as to
      materially and adversely affect the rights, preferences and privileges of the
      Series B Preferred Stock; (iii) repurchase, redeem or pay dividends on any
      securities of the Company that rank junior to the Series B Preferred Stock;
      or
      (iv) reclassify the Company's outstanding stock.





The
      Company also issued to Platinum a Series A Warrant to purchase 14,000,000 shares
      of the Company's common stock at $0.18. The warrants have a term of five years,
      and expire on August 1, 2012. The warrants provide a cashless exercise feature;
      however, the holders of the warrants may make a cashless
      exercise commencing twelve months after the original issue date of 
August 1, 2007 only if the underlying shares are not covered by an effective
      registration statement and the market value of the Company's common stock is
      greater than the warrant exercise price.





The
      terms
      of the Warrant provide that it may not be exercised if such exercise would
      result in the holder having beneficial ownership of more than 4.99% of the
      Company's outstanding common stock. The Amended and Restated Certificate of
      Designation contains a similar limitation and provides further that the Series
      B
      Preferred Stock may not be converted if such conversion, when aggregated with
      other securities held by the holder, will result in such holder's ownership
      of
      more than 9.99% of the Company's outstanding common stock. Beneficial ownership
      is determined in accordance with Section 13(d) of the Securities Exchange Act
      of
      1934, as amended, and Rule 13d-3 thereunder. These limitations may be waived
      upon 61 days notice to the Company.





In
      addition to the foregoing:





·
            The
                Company agreed that for a period of 3 years after the issuance of
                the
                Series B Preferred Stock that in the event theCompany
                enters into a financing, with terms more favorable than those attached
                to
                the Series B Preferred Stock, then theholders
                of the Series B Preferred Stock will be entitled to exchange their
                securities for shares issued in the
                financing.





·
            The
                Company agreed to register (i) 120% of the shares issuable upon conversion
                of the preferred shares and (ii) the sharesissuable
                upon exercise of the warrants in a Registration Statement to be filed
                with
                the SEC within 30 days of the closingand
                shall use its best efforts to have the registration statement declared
                effective with 90 days, or in the event of a reviewby
                the SEC, within 120 days of the closing. The failure of the Company
                to
                meet this schedule and other timetables providedin
                the registration rights agreement would result in the imposition
                of
                liquidated damages of 1.5% per month with amaximum
                of 18% of the initial investment in the Series B Preferred stock
                and
                warrants.  On September 6, 2007, Platinum extended the time to
                file until September 28, 2007 without penalty.  On October 3,
                2007, Platinum extended the time to file until October 15, 2007,
                without
                penalty.





·
            The
                Company granted to Platinum the right to subscribe for an additional
                amount of securities to maintain itsproportionate
                ownership interest in any subsequent financing conducted by the Company
                for a period of 3 years from theclosing
                date.





·
            The
                Company agreed to take action within 45 days of the closing to amend
                its
                bylaws to permit adjustments to theconversion
                price of the Series B Preferred Stock and the exercise price of the
                warrant. The failure of the Companyto
                meet this timetable will result in the imposition of liquidated damages
                of
                1.5% per month until the amendment tothe
                Bylaw is effected. On October 3, 2007 Platinum extended the amendment
                deadline to October 17, 2007, without penalty
                .





**17.
                QUARTERLY FINANCIAL INFORMATION
                (UNAUDITED)**




**Quarter****First**
            
            
            **Second**
            
            
            **Third**
            
            
            **Fourth****(in thousands, except per share data)****2007**Revenue
            
            $
            80
            
            
            $
            260
            
            
            $
            231
            
            
            $
            ―Operating
                expenses (excluding restructuring charges of $1,029)
            
            
            2,308
            
            
            
            1,496
            
            
            
            921
            
            
            
            930Net
                income (loss)
            
            
            (2,139
            )
            
            
            (637
            )
            
            
            80
            
            
            
            (1,037
            )Basic
                and diluted net income (loss) per share
            
            
            (0.13
            )
            
            
            (0.04
            )
            
            
            0.00
            
            
            
            (0.06
            )**2006**Revenue
            
            $
            327
            
            
            $
            146
            
            
            $
            114
            
            
            $
            140Costs
                and operating expenses
            
            
            3,967
            
            
            
            4,119
            
            
            
            5,014
            
            
            
            3,208Net
                loss
            
            
            (3,589
            )
            
            
            (3,901
            )
            
            
            (4,850
            )
            
            
            (2,997
            )Basic
                and diluted net loss per share
            
            
            (0.24
            )
            
            
            (0.26
            )
            
            
            (0.32
            )
            
            
            (0.17
            )




85




**18.**
            **UNAUDITED
                PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS**




Subsequent
      to the year ended June 30, 2007, Urigen N.A.,  completed its
      merger into Valentis, Inc. on July 13, 2007.  In connection
      with the merger, Urigen N.A. stockholders received a total of 51,226,679 shares
      of Valentis common stock, in exchange for shares of Urigen N.A. common stock
      held by such stockholders immediately prior to the closing of the
      merger.




Urigen
      N.A. security holders owned, immediately after the closing of the merger,
      approximately two-thirds of the combined company on a fully-diluted basis.
      Further, Urigen N.A. directors constitute a majority of the combined company’s
      board of directors and all members of the executive management of the combined
      company are from Urigen N.A. Therefore, Urigen N.A. was deemed to be the
      acquiring company for accounting purposes and the merger transaction will be
      accounted for as a reverse merger and a recapitalization. The financial
      statements of the combined entity after the merger will reflect the historical
      results of Urigen N.A. prior to the merger and will not include the historical
      financial results of Valentis prior to the completion of the merger.
      Stockholders’ equity and earnings per share of the combined entity after the
      merger will be retroactively restated to reflect the number of shares of common
      stock received by Urigen N.A. security holders in the merger, after giving
      effect to the difference between the par values of the capital stock of Urigen
      N.A. and Valentis, with the offset to additional paid-in capital.




The
      following unaudited pro forma combined condensed consolidated financial
      statements have been prepared to give effect to the merger of Urigen N.A. and
      Valentis as a reverse acquisition of assets and a recapitalization in accordance
      with accounting principles generally accepted in the United States. For
      accounting purposes, Urigen N.A. is considered to be acquiring Valentis in
      the
      merger and Valentis does not meet the definition of a business in accordance
      with Statement of Financial Accounting Standards, SFAS
      No. 141,  Business Combinations (“SFAS No. 141”) , and Emerging
      Issue Task Force 98-3 (“EITF 98-3”),  Determining Whether a
      Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business
      ,
      because Valentis had no material assets or liabilities at the time of closing
      of
      the merger and these assets and liabilities do not constitute a business
      pursuant to SFAS No. 141 and EITF 98-3. Consequently, all of the assets and
      liabilities of Valentis have been reflected in the pro forma financial
      statements at their respective fair values and no goodwill or other intangibles
      will be recorded as part of acquisition accounting and the cost of the merger
      is
      measured at net assets acquired.




The
      unaudited pro forma combined condensed consolidated financial statements
      presented below are based on the historical financial statements of Urigen
      N.A.
      and Valentis, adjusted to give effect to the acquisition of Valentis by Urigen
      N.A. for accounting purposes.




The
      unaudited pro forma combined condensed consolidated balance sheet assumes that
      the Merger was completed as of June 30, 2007. The unaudited pro forma
      combined condensed consolidated statement of operations for the year ended
      June 30, 2007 assumes that the merger was completed as of
      July 1, 2005.




The
      unaudited pro forma combined condensed consolidated financial information is
      presented for illustrative purposes only and is not necessarily indicative
      of
      the financial position or results of operations that would have actually been
      reported had the merger occurred at the dates stated above, nor is it
      necessarily indicative of future financial position or results of operations.
      The unaudited pro forma combined condensed consolidated financial information
      has been derived from and should be read in conjunction with the historical
      consolidated financial statements and related notes of Urigen N.A. and
      Valentis.





86




**Unaudited
      Pro Forma Combined Condensed Consolidated Balance Sheet**


**(in
      thousands)**





**As
                of June 30, 2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            585Prepaid
                expenses and other current assets
            
            
            239Total
                current assets
            
            
            824Property
                and equipment, net
            
            
            10Intangible
                Assets, net
            
            
            259Total
                assets
            
            $
            1,093**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT**Current
                liabilities:Accounts
                payable
            
            $
            925Other
                accrued liabilities
            
            
            960Notes
                payable
            
            
            476Total
                current liabilities
            
            
            2,361Stockholders’
                deficit:Common
                stock
            
            
            68Additional
                paid-in capital
            
            
            3,429Accumulated
                other comprehensive loss
            
            
            20Accumulated
                deficit
            
            
            (4,785
            )Total
                stockholders’ deficit
            
            
            (1,268
            )Total
                liabilities and stockholders’ deficit
            
            $
            1,093








**Unaudited
      Pro Forma Combined Condensed Consolidated Statement of
      Operations**


**(in
      thousands, except per share amounts)**








**Year
                ended June 30, 2007**Operating
                expenses:Research
                and development
            
            $
            729General
                and administrative
            
            
            2,846Sale
                and marketing
            
            
            296Total
                operating expenses
            
            
            3,871Loss
                from operations
            
            
            (3,871
            )Interest
                income
            
            
            53Other
                income and expense, net
            
            
            (36
            )Net
                loss
            
            $
            (3,854
            )Basic
                and diluted net loss per common share
            
            $
            (0.06
            )Shares
                used in computing basic and diluted net loss per common
                share
            
            
            68,279




87