UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 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 December 31,
2008
 
 OR
 [  ]           Transition
Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of
1934
 For the transition period from
_______________ to _______________
 
 Commission
File Number: 0-23317
 
 
 ORE
PHARMACEUTICALS INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              06-1411336(State
      of Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
      Employer Identification No.)
 
 610
Professional Drive, Suite 101
 Gaithersburg,
Maryland 20879
 (Address
of Principal Executive Offices)
 
 Registrant’s
phone number, including area code: (240) 361-4400
 Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act:
 COMMON
STOCK, $.01 PAR VALUE
 (Title
of Class)
 
 Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act: YES  ̈ 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 Act: YES  ̈ NO x
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:  YES x NO  ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the 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:   ̈
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated
      filer   ̈
                Accelerated
      filer   ̈
                Non-accelerated
      filer   ̈
                  (Do
      not check if a smaller reporting company)
                Smaller reporting
      company  x
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):  YES  ̈ NO x
 
 The
aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the Registrant as of June 30, 2008 was
approximately $6,983,000, based on the closing price on that date of Common
Stock on The NASDAQ Stock Market.*
 
 The number
of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
5,483,519 as of March 4, 2009.
 
 *
              Excludes
      211,216 shares of Common Stock held by directors and executive officers
      and stockholders whose beneficial ownership exceeds 10% of the shares
      outstanding on June 30, 2008. Exclusion of shares held by any person
      should not be construed to indicate that such person possesses the power,
      direct or indirect, to direct or cause the direction of the management or
      policies of the Registrant, or that such person is controlled by or under
      common control with the Registrant.
  Documents
Incorporated by Reference
 Certain
information required by Part III of this Annual Report on Form 10-K is
incorporated by reference from the Registrant’s definitive proxy statement for
the annual meeting of stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant’s fiscal
year ended December 31, 2008.
  
 
  TABLE
OF CONTENTS
  
 PART IITEM 1.
                  BusinessITEM 1A.
                  Risk FactorsITEM 1B.
                  Unresolved Staff CommentsITEM 2.
                  PropertiesITEM 3.
                  Legal ProceedingsITEM 4.
                  Submission of Matters to a Vote of Security
      HoldersPART IIITEM 5.
                  Market for the Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      SecuritiesITEM 6.
                  Selected Financial DataITEM 7.
                  Management’s Discussion and Analysis of Financial Condition
      and Results of OperationsITEM 7A.
                  Quantitative and Qualitative Disclosure About Market
      RiskITEM 8.
                  Financial Statements and Supplementary
      DataITEM 9.
                  Changes in and Disagreements with Accountants on
      Accounting and Financial DisclosureITEM 9A(T).
                  Controls and ProceduresITEM 9B.
                  Other InformationPART IIIITEM 10.
                  Directors, Executive Officers and Corporate
      GovernanceITEM 11.
                  Executive CompensationITEM 12.
                  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder MattersITEM 13.
                  Certain Relationships and Related Transactions, and
      Director IndependenceITEM 14.
                  Principal Accounting Fees and
    ServicesPART IVITEM 15.
                  Exhibits, Financial Statement
    SchedulesSIGNATURES
 Report of
Independent Registered Accounting Firm—Consolidated Financial
Statements
 Consolidated
Balance Sheets as of December 31, 2008 and 2007
 Consolidated
Statements of Operations for the two years ended December 31, 2008
 Consolidated
Statements of Stockholders’ Equity for the two years ended December 31,
2008
 Consolidated
Statements of Cash Flows for the two years ended December 31, 2008
 Notes to
Consolidated Financial Statements
 
 2
 
 PART I
 
 This
Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements
regarding future events and the future results of Ore Pharmaceuticals Inc. (“Ore
Pharmaceuticals”) that are based on current expectations, estimates, forecasts
and projections about the industries in which Ore Pharmaceuticals operates and
its business and the beliefs and assumptions of the management of Ore
Pharmaceuticals. Words such as "expects," "anticipates," "targets," "goals,"
"projects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words, and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are only
predictions and are subject to risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. Factors that
might cause or contribute to such differences include those discussed in this
Form 10-K under the section entitled “Risk Factors”. Ore Pharmaceuticals
undertakes no obligation to revise or update publicly any forward-looking
statements to reflect any change in management’s expectations with regard
thereto or any change in events, conditions, or circumstances on which any such
statements are based.
 
 Unless the
context otherwise requires, references in this Form 10-K to “Ore
Pharmaceuticals,” “Ore Pharmaceuticals Inc.,” the
“Company,” “we,” “us,” and “our” refer to Ore Pharmaceuticals Inc.
Gene Logic® is a
registered trademark of Ocimum Biosolutions, Inc.
 
 ITEM 1.
              BUSINESS
 
 Corporate
History
 
 Ore
Pharmaceuticals Inc., headquartered in Gaithersburg, Maryland, is a drug
development company focused on developing certain compounds for uses we
identified through our drug repositioning efforts. The Company was incorporated
in September 1994 as a Delaware corporation and completed its initial public
offering in 1997. Formerly named Gene Logic Inc., we changed our name to Ore
Pharmaceuticals Inc. in December 2007. In 2008, we focused on developing certain
compounds for which we had found new uses through our drug repositioning
technology. Our stock is traded on The NASDAQ Global Market under the symbol
“ORXE.”
 
 Until
2006, our core business was licensing our proprietary genomics databases and
software and providing related services. In 2006, following a strategic
reevaluation of our business we embarked on a series of actions. In December
2006, we sold our preclinical testing services subsidiary (sometimes referred to
as our Preclinical Division) to Bridge Pharmaceuticals, Inc. In December 2007,
we sold the assets of our Genomics Division (the “Genomics Assets”) and the
related name “Gene Logic” to Ocimum Biosolutions, Inc. (“Ocimum”). We retained
certain technology and the right to use our genomics databases for the purposes
of drug development and molecular diagnostics. In September 2008, we sold our
molecular diagnostics subsidiary, DioGenix Inc., to Nerveda, Inc.
 
 We then
focused our efforts on our drug repositioning and development business, which
was based on certain drug indication-seeking technologies that we had previously
acquired from Millennium Pharmaceuticals, Inc. (“Millennium”) and on the
proprietary genomics databases and software we had developed. Through our drug
repositioning efforts, we identified potential new therapeutic uses for specific
compounds. In 2008, we discontinued further drug repositioning efforts to focus
on developing certain of these specific compounds for the new uses.
 
 Our
Business
 
 Ore
Pharmaceuticals is a drug development company. We are now developing a small
number of drug candidates for new therapeutic uses discovered through our drug
repositioning efforts.
 
 Before
discontinuing our drug repositioning efforts, we applied well-known technologies
along with our proprietary know-how in integrative pharmacology to identify
potential new uses for certain drug candidates owned by other pharmaceutical
companies. These drug candidates were discontinued in such other pharmaceutical
companies’ clinical development for reasons other than safety. In 2008, we
decided to focus our efforts and resources on developing certain of these drug
candidates for which we had discovered potential new therapeutic use and
discontinued further drug repositioning work.
 
 3
 Our drug
candidates have already been tested in preclinical testing and in humans by the
original developer and have demonstrated an acceptable safety profile.
Therefore, we believe that our drug candidates have a higher likelihood of
clinical success than the drug candidates typically under development at small
drug development companies.
 
 Under the
supervision of our Senior Vice-President for Clinical Development, our drug
development efforts are generally performed by outsourced contractors and
consultants.
 
 Although
our current financial resources are presently limited, we have made and continue
to make significant changes to reduce our rate of cash usage, while maintaining
our business objectives. In 2009, we expect to outsource additional
administrative functions as we continue efforts to reduce our employee headcount
and related rate of cash usage.
 
 We also
continue to consider other strategic opportunities and paths to enhance
shareholder value, including, but not limited to, targeting additional sources
of funding and developing new strategic relationships with pharmaceutical
companies and other interested third parties.
 
 Our
Pipeline of Drug Candidates
 
 We
currently have three drug candidates for which we have development rights for
new uses we discovered. All of these drug candidates have undergone extensive
preclinical safety testing and have, at the very least, been through early-stage
human clinical trials. Using our drug repositioning technology, we found
potential alternate uses for these drug candidates that our drug repositioning
partners had not previously investigated. Since these drug candidates have
already been in early-stage clinical testing, we believe we can quickly move
these drug candidates back into clinical development enabling us to efficiently
determine their potential for their newly discovered indications.
 
 Our right
to develop each of our drug candidates resulted from a commercial arrangement
with our drug repositioning partners (see “Contractual Arrangements” below).
Under these arrangements, we are obligated to pay to such partners certain
success-based milestones during clinical development, as well as royalties on
future commercial sales. We are seeking to obtain development rights to several
other compounds for which we identified new uses from our drug repositioning and
development partnership agreements.
 
 GL1001
 
 Our lead
drug candidate and the primary focus of our scientific efforts is GL1001, which
we are developing for the treatment of inflammatory bowel disease (“IBD”). We
recently completed a multiple ascending dose Phase I clinical trial in the
United States. We are planning to initiate a Phase Ib/IIa clinical trial for
ulcerative colitis in mid 2009 that we expect to have completed in mid to late
2010.
 
 Background
on GL1001
 
 In 2006,
we acquired the rights to develop GL1001 from Millennium. Through extensive
analysis, we have identified potential new therapeutic uses for this drug
candidate to treat IBD and other gastrointestinal diseases and
conditions.
 
 GL1001 is
a potent inhibitor of the ACE2 enzyme, whose substrates include several
bioactive peptides. We have broadly analyzed GL1001’s action, as well as its
disease-specific expression in human tissue samples. Our animal models indicate
that GL1001 reduces signs of injury and inflammation in experimental colitis,
gastritis and gastric ulcer. In a particular model, our drug candidate reduced
the severity of histological lesions and was observed to target colon tissue. In
another model, GL1001 reduced gastric damage scores induced by non-steroidal
anti-inflammatory drugs.
 
 In 2002,
GL1001 was tested by Millennium in a single ascending dose Phase I clinical
study in the United Kingdom. Results of that clinical trial indicated that the
drug candidate was well-tolerated up to the highest dose tested. In June 2008,
we filed an investigational new drug (“IND”) application with the U.S. Food and
Drug Administration (“FDA”) for GL1001 (see “Drug Development” below). Following
clearance of the IND and to confirm GL1001’s safety profile in humans, we
commenced clinical testing of GL1001 in September 2008 in a multiple ascending
dose Phase I clinical trial. This study was a blinded, placebo-controlled study
in 32 healthy volunteers that studied the effects on subjects of multiple
ascending doses. The drug candidate was orally administered for 14 days. Results
of that trial showed that the drug candidate was well tolerated by humans, with
no serious adverse events observed.
 
 4
 We are
currently preparing protocols and manufacturing sufficient quantities of GL1001
in anticipation of initiating a Phase Ib/IIa clinical trial in mid 2009. This
trial will be designed to study additional safety aspects, as well as the
effectiveness of GL1001 in the treatment of ulcerative colitis. We expect
results of this study to be available in mid to late 2010.
 
 Therapeutic
Opportunity – Inflammatory Bowel Disease
 
 IBD
consists of two categories of disease: ulcerative colitis (“UC”) and Crohn’s
disease (“CD”). These are conditions that are characterized by intermittent,
relapsing intestinal inflammation. UC tends to occur in the terminal portions of
the digestive tract, and CD can occur anywhere in the digestive tract. Roughly
fifty percent (50%) of patients diagnosed with IBD are believed to have UC,
while thirty percent (30%) have CD and the remaining twenty percent (20%) have
“indeterminate colitis” with symptoms that fall between CD and UC. The clinical
trial for GL1001 that we are planning will focus on treatment of UC; however, we
have preliminary evidence that GL1001 may also be useful in the treatment of
CD.
 
 Worldwide,
there are estimated to be four million patients diagnosed with IBD;
approximately one million of these patients are in the United States. Recent
statistics appear to indicate a rise in the number of new cases.
 
 UC is
characterized by diffuse inflammation affecting the mucosal and submucosal
layers of the colon that typically is most intense in the rectum and can extend
into the colon. In about a third of UC patients, the entire large bowel is
affected. The inflammation can result in ulcerations that can lead to bloody
diarrhea. Current therapies do not appear to cure the disease or prevent future
recurrences. Chronic inflammation increases the risk of colon cancer, making
surveillance for dysplasia (a form of pre-cancer) necessary even if the actual
inflammatory disease remains in remission.
 
 CD is more
varied in its inflammatory process and clinical manifestations. Typically,
inflammation affects all layers (referred to as transmural inflammation), in
contrast to the superficial inflammation found in UC. Unlike UC, where the
inflammatory process is typically diffuse and continuous in extent, CD
inflammation may be patchy and segmental. Symptoms can reflect the inflammation
itself or the scarring that can result (fibrostenotic disease). Often the
gastrointestinal tract becomes obstructed at the affected site. In many
patients, the transmural inflammation can result in pathologic connections
between the intestine and a variety of structures, including other parts of the
GI tract, the bladder and the skin (most commonly in the perineal or perianal
region). While CD can result in a wide range of symptoms, patients can
experience a combination of abdominal pain, diarrhea and weight loss. In
pediatric patients, lack of growth is a particularly common manifestation. In
addition to symptoms related directly to gastrointestinal tract function, a
significant minority of patients with either UC or CD also experience
manifestations outside the intestinal tract due to associated inflammation
affecting the skin, eyes, joints, liver and bile ducts. Although specific
episodes or complications of CD can respond to available drugs or surgical
intervention, none are curative, and the disease is life-long.
 
 It is
estimated that between one and two million Americans are affected by IBD. With
typical onset in childhood or early adulthood, these disorders cause many
decades of pain and suffering and result in significant lost productivity, in
addition to the direct costs of medical and surgical care.
 
 The burden
on the U.S. healthcare system alone is significant; IBD is one of the five most
prevalent gastrointestinal diseases in the United States, with an overall health
care cost estimated at more than $1.7 billion. This chronic condition commonly
requires a lifetime of care after diagnosis. Each year in the United States, IBD
accounts for over 700,000 physician visits, 100,000 hospitalizations and
disability in 119,000 patients. Over the long term, approximately 75% of
patients with CD and 25% of those with UC will require surgery.
 
 Limitations
of Current IBD Treatments
 
 Existing
therapies present significant concerns in efficacy, safety and dosing. Although
a variety of medications are available that can control inflammation and relieve
the resulting symptoms, none provide fully effective treatment, and almost all
are associated with the risk of serious side effects. Surgical intervention
plays a key role in the management of some patients. However, even with surgery,
recurrence of IBD over time is likely. If approved for use, GL1001 has the
potential to offer long-term therapeutic relief of the serious symptoms
exhibited by patients with IBD with less adverse side effects than current
medications.
 
 5
 Potential
Therapeutic Opportunity – Radiation Enteritis
 
 In
addition to IBD, we are also investigating use of GL1001 for the treatment of
radiation enteritis (also known as radiation enteropathy), a common adverse
side-effect of radiation therapy for cancer where the mucosal lining of the
intestine is damaged by cytotoxic radiation. An early pilot study testing GL1001
in a radiation enteritis animal model showed positive results; however, it is
still too early to determine whether GL1001 could be developed in this
indication.
 
 Commercialization
Opportunities
 
 As we
proceed with our early-stage clinical testing, we are actively seeking to enter
into an arrangement with one or more third parties that would conduct or finance
later-stage clinical development and commercialization of GL1001.
 
 Tiapamil
 
 In 2008,
we acquired development and commercialization rights for tiapamil from F.
Hoffman La Roche Ltd. (“Roche”). As part of our drug repositioning program, we
discovered that tiapamil activates a major regulatory protein in the brain, an
activity for which this drug candidate and its class of L-type calcium channel
antagonists had not been previously developed. We have thus identified
potentially novel therapeutic uses for tiapamil in certain central nervous
system diseases, particularly focused on cognition and memory.
 
 Development
of tiapamil was discontinued by Roche in 1986 for reasons other than safety
after completing Phase II trials in hypertension, dysrhythmia and angina
pectoris. Based on the results of our early preclinical studies, we intend to
develop tiapamil for the most appropriate of several potential indications.
Additional preclinical work will likely be necessary to assist in this
determination prior to filing an IND with the FDA. We have not yet determined
when we will make such a filing.
 
 The
composition of matter patents (see “Intellectual Property Rights” below) for
tiapamil that were filed by Roche have expired; however, we have recently filed
provisional method-of-use patent applications for tiapamil based on our
preclinical discoveries. Because tiapamil has never been made available
commercially, we expect that any issued patents resulting from our patent
applications would adequately protect a developer in the marketplace from
generic competition for the remainder of such patents’ life.
 
 Romazarit
 
 In 2008,
we also acquired development and commercialization rights from Roche for the
clinical-stage drug candidate romazarit. Through our repositioning analysis, we
identified potentially novel therapeutic uses for romazarit in metabolic
diseases and subsequently observed lowered lipid levels, weight and glucose
levels in preclinical testing, which could allow this drug candidate to be
developed for the treatment of metabolic indications such as
obesity.
 
 Development
of romazarit was discontinued by Roche in 1990 for reasons other than safety
during Phase II trials for rheumatoid arthritis. Based on our preclinical
efforts, we intend to develop romazarit for a metabolic indication, although we
expect that some limited preclinical work will be necessary to assist in
delineating the appropriate development path and prior to filing any IND with
the FDA.
 
 The
composition of matter patents for romazarit have also expired; however, we have
filed provisional method-of-use patent applications for romazarit based on the
results of our preclinical analysis. Because romazarit has never been made
available commercially, we expect that any issued patents resulting from our
patent applications would adequately protect a developer in the marketplace from
generic competition for the remainder of such patents’ life.
 
 6
 Drug
Development
 
 Today,
drug development in the United States generally consists of the following
steps:
 
 ·
              Discovery.
      Discovery is the process of identifying new biological targets and the
      compounds that can affect them. Targets must be identified, prioritized
      and validated.
 
 ·
              Preclinical
      Testing. Compounds that are being considered as drugs are studied
      in the laboratory and in animal studies to determine if the compound will
      have an acceptable safety profile and if it will be effective in treating
      the targeted disease or condition (i.e. show efficacy in treatment). For
      certain diseases, animal models may exist which may predict human
      efficacy.
 
 ·
              Investigational
      New Drug (“IND”)
      Application. After completing preclinical testing, an IND
      application is filed with the FDA for permission to test the compound in
      humans. The IND application includes the results of any animal studies and
      any other relevant safety and efficacy
data.
 
 ·
              Clinical
      Trials. These trials consist of a series of increasingly complex
      and costly studies (Phase I, II and III) designed to show the effect of
      drug candidates administered to human subjects that ultimately can involve
      up to several thousand patients over a multi-year
  period.
 o
              Phase I
      Trials. Represents the initial introduction of an investigational
      new drug into a small number of healthy human subjects to test for safety
      concerns and possible adverse effects, dosage tolerance, absorption,
      biodistribution, metabolism, excretion and clinical pharmacology. These
      trials may also potentially provide early indications of efficacy. In some
      instances, a slightly more advanced Phase Ib study can be used as a “proof
      of concept,” or confirmation of the drug developer’s
      hypothesis.
 o
              Phase II
      Trials. Includes early, controlled, small-scale clinical studies
      conducted to obtain initial data on the efficacy of the drug, to determine
      dose tolerance and optimal dose range and to gather additional information
      relating to safety and potential adverse effects. Phase II studies are
      sometimes divided into Phase IIa and Phase IIb. Phase IIa is designed to
      assess “proof of concept” (i.e. does the drug demonstrate the intended
      therapeutic effect), as well as dosing requirements (how much drug should
      be given), and Phase IIb is specifically designed to study efficacy (how
      well the drug works at the prescribed
  doses).
 o
              Phase III
      Trials. Consists of clinical trials involving substantially larger
      groups of subjects and longer testing after initial evidence of
      effectiveness of the drug has been obtained in Phase II. These trials also
      gather additional information about effectiveness and safety needed to
      evaluate the overall benefit-risk relationship of the drug. Phase III
      studies usually include several hundred to several thousand people and may
      be conducted over multiple years. As Phase III trials are the most
      expensive of the clinical trials, with costs frequently in excess of $50
      million and in some cases more than $100 million, smaller companies often
      attempt to outlicense their drug candidates prior to Phase III
      trials.
 
 ·
              New Drug
      Application (“NDA”) and
      Approval. Following successful completion of clinical trials, the
      developers are required to file NDA applications with the FDA for its
      approval to allow commercial manufacture, marketing and sale of the drug
      (referred to as commercializing the drug). This process can also be both
      extensive and burdensome and the FDA can request additional
      testing.
 
 Sales
and Marketing
 
 Our sales
and marketing activities consist of business development efforts to identify
third parties potentially interested in our drug candidates. These activities
are ongoing and it may take a considerable period of time for us to be able to
complete a commercial arrangement. We don’t expect that we will be able to
complete any such arrangement for our lead candidate, GL1001, until we complete
the anticipated Phase Ib/IIa clinical trial in mid to late 2010.
 
 In 2008,
we approached what we believe to be the majority of companies who may have a
therapeutic interest in the gastrointestinal disease market. We received
indications of interest from a number of these companies, and have kept such
interested companies aware of our progress. In 2009, we expect to continue to
have additional communications and discussions with companies interested in
GL1001.
 
 7
 Research
& Development
 
 Research
and development expenses for the years ended 2008 and 2007 were $9.7 million and
$10.3 million, respectively. In 2007, our research and development expenses
primarily consisted of costs associated with our discontinued drug repositioning
business. In 2008, our research and development expenses primarily related to
the development of GL1001.
 
 Contractual
Arrangements
 
 We
obtained rights to GL1001 from Millennium and to romazarit and tiapamil from
Roche.
 
 Under the
terms of a Compound Transfer and Development Agreement with Millennium dated
July 26, 2006, we obtained broad rights to develop and/or outlicense GL1001 in
any disease indication, except for oncology diseases. Under the agreement, we,
or any successor that ultimately develops GL1001, would be obligated to make
certain milestone payments to Millennium based on the achievement of the
following milestones:
 
 ·
              upon
      completion of Phase IIa clinical
trials;
 ·
              upon
      initiation of Phase III clinical trials;
and
 ·
              upon
      first obtaining regulatory approval to market the
  drug.
 
 In
addition, the developer of GL1001 will be obligated to make royalty payments to
Millennium equal to a percentage of net commercial sales of approved products
containing GL1001. The term of this agreement extends to the life of any of our
valid patents for GL1001.
 
 Under the
terms of the Drug Indication Evaluation and Development Agreement with Roche
dated December 5, 2005, and amended on June 13, 2008, we obtained rights to
develop and/or outlicense romazarit and tiapamil. Under the agreement, we, or
any successor that ultimately develops either tiapamil or romazarit, would be
obligated to make certain milestone payments to Roche based on the achievement
of the following milestones:
 
 ·
              upon
      filing or reactivation of an IND;
 ·
              upon
      preliminary efficacy established in first Phase II clinical
      trial;
 ·
              upon
      initiation of Phase III trials; and
 ·
              upon
      obtaining regulatory approval to market the drug in the United States,
      Europe and/or Japan.
 
 In
addition, the developer of either tiapamil or romazarit will be obligated to
make royalty payments to Roche equal to a percentage of net commercial sales of
approved products containing such drug candidates. The term of this agreement
extends to the life of any of our valid patents for tiapamil or romazarit, as
the case may be.
 
 Competition
 
 Currently,
there are many small pharmaceutical and biotechnology companies developing
drugs. In many instances, these companies may not have the experience or
resources necessary to bring a compound through the full clinical and regulatory
process to obtain marketing approval and thus must seek assistance from larger
companies. Recently, difficult economic conditions and the difficulties smaller
companies have in obtaining capital appear to be causing more of these smaller
companies to seek such assistance earlier in the development process. We compete
with these companies to make commercial arrangements with larger, more
well-established, companies.
 
 In
addition, we expect to see competition from both manufacturers of existing drugs
and drugs currently in development to treat patients afflicted with diseases or
conditions that can be treated with our drug candidates. Products in this market
will be differentiated based on cost, effectiveness, dosage sizes, side effects
and interaction with other therapies and drugs. Companies such as Proctor &
Gamble Pharmaceuticals, Pfizer, Inc., Salix Pharmaceuticals Ltd. and Centocor
Ortho Biotech Inc. currently market drugs that we anticipate would compete with
GL1001 for the treatment of IBD. We believe that the following companies are
currently developing drugs that, if approved, would also compete with GL1001 for
IBD treatment:  Bristol-Myers Squibb Company, Takeda Pharmaceutical
Company Ltd., DanioLabs Ltd., BioLineRx, Ltd., Cosmo Pharmaceuticals S.p.A., AGI
Therapeutics PLC and SLA Pharma AG. There may be other drugs in development for
IBD treatment of which we are not aware.
 
 8
 Suppliers
 
 We
outsource a number of technical activities to achieve our business goals. These
activities include performing preclinical and clinical testing, compound
manufacturing and designing clinical protocols that meet FDA and other
regulatory standards. We have entered into contractual arrangements with
experienced professional consultants to provide advice and assist in meeting
various regulatory requirements while we seek to conduct clinical trials for
GL1001. We also have a manufacturing agreement to provide sufficient quantities
of GL1001 for our clinical testing needs. Finally, we have service arrangements
with a number of clinical research organizations to design the protocols,
identify clinical facilities to recruit participants and conduct trials and to
manage and oversee the actual conduct of clinical trials for GL1001. Because
there is an adequate supply of other providers who could perform the services
provided by our suppliers, we do not believe that we are dependent on any of our
suppliers.
 
 Intellectual
Property Rights
 
 As of
December 31, 2008, we own or have license rights to 36 issued patents, 21 of
which are United States patents, and 47 patent applications, 23 of which are
United States utility (non-provisional) or provisional patent applications. Of
such patents and patent applications, 6 US patents and 9 patent applications
relate to GL1001 and 6 US patents and 11 patent applications relate to the other
drug candidates in our pipeline. The remaining patents relate to programs or
technologies that we expect to outlicense, assign or abandon in 2009. At this
time, we believe that, in particular, only the patent applications related to
new indications of usage for GL1001 (and the in-licensed rights to Millennium
patents and patent applications for GL1001) are material to our business. The
patents and patent applications associated with our drug candidates generally
fall into two categories: composition of matter patents and method-of-use
patents.
 
 Composition
of Matter Patents.Typically, patents on new compounds are filed before or during the
discovery stages of development, when lead compounds are identified as
prospective drugs. These are typically composition of matter patents that set
forth the invention of a compound described by its chemical composition and
other physical or behavioral properties. These patents often claim
initially-conceived methods for using the compound. When granted, any commercial
use of the compound would likely infringe such patents and thus they provide
full protection against generic manufacturers or developers of alternate
uses.
 
 Method-of-Use
Patents.By
contrast, method-of-use patents describe discoveries of new potential uses of
pre-existing compounds, but do not claim the invention of the compound itself.
These patents provide protection against infringement by other parties that may
seek to use a compound in a way that is claimed in the patent, even if that
compound’s composition of matter patent has expired. In this situation, while it
may not be infringement to manufacture and sell a particular approved drug that
is off patent (i.e. no longer protected by a composition of matter patent), it
is likely to be infringement to sell the drug marketed for a use described in a
valid method-of-use patent. A perceived industry risk with method-of-use patents
is that, without infringing such patents, generic manufacturers can market and
sell approved pharmaceuticals for other uses that are not
covered by the method-of-use patents; however, doctors may prescribe such
generic products for the uses that areclaimed by the
method-of-use patents. In the cases of our drug candidates, these drugs have not
been approved for any use; thus, generic companies seeking to sell and market
our drug candidates simply because composition of matter patents have expired
would have to go through lengthy clinical trials and approval processes in order
to bring these drug candidates to market for any use that would not otherwise
infringe our method-of-use patents.
 
 We also
have licenses granting us exclusive rights in particular issued composition of
matter patents and patent applications for GL1001 that are currently owned by
Millennium. Pursuant to these licenses with Millennium, which expire only when
the patent life ends, we have the right to participate in the prosecution and
other strategic decisions for these patents and patent
applications.
 
 Patents
and patent applications associated with our drug candidates are the primary
method for protecting our intellectual property rights. For intellectual
property rights that are not eligible for patent protection, we rely on
confidentiality agreements and other trade secret protection measures to protect
our interests. We take security measures to protect our proprietary know-how and
technologies and confidential data and information, including requiring all
employees and consultants to enter into confidentiality agreements. In
arrangements with third parties (including suppliers) that require the sharing
of know-how and other confidential information, our policy is to make available
only such information as is relevant to our agreements with such parties,
subject to appropriate contractual restrictions, including requirements for them
to maintain confidentiality and use such information solely in accordance with
our agreement. However, such measures may not adequately protect our
information.
 
 9
 In
connection with the sale of our Genomics Assets, we also obtained a perpetual,
royalty-free license to the genomics databases we had developed by our former
Genomics Division that allow us to use such databases, in the form they existed
as of the date of sale, for drug development.
 
 Additional
Government Regulation
 
 As
described above, our preclinical and clinical activities are regulated by the
FDA. In addition we use third-party manufacturers to produce GL1001. These third
party manufacturers are subject to FDA regulations and inspections. Also, new
government requirements may be established that could delay or prevent our drug
candidates from further clinical development.
 
 Our
laboratory is located in our facility in Cambridge, Massachusetts. Our sublease
for this facility expires by June 30, 2009, and we do not anticipate leasing
additional laboratory space as we now use outside contractors to perform the
majority of our laboratory work. Our laboratory is currently subject to a
variety of national, state and local laws and regulations. We maintain standard
operating procedures and the documentation necessary to comply with regulations
relating to hazard communication and employee right-to-know regulations, the
handling, storage and disposal of medical specimens, laboratory materials and
hazardous waste and radioactive materials and the safety and health of
laboratory employees. The cost of complying with such regulations is not
material.
 
 We no
longer use controlled substances in our laboratory; however, in 2008 such use
was regulated and subject to licensure by the United States Drug Enforcement
Administration and relevant state and local agencies. We are in the process of
closing this license and removing any remaining controlled substances from our
laboratory.
 
 The
regulations of the United States Department of Transportation and the United
States Postal Service apply to the transportation of laboratory specimens via
surface and air.
 
 The
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety, which require us to follow certain
procedures, including providing ongoing training and proper equipment for
employees working in our facilities. Our employees receive training focusing on
compliance with applicable hazardous materials regulations and health and safety
guidelines.
 
 Seasonality
 
 Our
business is not subject to predictable seasonal variation.
 
 Human
Resources
 
 As of
December 31, 2008, we had 14 full-time employees, all of whom reside within the
United States. Most of our employees are engaged directly in the management and
administration of the Company. None of our employees are covered by collective
bargaining agreements, and management considers relations with our employees to
be good.
 
 Available
Information
 
 We
maintain an Internet site at www.orepharma.com.
However, material contained on our Internet site is not incorporated by
reference into this Form 10-K. We make available free of charge on or through
our Internet site our SEC filings, including our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports we file or furnish pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the Securities and
Exchange Commission (SEC).
 
 10
 ITEM
      1A.
              RISK FACTORS
 
 The Company is subject to risk factors
common to other small drug development companies and to risks particular to its
own situation. While it is not possible to predict or identify all such risk
factors, set forth below are what we believe to be the most significant risks
and uncertainties that could cause our actual results to differ materially from
the results contemplated by the forward-looking statements contained in this
Form 10-K. This list is not meant to be all-inclusive. You should carefully
consider these risks and all other information included in this Form 10-K,
together with all other risks associated with small public drug development
companies and all risks associated with investing under difficult economic
uncertainties. Each of these risk factors could have material adverse effects on
our business, results of operations, financial condition and cash flows, as well
as adversely affect the value of our Common Stock.
 
 Risks
and Uncertainties Related to Our Current Business and Industry
 
 Our
business is dependent on the successful development of our drug
candidates.
 
 Similar to
other small drug development companies, we have a limited number of drug
candidates and our business is dependent on their success. We currently have
three drug candidates in our pipeline; however, our primary effort is focused on
our lead drug candidate, GL1001. If we are unable to successfully develop and
commercialize GL1001, it is unlikely that we will have sufficient resources to
develop the other drug candidates in our pipeline.
 
 Small drug
development companies with drug candidates in testing stages face numerous risks
and uncertainties, including but not limited to:
 
 ·
              whether
      they can successfully conduct preclinical and clinical testing of their
      drug candidates and whether such testing produces results sufficiently
      positive to support entering into outlicensing or other commercial
      arrangements with third parties;
 ·
              whether
      they can design protocols and recruit sufficient subjects with the right
      characteristics and conduct clinical testing to adequately prove the
      safety and therapeutic effectiveness of their drug candidates at a cost
      acceptable to the company;
 ·
              whether
      testing of their drug candidates demonstrates acceptable therapeutic
      effect;
 ·
              whether
      testing of their drug candidates reveals unanticipated safety issues or
      undesirable side effects;
 ·
              whether
      regulatory review and approval by the FDA and other domestic and foreign
      regulatory authorities can be timely and successfully
      completed;
 ·
              whether
      their drug candidates appear to have sufficient potential economic return
      to interest investors and/or commercial
  partners;
 ·
              whether
      sufficient funding is available to operate the company and to conduct the
      necessary testing and clinical trials;
and
 ·
              whether
      commercial partners are successful in developing and commercializing any
      drug candidates and whether such drug candidates produce sufficient
      revenue to pay any third party license fees associated with those drug
      candidates, support the companies and provide a financial return to their
      stockholders.
 
 In
addition to the foregoing, our drug candidates are subject to additional risks
and uncertainties which include, but are not limited to:
 
 ·
              whether
      we experience difficulties or delays in the initiation, progress or
      completion of clinical trials for our drug candidates, including GL1001
      trials, whether caused by competition, adverse events, investigative site
      initiation rates, patient enrollment rates, regulatory issues or other
      factors;
 ·
              whether
      the clinical trials demonstrate that GL1001 is a safe and effective
      treatment for diseases of commercial
interest;
 ·
              whether
      the safety and/or efficacy results of the GL1001 trials support developing
      an NDA in the United States or any other country;
  and
 ·
              whether
      an NDA is approved by the FDA or any other regulatory
      authority.
 
 Adverse
outcomes with regard to any of the foregoing risks and uncertainties could cause
a drug candidate to fail, either technically, economically or commercially, and
such failure could deplete or exhaust our resources.
  11
 If
we are unable to develop commercial arrangements for our drug candidates, we may
be unable to generate revenues.
 
 Prior to
late-stage clinical testing, smaller drug development companies often must
outlicense or otherwise partner a drug candidate to or with a larger company
with more financing and resources because smaller companies lack the resources
necessary to (a) conduct late-stage clinical testing, which is very expensive
and time consuming, and (b) manufacture and commercialize the product. Because
other funding available to small drug development companies is difficult and
expensive to obtain in the current economic climate, we will face significant
competition from other small drug development companies in our attempt to
interest larger companies in our drug candidates. This competitive environment
could force us to outlicense or otherwise partner our drug candidates at earlier
stages and to accept less compensation. There can be no assurance that we will
be able to complete successful commercial arrangements for our drug
candidates.
 
 There
are numerous risks associated with the commercialization of drug
candidates.
 
 If GL1001
or any of our other drug candidates is commercialized, there are additional
risks and uncertainties, including, but not limited to:
 
 ·
              whether
      the government, private health insurers and other third-party payors will
      provide sufficient coverage or reimbursement for products derived from our
      drug candidates;
 ·
              whether
      such products will achieve sufficient acceptance by the medical
      community;
 ·
              whether
      alternative or more effective drug candidates or treatment strategies are
      developed; and
 ·
              whether
      insurance covering our drug candidates will sufficiently cover product
      liability claims.
 
 Adverse
outcomes with regard to any of the foregoing risks and uncertainties would
hinder or prevent the successful commercialization of GL1001 or any of our other
drug candidates and could have a materially adverse effect on our
business.
 
 Because
our drug candidates and our development and collaboration efforts depend on our
intellectual property rights, adverse events affecting such rights would harm
our ability to commercialize our drug candidates.
 
 Our
success will depend to a large degree on our own, our licensors’ and potential
partners’ ability to obtain and defend patents for our drug candidates. Our
patent position on drug candidates involves complex legal and factual questions.
Specific risks and uncertainties that we face in the area of patent exclusivity
include, but are not limited to:
 
 ·
              whether
      the pending patent applications we have filed, or to which we have
      licensed rights, result in issued patents and the length of time it takes
      to obtain issued patents;
 ·
              whether
      the claims of any patents which are issued on our pending applications
      provide commercially meaningful protection or
  value;
 ·
              whether
      the patents licensed or issued to us provide adequate exclusivity for all
      aspects of our proprietary
technology;
 ·
              whether
      other companies challenge patents issued or licensed to us;
      and
 ·
              whether
      the patent protection available is deemed adequate protection by our
      commercial partners to invest in the development and commercialization of
      our drug candidates.
 
 Adverse
outcomes with regard to any of the foregoing risks and uncertainties could have
a detrimental impact on the development and commercialization of our drug
candidates.
 
 We
may need to initiate patent enforcement litigation or be subject to future
infringement claims.
 
 Various
organizations, including companies, academic institutions and non-profit
institutions are developing drug candidates. Many of these drug candidates are
subject to the same evolving legal standards and related uncertainties about
patent protection. Therefore, it may be necessary for us to initiate litigation
to protect and enforce our intellectual property rights. We may not have the
resources to initiate such litigation, and if we do, we may not prevail in such
litigation. In addition, we may be the subject of patent infringement claims
raised by other parties; we could incur substantial litigation costs to defend
ourselves in such infringement suits.
 
 12
 Risks
and Uncertainties Related to our Sold or Discontinued Businesses
 
 We
remain subject to outstanding obligations with respect to our sold or
discontinued businesses.
 
 We
previously conducted a genomics business, a preclinical business, a drug
repositioning business and, on a smaller scale, a molecular diagnostic business.
In most cases, when we sold or discontinued these businesses, we assigned the
leases for the space required to conduct these businesses, but remain liable to
the landlord with regard to several properties if the assignees of such
properties fail to timely make rental payments or otherwise breach the terms of
such leases. Such leases expire through December 2013 and at December 31, 2008
represented a potential aggregate contingent liability of $12.2 million. We also
accepted promissory notes in partial payment of the sales price for two of our
sold or discontinued businesses ($3 million due in June 2009 and $0.4 million
due each in December 2009 and June 2010) that have not yet come due and agreed
to remain liable and to indemnify the purchasers of our discontinued businesses
to various degrees, and subject to various limitations and exclusions, with
regard to any claims resulting from the discontinued businesses.
 
 Therefore,
risks and uncertainties applicable to our sold or discontinued businesses
include, but are not limited to:
 
 ·
              whether
      the promissory notes will be paid in full and without dispute when
      due;
 ·
              whether
      claims will be made against us for any indemnity provided to purchasers or
      by any customer or supplier of the sold or discontinued businesses;
      and
 ·
              whether
      the assignees of the various leases will make rental payments and
      otherwise comply with the terms of such leases for the balance of the
      lease terms, or if any of them default, whether we will be able to limit
      any resulting lease liability.
 
 General
Business Risks and Risks Related to Our Common Stock
 
 We
have a history of operating losses that could continue for some
time.
 
 We have
incurred operating losses in each year since our inception, including losses of
$22.5 million in 2008 and $34.7 million in 2007. At December 31, 2008, we had an
accumulated deficit of $372.8 million. Our losses have resulted principally from
costs incurred from the businesses we sold and the development of our drug
development business. These costs have exceeded our revenue and we expect to
incur additional losses in the future.
 
 We
have limited funding available and may not be able to obtain the additional
funding we need to continue to develop our drug candidates as
planned.
 
 We have
limited funding available, but have made and are continuing to make substantial
efforts to reduce our rate of cash usage so that we will have sufficient funds
to complete the Phase Ib/IIa clinical trial we believe is needed to realize
value with respect to GL1001. As part of those efforts, we are reducing our
workforce and attempting to reduce other expenses; however, we may also need to
seek additional funding in the near future. There is no assurance that funding
will be available or will be on terms acceptable to us or to our shareholders.
If we are unable to obtain necessary financing, or financing on favorable terms,
when needed, our business would materially suffer and we may not be able to
continue our strategies, including continuing to develop our drug candidates. If
additional financing is obtained through the issuance of equity securities or
debt convertible to equity, our existing stockholders could experience
significant dilution.
 
 Our
Common Stock is subject to the possibility of delisting from The NASDAQ Global
Market.
 
 Our Common
Stock, which is currently listed on The NASDAQ Global Market, is currently
trading below the minimum $1.00 per share price necessary for such listing. Such
requirement has been temporarily suspended by NASDAQ until at least April 2009;
however, if we are unable to meet this requirement when reinstated, our Common
Stock could be delisted by NASDAQ.
 
 13
 
 We
may not be able to hire or retain key officers or employees that we need to
implement our business strategy and develop our drug candidates.
 
 Due to our
efforts to reduce cash usage, we have had to significantly reduce our workforce.
These changes could have potential negative effects on our operations.
Additionally, these workforce reductions combined with the uncertainty of our
future could make it difficult to retain and recruit qualified personnel as we
continue to develop our drug candidates. The competition for qualified personnel
is intense, and the loss of services of certain personnel or our inability to
attract additional personnel when needed could adversely affect our business. In
order to hire and retain personnel, we may be required to issue significant
amounts of equity-based compensation, which could cause our existing
stockholders to experience dilution.
 
 ITEM
      1B.
              UNRESOLVED STAFF
COMMENTS
 
 None.
 
 ITEM 2.
              PROPERTIES
 
 The
following table sets forth information regarding the principal facilities we
sublease, the location and approximate size of each subleased space and their
designated use. We believe that these facilities are in good condition and are
sufficient to meet our business needs for the foreseeable future.
  Location
                              
                              Approximate Square Footage
                              
                              Operation
                              Type of Holding
                              ExpirationGaithersburg,
      MD.
                              
                              
                              5,108
                              
                              Office
                              Sublease
                              2013Cambridge,
      MA.*
                              
                              
                              4,211
                              
                              Administrative,
      R&D
                              Sublease
                              20099,319
  *Our sublease of the Cambridge facility expires by
June 30, 2009; we are currently looking to enter into a new lease arrangement in
or around Cambridge, MA.
 
 ITEM
      3.
              LEGAL PROCEEDINGS
 
 We are not
currently a party to any legal proceedings that would have a material adverse
effect on our financial condition or results of operations.
 
 ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 None.
 
 14
 PART II
 
 ITEM
      5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY
  SECURITIES
 
 Our Common
Stock is traded on The NASDAQ Global Stock Market under the symbol “ORXE”. Prior
to January 3, 2008, it traded under the symbol “GLGC.” The following table sets
forth information regarding the high and low closing prices* for our Common
Stock, for the periods indicated:
 
 Year
      Ended December 31, 2008
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      $
                      4.50
                      
                      
                      $
                      2.40Second
      Quarter
                      
                      $
                      2.85
                      
                      
                      $
                      1.31Third
      Quarter
                      
                      $
                      1.40
                      
                      
                      $
                      0.73Fourth
      Quarter
                      
                      $
                      0.96
                      
                      
                      $
                      0.48Year
      Ended December 31, 2007First
      Quarter
                      
                      $
                      12.60
                      
                      
                      $
                      7.65Second
      Quarter
                      
                      $
                      12.50
                      
                      
                      $
                      6.25Third
      Quarter
                      
                      $
                      7.00
                      
                      
                      $
                      5.90Fourth
      Quarter
                      
                      $
                      6.10
                      
                      
                      $
                      3.80
 * All
closing prices shown in the table reflect the one-for-five reverse stock split
approved by our stockholders on May 23, 2008.
  ITEM
      6.
              SELECTED FINANCIAL
DATA
 
 Not
Applicable.
  15
   ITEM
      7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
  Overview
 
 We are a
drug development company focused on advancing our pipeline of drug candidates
for uses previously identified by our discontinued drug repositioning
program.  We currently have three drug candidates in our pipeline:
GL1001 (in development for inflammatory bowel disease), tiapamil (beginning
development for treatment of diseases of the central nervous system) and
romazarit (beginning development for metabolic disorders).  We are
also seeking to obtain rights to several other compounds for which we identified
new uses from our drug repositioning and development partnership agreements;
however, there can be no assurances that we will be able to do
so.  Our pipeline is unique in that all of our drug candidates have
been successfully tested for safety in humans by the original
developer.  We believe this gives our drug candidates a greater chance
of success since the majority of compounds fail in clinical trials due to safety
issues.  We are exploring commercial arrangements for these
compounds.
 
 In June
2008, we filed an IND with the FDA for GL1001, our lead drug candidate, for the
treatment of inflammatory bowel disease.  In December 2008, we
completed a multiple ascending dose Phase I clinical trial.  The study
was a blinded, placebo-controlled study in 32 healthy volunteers that studied
the effects on subjects of multiple ascending doses.  The drug
candidate was orally administered for 14 days.  Results of that trial
showed that the drug candidate was well tolerated by humans, with no serious
adverse effects observed.
 
 In 2008,
we discontinued our drug repositioning efforts and realigned our corporate
resources to invest in the clinical and business development of drug candidates
in our pipeline.  We reduced our operating expenses by implementing a
significant reduction in our workforce from the 71 employees reported on
December 31, 2007 to 14 as of December 31, 2008.  Further expense
reductions were achieved as a result of the assignment of our Cambridge,
Massachusetts facility (we subleased back a smaller portion for a term ending in
June 2009) resulting in total savings of approximately $7.1 million over the
remaining term of the lease that expires in 2013.
 
 We believe
that as a result of our ongoing realignment efforts and cash conservation
programs, including further employee reductions expected in 2009, nine of which
are expected to occur prior to May 2009, we now have the resources to initiate
and complete the Phase Ib/IIa clinical trial for GL1001, which is expected to
begin mid 2009 and be completed in mid to late 2010.  We also plan to
continue to exploit our portfolio of other drug candidates.
 
 Previously,
we had drug repositioning and development partnership agreements with
pharmaceutical companies to find new therapeutic uses for compounds they had
assessed as safe in human clinical trials, but for which development had been
discontinued.  Our obligations to evaluate their compounds under these
agreements have been completed.  We obtained rights to develop three
such compounds and are seeking to obtain similar rights to several other
compounds we identified from these agreements.  For each compound to
which we obtain rights, if we further develop it, alone or with others, we are
obligated to pay success-based milestone payments and royalties on net
commercial sales.
 
 In March
2008, we purchased 920,426 shares of Common Stock of the Company from a then
member of our Board of Directors for $3.3 million (the “Share Purchase”) and
paid the director $0.1 million for certain fees and expenses.  In
connection with the Share Purchase, the director resigned from the Company’s
Board of Directors and surrendered stock options for 6,000 shares of our Common
Stock.
 
 In 2008,
we sold to Nerveda, Inc. our wholly owned subsidiary, DioGenix Inc., which
was our molecular diagnostics business, for a sales price of $1.3 million, of
which $0.5 million was received at closing and the balance is payable
pursuant to a $0.8 million promissory note bearing interest at 2.38%, with
two principal payments of $0.4 million plus interest due December 2009 and June
2010, subject to acceleration in certain events.  We agreed to
indemnify each other for the breach by either of any representation, warranty,
covenant or obligation made or undertaken pursuant to the
agreement.  During 2008, we recorded a gain on the sale of DioGenix
Inc. of $0.1 million.
 
 In 2007,
we sold our Genomics Assets to Ocimum for a sales price of $10.0 million, of
which $7.0 million was received at closing and the balance is payable pursuant
to a $3.0 million non-interest bearing promissory note due June
2009.  We agreed to indemnify Ocimum in the event of a breach of our
representations and warranties to, and agreements with,
Ocimum.  Ocimum assumed certain liabilities relating to the Genomics
Assets and the lease obligations of our former Genomics laboratory and office
facility, subject to our agreement to reimburse Ocimum for 50% of the lease
obligations for 2008.  In the event of Ocimum’s default under the
lease, we could be liable for amounts due under the lease that at December 31,
2008 totaled $2.2 million.  Our liability expires for obligations
under the lease in February 2011.  At December 31, 2008, Ocimum had on
deposit in escrow $0.7 million to partially secure both Ocimum’s performance
under the lease and payment of the $3.0 million promissory note.
 
 16
 The sale of our Genomics
Assets was part of ourtransformation into a drug development
company.  We continue to consider other strategic opportunities and
paths to enhance shareholder value, including but not limited to, targeting
additional sources of funding and developing new strategic relationships with
pharmaceutical companies and other interested third parties.
 
 In
December 2007, NASDAQ notified us that our stock would be subject to delisting
if we did not regain compliance within six months with a listing requirement
that the closing bid price of our Common Stock equal or exceed $1.00 per share
for a minimum of 10 consecutive trading days.  On May 23, 2008, our
stockholders approved a one-for-five reverse split of our outstanding Common
Stock shares that allowed us to regain compliance with NASDAQ’s listing
requirements.  Our Common Stock is currently again below the $1.00
price, but NASDAQ has temporarily suspended the listing requirement through at
least April 19, 2009.
 
 We have
incurred net losses in each year since our inception, including losses of $22.5
million in 2008 and $34.7 million in 2007.  At December 31, 2008, we
had an accumulated deficit of $372.8 million.  Our losses have
resulted principally from costs incurred from the businesses we sold and the
development of our drug development business.  We expect to incur
additional losses in the future.
 
 Results of Continuing Operations
 
 With the
completion of the sale of our Genomics Assets in December 2007, the Genomics
Division has been classified as a “Discontinued Operation” for historical
financial statement purposes.  Our remaining continuing operations
consist of our drug development business.  Expenses for our molecular
diagnostic business, which we sold in 2008, are also included in our operating
expenses from continuing operations; however, these expenses and associated
assets are not considered material to us.  There was no revenue from
our molecular diagnostics business.
 
 Years Ended December 31, 2008 and 2007
 
 Revenue. Revenue from
continuing operations was $2.0 million in 2008 compared to $1.6 million in
2007.  During 2008, two customers accounted for 97% of our revenue
from continuing operations.  During 2007, one customer accounted for
94% of our revenue from continuing operations.  The 2008 revenue
primarily resulted from $1.5 million from a licensing agreement for certain
technology unrelated to our core drug development business and $0.4 million from
the achievement of milestones under a drug repositioning and development
partnership agreement.  The 2007 revenue primarily resulted from $1.5
million from the licensing agreement referred to above.  We expect
future revenue to be derived primarily from commercial arrangements for our drug
candidates in our pipeline, including our lead drug candidate GL1001 (that would
occur no sooner than 2010).
 
 Research and Development
Expense. Research and development expenses, which now consist primarily
of costs associated with the further development of GL1001, decreased to $9.7
million in 2008 from $10.3 million in 2007.  The decrease was
primarily due to $1.9 million in lower employee and laboratory related costs,
partially offset by $1.6 million in increased third-party costs for further
development of GL1001.  For 2009, we expect research and development
expenses to decrease significantly as a result of our workforce
reductions.
 
 Selling, General and Administrative
Expense. Selling, general and administrative expenses from continuing
operations, which consist primarily of sales, marketing, accounting, legal,
human resources and other general corporate expenses, increased to $12.7 million
in 2008 from $11.1 million in 2007.The increase is
largely due to increased professional services associated with strategic
planning (including $0.9 million related to exploring a specific strategic
alternative), the Share Purchase and our reverse split of the Company’s shares
and $0.4 million of expense related to the Share Purchase.  This
increase was partially offset by lower employee-related expenses.  For
2009, we expect selling, general and administrative expenses to decrease
significantly as a result of our workforce reductions.
 
 17
 Net Interest Income.Net
interest income decreased to $0.8 million in 2008 from $2.0 million in 2007, due
to the decline in the balance of our cash and cash equivalents and marketable
securities available-for-sale and decreases in our rates of return on
investments.
 
 Write-down of Equity
Investment. In 2008, we recorded a $3.0 million write-down of the
remaining book value of our investment in Xceed Molecular (“Xceed”, formerly
MetriGenix Corporation), due to an other-than-temporary decline in its estimated
fair value.
 
 Gain on Sale of DioGenix Inc.In 2008, we sold our wholly owned subsidiary, DioGenix Inc., which
was our molecular diagnostics business, and recorded a gain on the sale of $0.1
million.
 
 Liquidity and Capital Resources
 
 From
inception through December 31, 2008, we have financed our operations and
acquisitions through the issuance and sale of equity securities and payments
from customers.  As of December 31, 2008, we had approximately $10.8
million in cash, cash equivalents and marketable securities available-for-sale,
compared to $32.8 million as of December 31, 2007.
 
 Net cash
from operating activities from continuing operations decreased to a negative
$20.3 million in 2008 from a negative $17.7 million in 2007, primarily due to
our increased net loss from continuing operations in 2008.As a result of the
significant reductions in our cash usage, we presently anticipate that we have
sufficient resources to initiate and complete the Phase Ib/IIa clinical trial
for GL1001, which is expected to begin mid 2009 and be completed in mid to late
2010.  We currently expect our cash usage for the first quarter of
2009 to be slightly higher than that of the fourth quarter of 2008, primarily
due to timing of payments to certain of our professional service providers and
the fourth quarter of 2008 receipt of $0.7 million from Agios Pharmaceuticals,
Inc. (“Agios”) for the sale of laboratory equipment associated with drug
repositioning.
 
 Our
investing activities during 2008 and 2007, other than proceeds and payments
relating to our discontinued operations and the sale of DioGenix Inc., consisted
primarily of purchases and sales of marketable securities available-for-sale and
the sale of laboratory equipment to Agios.  For 2009, other than
purchases and sales of marketable securities available-for-sale and proceeds
relating to our discontinued operations and the sale of DioGenix Inc., we do not
expect our investing activities to be significant.
 
 In
connection with the 2008 sale of DioGenix Inc., described above, the balance of
the purchase price is payable pursuant to a $0.8 million interest bearing
promissory note, with two principal payments of $0.4 million plus interest due
December 2009 and June 2010, subject to acceleration in certain
events.
 
 In 2008,
we assigned our lease in Cambridge, Massachusetts to Agios, but remain liable
under the lease in the event of Agios’ default.  The lease expires in
August 2013 and at December 31, 2008, the total remaining amounts due under the
lease for the balance of the term is $5.2 million, not including $1.9 million of
estimated building operating costs.
 
 In
connection with the 2007 sale of our Genomics Assets, described above, the
balance of the sales price is payable pursuant to a $3.0 million non-interest
bearing promissory note due June 2009.  Ocimum also assumed the lease
obligations of our former Genomics laboratory and office facility, but we remain
liable under the lease in the event of Ocimum’s default.  Our
liability expires for obligations under the lease in February 2011 and at
December 31, 2008 (not taking into account Ocimum’s escrow of $0.7 million), we
could be liable for amounts due under the lease that total $2.2
million.
 
 In
connection with the 2006 sale of our Preclinical Division to Bridge
Pharmaceuticals, Inc. (“Bridge”), less than $0.1 million of the sales price
remains in escrow pending resolution between the parties.  We continue
to guarantee two leases now held by Bridge.  The leases expire in
February 2011 and December 2013 and at December 31, 2008, the total remaining
amounts due under the leases for the balance of the terms is $1.2 million and
$3.6 million, respectively.
 
 Our
financing activities consisted primarily of the Share Purchase from a former
director for $3.0 million (not including $0.3 million for the price paid in
excess of the fair value of the shares).
 
 We have
had discussions with the lender concerning repayment and/or forgiveness of a
$0.5 million loan that is currently due upon demand, as well as $0.1 million of
accrued interest thereon.
  18
 We believe
that existing cash and cash equivalents, the anticipated receipt of $3.0 million
and $0.8 million relating to the promissory notes from Ocimum and Nerveda,
respectively, and our ongoing realignment efforts and cash conservations
programs will be sufficient to support our operations through mid to late 2010,
including any milestone payment  obligations related to developing our
compounds.  We expect long-term support of our operations to come from
our possible future financings and payments from commercial arrangements from
our pipeline of drug candidates.  These estimates are forward-looking
statements that involve risks and uncertainties.  Our actual future
capital requirements and the adequacy of our available funds will depend on many
factors, including those discussed under “Risks Factors” elsewhere in this Form
10-K.
 
 Critical Accounting Policies
 
 Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period.  Actual results
could differ from these estimates.  The following discussion
highlights what we believe to be the critical accounting policies and judgments
made in the preparation of these consolidated financial statements.
 
 Revenue
Recognition
 
 Revenue is
recognized in accordance with the SEC’s Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB 104”).  SAB 104 requires that four basic
criteria be met before revenue can be recognized: 1) persuasive evidence of an
arrangement exists; 2) delivery has occurred or services rendered; 3) the fee is
fixed and determinable; and 4) collectability is reasonably
assured.  As to 1), our business practices require that our services
be performed pursuant to contracts with our customers.  As to 2), we
recognize revenue when services are rendered to our
customers.  Determination of 3) and 4) are based on management’s
judgments regarding the fixed nature of our arrangements taking into account
termination provisions and the collectability of fees under our
arrangements.  Should changes in conditions cause management to
determine these criteria are not met for certain future arrangements, revenue
recognized for any reporting period would be adjusted and could be adversely
affected.
 
 In
accordance with Emerging Issues Task Force ("EITF") Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables,” revenue recognized for any
multiple-element contract is allocated to each element of the arrangement based
on the relative fair value of the element.  The determination of fair
value of each element is based on our analysis of objective evidence from
comparable internal or third-parties’ sales of the individual
element.  If we are unable to determine evidence of fair value for an
undelivered element of the arrangement, revenue for the arrangement is deferred
and recognized using the revenue recognition method appropriate to the
predominant undelivered element.
 
 We could
enter into contractual arrangements with multiple deliverables.  If we
are unable to determine objectively and reliably the fair value of individual
undelivered elements, we recognize all revenue using the revenue recognition
method appropriate to the predominant undelivered element.  We also
defer the direct and incremental expenses associated with the revenue and
recognize these expenses as we recognize the related revenue.  The
timing of revenue recognition associated with agreements we enter into in future
periods may also be dependent on our ability to objectively and reliably
determine the fair value of deliverables included in those
agreements.
 
 Goodwill and Intangible Assets Impairment
 
 In connection with the sale of our Genomics Assets, we allocated $2.1
million of goodwill to the disposition of such assets with the remaining amount
of $0.6 million being allocated to our molecular diagnostics
business.  The allocation of goodwill was based on the respective fair
values of each of our Genomics Assets and molecular diagnostics
business.  In 2008, we sold our molecular diagnostic business
(DioGenix Inc.) and recorded a write-down of all of our remaining goodwill of
$0.6 million (included in the gain on sale of DioGenix Inc. in
2008).
 
 Under
Statement of Financial Accounting Standards ("SFAS") No. 142, “Goodwill and
Other Intangible Assets,” we are required to perform an annual impairment test
of our goodwill and periodic reviews of our other intangible
assets.  In addition, we are required to test for impairment at any
point we have an indication that an impairment may exist.  We have
elected to perform our annual impairment test of goodwill as of October
1.  As part of our annual testing of goodwill, we determined that no
impairment existed in the carrying value of goodwill in
2007.   In connection with the sale of DioGenix Inc., all
remaining amounts of goodwill were disposed.
  19
 Equity Investments
 
 In 2008,
we recorded a $3.0 million write-down of the remaining book value of our
investment in Xceed, due to an other-than-temporary decline in its estimated
fair value.  We record an investment impairment charge when indicators
of impairment exist and it is believed that an investment has experienced a
decline in value that is other-than-temporary.
 
 Stock-Based
Compensation
 
 In 2006,
we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires us to expense the fair value of
stock-based compensation awards of our various stock-based compensation programs
over the requisite service period of the award.  We estimate the fair
value of our stock-based compensation using fair value pricing models that
require the use of significant assumptions for expected volatility of our common
stock, life of stock options and forfeiture rates.  Future adverse
changes in such assumptions could result in us recording increased stock-based
compensation expenses for stock-based compensation awards granted/issued in the
future.
 
 Recently Issued Accounting Pronouncements
 
 In
February 2008, the Financial Accounting Standards Board (“FASB”) issued a
one-year deferral for non-financial assets and liabilities to comply with
SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”).  We adopted SFAS No. 157 for
financial assets and liabilities effective January 1, 2008 and the adoption
had no impact on our financial position or results of operations.  We
do not expect the adoption of SFAS No. 157 as it pertains to
non-financial assets and liabilities to have a material impact on our financial
position or results of operations.
 
 In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e. the date
the acquirer obtains control).  Previously, an acquisition was valued
as of the date the parties agreed upon the terms of the
transaction.  SFAS 141R also modifies, among other things, the
accounting for direct costs associated with an acquisition, contingencies
acquired and contingent consideration.  We will adopt SFAS 141R for
business combinations for which the acquisition date occurs on or after January
1, 2009.
 
 In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for
Collaborative Agreements” (“EITF 07-1”).  EITF 07-1 provides guidance
regarding financial statement presentation and disclosure of collaborative
arrangements, as defined therein.  EITF 07-1 is effective for us as of
January 1, 2009.  We do not expect the adoption of this statement
will have a material effect on our financial position or results of
operations.
 
 ITEM
      7A.
              QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK
 Not
applicable.
 ITEM
      8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA
 
 Our
Consolidated Financial Statements and notes thereto, together with the Report of
Independent Registered Public Accounting Firm, appear on pages F-1 through F-18
of this Form 10-K and are incorporated herein by reference.
 
 ITEM
      9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
 
 None.
  20
 
 ITEM
9A(T). CONTROLS
AND PROCEDURES
  Attached
as exhibits to this Form 10-K are certifications of our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  This “Controls and Procedures” section includes
information concerning the controls and controls evaluation referred to in the
certifications.
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of
December 31, 2008, under the supervision and with the participation of our
management, including the CEO and CFO, an evaluation was performed of the
effectiveness of the design and operation of our “disclosure controls and
procedures” (“Disclosure Controls”).  These are controls and
procedures designed to reasonably assure that information required to be
disclosed in our reports filed under the Exchange Act, such as this Form 10-K,
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.  Disclosure Controls are
also designed to reasonably assure that such information is accumulated and
communicated to our management, including the CEO and CFO as appropriate, to
allow timely decisions regarding required disclosure.  Based on that
evaluation, our CEO and CFO have concluded that, as of December 31, 2008, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified by the SEC, and that material information relating to us is made known
to management, including the CEO and CFO, particularly during the period when
our periodic reports are being prepared.
 
 Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
all errors and all instances of fraud.  A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met.  The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.  Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.  Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls.  The design of any system of
controls is based, in part, on certain assumptions about the likelihood of
future events and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future
conditions.  Projections of any evaluation of the effectiveness of
controls to future periods are subject to risks.  Over time, controls
may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
 
 Management’s Report on Internal Control Over Financial
Reporting
 
 Our
management is responsible for establishing and maintaining adequate “internal
control over financial reporting” to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.  Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
 
 Under the
supervision and with the participation of our management, including our CEO and
CFO, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2008 based on the framework in Internal Control--Integrated
Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31, 2008
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles.
 
 21
 This Form 10-K does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in the Form
10-K.
 
 Changes
In Internal Control Over Financial Reporting
 
 There were
no changes in our internal controls over financial reporting during the fourth
quarter of 2008 that materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
 
 ITEM
      9B.
              OTHER
INFORMATION
 None.
 
 PART III
 
 ITEM
      10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
 
 Identification
Of Directors
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Election of Directors,” contained
in the Company’s definitive Proxy Statement for the 2009 Annual Meeting of
Stockholders to be filed with the SEC within 120 days following the Company’s
fiscal year ended December 31, 2008 (the “Proxy Statement”).
 
 Identification Of Executive Officers
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Executive Officers,” contained in
the Proxy Statement.
 
 Compliance With Section 16(A) Of The Securities Exchange Act Of
1934
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance,” contained in the Proxy Statement.
 
 Code Of Ethics/Corporate Governance
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Corporate Governance,” contained
in the Proxy Statement.
 
 ITEM 11.       EXECUTIVE
COMPENSATION
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Executive Compensation,”
contained in the Proxy Statement.
 
 22
 ITEM
      12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Security Ownership of Certain
Beneficial Owners and Management” and “Equity Compensation Plan Information,”
contained in the Proxy Statement.
 
 ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Certain Transactions,” contained
in the Proxy Statement.
 
 ITEM 14.       PRINCIPAL
ACCOUNTING FEES AND SERVICES
 
 The
information required by this item is incorporated by reference to the
information set forth in the section entitled “Principal Accountant Fees and
Services,” contained in the Proxy Statement.
 
 PART IV
 
 ITEM
      15.
              EXHIBITS, FINANCIAL STATEMENT
  SCHEDULES
 
 (a)1.
Financial Statements
  Consolidated
      Financial Statements of Ore Pharmaceuticals Inc.
                    PageReport
      of Independent Registered Public Accounting Firm
                    F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                    F-3Consolidated
      Statements of Operations for the two years ended December 31,
      2008
                    F-4Consolidated
      Statements of Stockholders' Equity for the two years ended December 31,
      2008
                    F-5Consolidated
      Statements of Cash Flows for the two years ended December 31,
      2008
                    F-6Notes
      to Consolidated Financial Statements
                    F-7
  
 (a)2.
Financial Statement Schedules
 
 All schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instruction or
applicable and therefore have been omitted.
 
 (a)3. Index to Exhibits
 
 Exhibit
 Number                   Description of
Document
 
 2.2
              Stock
      Purchase Agreement, dated December 15, 2006, between Registrant and Bridge
      Pharmaceuticals, Inc. (23)
 2.3
              Asset
      Purchase Agreement by and between Registrant and Ocimum Biosolutions
      (India) Limited and Ocimum Biosolutions Inc. dated as of October 14, 2007.
      (30)
 2.3a
              Letter
      Agreement dated as of December 12, 2007 by and between Registrant, Ocimum
      Biosolutions, Inc. and Ocimum Biosolutions (India) Limited.
      (31)
 2.3b
              Letter
      Agreement dated as of December 14, 2007 by and between Registrant, Ocimum
      Biosolutions, Inc. and Ocimum Biosolutions (India) Limited.
      (31)
 
 23
 3.1
              Amended
      and Restated Certificate of Incorporation dated November 26, 1997, as
      amended by the Certificate of Amendment dated December 18, 2007, and as
      further amended by the Certificate of Amendment dated May 23,
      2008.
 3.2
              By-Laws,
      as amended and restated as of July 31, 2008.
  (32)
 4.1
              Reference
      is made to Exhibits 3.1 and 3.2.
 4.2
              Specimen
      stock certificate. (1)
 *10.1
              Form
      of Indemnity Agreement entered into between Registrant and its directors
      and officers. (1)
 *10.2
              Registrant's
      1997 Equity Incentive Plan, as amended (the "Stock
  Plan").
 *10.3
              Form
      of Stock Option Agreement under the Stock Plan.
  (1)
 *10.4
              Form
      of Stock Option Grant Notice. (1)
 *10.5
              Registrant's
      Employee Stock Purchase Plan, as amended, and related offering document.
      (13)
 *10.6
              Registrant's
      1997 Non-Employee Directors' Stock Option Plan, as amended.
      (2)
 *10.7
              Form
      of Nonstatutory Stock Option under the 1997 Non-Employee Directors' Stock
      Option Plan. (1)
 *10.12
              Employment
      Agreement, dated June 7, 2001, between the Registrant and Michael J.
      Brennan. (12)
 *10.14
              Employment
      Agreement, dated May 16, 1996, between the Registrant and Mark D. Gessler.
      (1)
 *10.15
              Amendment
      to the Employment Agreement, dated July 9, 1997, between the Registrant
      and Mark D. Gessler. (1)
 10.22
              Lease
      Agreement, dated August 22, 1997, between Registrant and ARE-708 Quince
      Orchard, LLC. (1)
 10.22a
              First
      Amendment to Lease, dated July 21, 2000, between Registrant and ARE-708
      Quince Orchard, LLC. (7)
 *10.45
              Amended
      and Restated Employment Agreement, dated April 1, 1999, between Registrant
      and Y. Douglas Dolginow. (3)
 10.50
              Agreement,
      effective January 1, 2002, between Registrant and Affymetrix, Inc.
      (superceded)(10)
 10.50a
              Letter
      Agreement, amending Agreement effective January 1, 2002, between
      Registrant and Affymetrix, Inc.
  (superceded)(5)(B)
 10.50b
              Service
      Provider Agreement, effective January 1, 2006, between Registrant and
      Affymetrix, Inc. (21)
 10.50c
              Biotech
      Access Agreement, effective January 1, 2007, between Registrant and
      Affymetrix, Inc. (28)
 10.50d
              Service
      Provider Agreement, effective January 1, 2007, between Registrant and
      Affymetrix, Inc. (28)
 *10.55
              Executive
      Severance Plan, as amended February 2001.
(8)
 *10.55a
              Executive
      Severance Plan, as amended September 2008.
(35)
 *10.58
              Employment
      Agreement, dated October 11, 1999, between Registrant and Philip L.
      Rohrer, Jr. (4)
 *10.58a
              Second
      Amendment to Executive Employment Agreement, dated as of February 23,
      2007, between Registrant and Philip L. Rohrer, Jr.
  (28)
 *10.58b
              Third
      Amendment to Executive Employment Agreement, dated as of January 1, 2008,
      between Registrant and Philip L. Rohrer,
Jr.
 *10.58c
              Executive
      Employment Agreement, dated as of December 31, 2008, between Registrant
      and Philip L. Rohrer, Jr. (9)
 10.67
              Lease
      Agreement, dated July 21, 2000 between Registrant and ARE-50 West Watkins
      Mill, LLC. (6)
 *10.75
              Employment
      Agreement, dated May 30, 2002, between Registrant and F. Dudley Staples,
      Jr. (11)
 10.78
              Settlement
      and Nonexclusive License Agreement, dated January 10, 2001, between
      Registrant and Incyte Corporation.
(19)(A)
 10.80
              Lease
      Agreement for 620 Professional Drive, dated October 26, 2000, between
      TherImmune Research Corporation and Oxbridge Development at Crown Pointe,
      L.C. (15)
 10.80a
              Guarantee
      of Lease Agreement dated April 1, 2003, between Registrant and Oxbridge
      Development at Crown Pointe, L.C.
(28)
 10.81
              Lease
      Agreement for 610 Professional Drive, dated June 22, 2001, between
      TherImmune Research Corporation and Oxbridge Development at Crown Pointe,
      L.C., including amendments dated September 25, 2001 and December 20, 2002.
      (15)
 10.81a
              Third
      Amendment to Lease dated June 22, 2001, between TherImmune Research
      Corporation and Oxbridge Development at Crown Pointe, L.C.
      (19)
 10.81b
              Guarantee
      of Lease Agreement dated April 1, 2003, between Registrant and Oxbridge
      Development at Crown Pointe, L.C.
(28)
 *10.83
              Employment
      Agreement, dated November 4, 2004, between Registrant and Dennis A. Rossi.
      (17)
 *10.84
              Employment
      Agreement, dated November 4, 2004, between Registrant and Joanne M.
      Smith-Farrell. (17)
 10.85
              Asset
      Purchase Agreement, dated July 22, 2004, between Registrant and Millennium
      Pharmaceuticals, Inc. (17)(B)
  24
 10.85a
              Compound
      Transfer and Development Agreement, dated July 26, 2006, between
      Registrant and Millennium Pharmaceuticals, Inc.
  (34)(C)
 10.86
              Lease
      Agreement, dated July 31, 2004, between Registrant and Thirty-Eight Sidney
      Street Limited Partnership. (17)
 10.86a
              First
      Amendment to Lease dated February 28, 2008, between Registrant and
      Thirty-Eight Sidney Street Limited Partnership.
  (36)
 *10.88
              Employment
      Agreement, dated March 10, 2005, between Registrant and V.W. Brinkerhoff,
      III. (20)
 *10.88a
              Second
      Amendment to Employment Agreement, dated February 23, 2007, between
      Registrant and V. W. Brinkerhoff, III.
(28)
 10.90
              License
      and Sublicense Agreement, dated September 12, 2005, between Registrant and
      Promega Corporation. (14)(C)
 10.91
              License
      Agreement for Real-Time In Vivo Imaging Technology, effective November 17,
      2004, between Registrant and Xenogen Corporation.
  (14)(C)
 10.91a
              Amendment
      to License Agreement for Real-Time In Vivo Imaging Technology, effective
      November 22, 2005, between Registrant and Xenogen Corporation.
      (14)(C)
 *10.92a
              2007
      Performance Year Incentive Compensation Plan.
  (28)
 *10.92b
              2008
      Performance Year Incentive Compensation Plan.
  (37)
 *10.93
              Employment
      Agreement, dated June 21, 2006, between Registrant and Larry Tiffany.
      (24)
 *10.93b
              Amendment
      to Employment Agreement, dated December 6, 2006 between Registrant and
      Larry Tiffany. (28)
 *10.93c
              Executive
      Employment Agreement, dated February 1, 2007, between Registrant and Larry
      Tiffany. (28)
 *10.93d
              First
      Amendment to Employment Agreement, dated January 1, 2008, between
      Registrant and Larry Tiffany. (38)
 *10.94
              Amendment
      to Employment Agreement, dated August 31, 2006, between Registrant and
      Larry Tiffany. (25)
 *10.95
              Amendment
      to Employment Agreement, dated October 24, 2006, between Registrant and
      each of Mark D. Gessler, Philip L. Rohrer, Jr., F. Dudley Staples, Joanne
      Smith-Farrell and Louis A. Tartaglia.
(26)
 *10.95a
              Form
      of Amendment to Employment Agreement for Employment Agreements between
      Registrant and Charles L. Dimmler, III, Philip L. Rohrer, Jr. and F.
      Dudley Staples. (35)
 *10.96
              Form
      of Restricted Stock Agreement under the Stock Plan.
  (28)
 *10.97
                Employment
      Agreement, signed July 9, 2007, between Registrant and Charles L. Dimmler,
      III. (29)*10.98
                Advisory
      Services Agreement between Registrant and Louis Tartaglia, dated as
      of October 26, 2007. (33)
 
 10.100
              License
      Agreement dated as of December 14, 2007 by and between Registrant and
      Ocimum Biosolutions, Inc. (31)
 10.101
              License
      Agreement dated as of December 14, 2007 by and between Registrant and
      Ocimum Biosolutions, Inc. (31)
 10.103
              Secured
      Note dated as of December 14, 2007 from Ocimum Biosolutions (India)
      Limited and Ocimum Biosolutions, Inc. to Registrant.
  (31)
 10.103
              Sublease
      dated as of December 14, 2007 by and between Registrant and Ocimum
      Biosolutions, Inc. (31)
 10.104
              Stock
      Purchase Agreement dated as of September 19, 2008 by and among Registrant
      and Nerveda, Inc. (39)
 *10.105
              Letter
      Agreement, dated February 26, 2009, between Registrant and Mark J.
      Gabrielson. (18)
 10.106
              Stock
      Purchase Agreement, dated as of March 14, 2008, by and among Lloyd I.
      Miller, III, Millfam II L.P., and Registrant.
  (40)
 10.107
              Letter
      of Resignation from Lloyd I. Miller, III dated March 14, 2008.
      (40)
 23.1
              Consent
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm.
 31
              Certifications
      pursuant to Rule 13a-14(a) and
15d-14(a).
 32
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
 _____________________
 
 *
              Indicates
      management compensatory plan, contract or
  arrangement.
 
 (1)
              Filed
      as an exhibit to Registrant’s Registration Statement on Form S-1, filed
      October 7, 1997, as amended, (No. 333-37317) and incorporated herein by
      reference.
 
 (2)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K, filed on June 6,
      2005, and incorporated herein by
reference.
 
 25
 (3)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1999, filed on August 13, 1999, and incorporated
      herein by reference.
 
 (4)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 1999, filed on March 30, 2000, and incorporated
      herein by reference.
 
 (5)
              Filed
      as an exhibit to Registrant’s Annual Report on From 10-K for the fiscal
      year ended December 31, 2004, filed on March 16, 2005, and incorporated
      herein by reference.
 
 (6)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2000, filed on November 14, 2000, and
      incorporated herein by reference.
 
 (7)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2000, filed on March 29, 2001, and incorporated
      herein by reference.
 
 (8)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2001, filed on May 11, 2001, and incorporated
      herein by reference.
 
 (9)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of Phillip L. Rohrer, Jr. filed on January 15,
      2009, and incorporated herein by
reference.
 
 (10)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K/A for the fiscal
      year ended December 31, 2001, filed on July 31, 2003, and incorporated
      herein by reference.
 
 (11)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2002, filed on August 9, 2002, and incorporated
      herein by reference.
 
 (12)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2001, filed on March 28, 2002, and incorporated
      herein by reference.
 
 (13)
              Filed
      as an exhibit to Registrant’s Proxy Statement with respect to the Annual
      Meeting of Stockholders held on June 5, 2003, filed on April 25, 2003, and
      incorporated herein by reference.
 
 (14)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005, filed on March 16, 2006, and incorporated
      herein by reference.
 
 (15)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2003, filed on August 14, 2003, and incorporated
      herein by reference.
 
 (16)
              Not
      used.
 
 (17)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2004, filed on November 9, 2004, and
      incorporated herein by reference.
 
 (18)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of Mark J. Gabrielson, filed on March 3, 2009,
      and incorporated herein by
reference.
 
 (19)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2003, filed on March 15, 2004, and incorporated
      herein by reference.
 
 (20)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s hiring of V. W. Brinkerhoff, III as Senior Vice President
      and General Manager, Gene Logic Laboratories, filed on March 10, 2005, and
      incorporated herein by reference.
 
 (21)
              Filed
      as Exhibit 10.50 to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2006, filed on May 10, 2006, and incorporated
      herein by reference.
  26
 (22)
              Not
      used.
 
 (23)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s sale of its Preclinical Division, filed on December 21,
      2006, and incorporated herein by
reference.
 
 (24)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of Larry Tiffany, filed on June 30, 2006, and
      incorporated herein by reference.
 
 (25)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of Larry Tiffany, filed on September 7, 2006, and
      incorporated herein by reference.
 
 (26)
              Filed
      as Exhibit 99.1 to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of the named executives, filed on October 24,
      2006, and incorporated herein by
reference.
 
 (27)
              Not
      used.
 
 (28)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2007, filed on May 10, 2007, and incorporated
      herein by reference.
 
 (29)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K/A with respect to
      the Company’s employment of Charles L. Dimmler, III, filed on July 12,
      2007, and incorporated herein by
reference.
 
 (30)
              Filed
      as Exhibit 10.99 to Registrant’s Report on Form DEFA14A with respect to
      the Special Meeting of Stockholders held on December 14, 2007, filed on
      October 18, 2007, and incorporated herein by
  reference.
 
 (31)
              Filed
      as Exhibit 10.99a or 10.99b, as applicable, to Registrant’s Current Report
      on Form 8-K with respect to the Company’s entry into certain material
      agreements, filed on December 18, 2007, and incorporated herein by
      reference.
 
 (32)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      an amendment to the By-laws, filed on August 6, 2008, and incorporated
      herein by reference.
 
 (33)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K/A with respect to
      an advisory services agreement, filed on October 18, 2007, and
      incorporated herein by reference.
 
 (34)
              Filed
      as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
      year ended December 31, 2007, filed on March 17, 2008, and incorporated
      herein by reference.
 
 (35)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      amendments to certain agreements to comply with Section 409A of the
      Internal Revenue Code of 1986, as amended, filed on October 2, 2008, and
      incorporated herein by reference.
 
 (36)
              Filed
      as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2008, filed on May 8, 2008, and incorporated
      herein by reference.
 
 (37)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s 2008 incentive compensation plan, filed on March 27, 2008,
      and incorporated herein by
reference.
 
 (38)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s employment of Larry Tiffany, filed on April 30, 2008, and
      incorporated herein by reference.
 
 (39)
              Filed
      as an exhibit to Registrant’s Current Report on Form 8-K with respect to
      the Company’s sale of its wholly owned subsidiary, DioGenix Inc., its
      molecular diagnostics business, to Nerveda, Inc., filed on September 23,
      2008, and incorporated herein by
reference.
 
 (40)
              Filed
      as Exhibit 10.1 or Exhibit 10.2, as applicable, to Registrant’s Current
      Report on Form 8-K with respect to the Company’s purchase of shares of
      Common Stock from a former director of the Company, filed on March 14,
      2008, and incorporated herein by
reference.
 
 27
 (A)
              Confidential
      treatment has been granted with respect to certain portions of this
      exhibit pursuant to an Order Granting Application Under the Securities
      Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
      Treatment dated December 12, 2003.
 
 (B)
              Confidential
      treatment has been granted with respect to certain portions of this
      exhibit pursuant to an Order Granting Application Under the Securities
      Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
      Treatment dated May 5, 2005.
 
 (C)
              Confidential
      treatment has been requested with respect to certain portions of this
      exhibit. Omitted portions have been filed separately with the
      SEC.
  28
 SIGNATURE
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 17th day of
March, 2009.
  ORE PHARMACEUTICALS
      INC.By:
                /s/ MARK J.
      GABRIELSONMark
      J. GabrielsonChief
      Executive Officer and President
 
 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.
  Name
                                                                          
                                                                          Position
                                                                          
                                                                          Date/s/ MARK J. GABRIELSON
                                                                          
                                                                          Chief
      Executive Officer,
                                                                          
                                                                          March
      17, 2009(Mark
      J. Gabrielson)
                                                                          
                                                                          President
      and Director(Principal
      Executive Officer)/s/ PHILIP L. ROHRER, JR.
                                                                          
                                                                          Chief
      Financial Officer
                                                                          
                                                                          March
      17, 2009(Philip
      L. Rohrer, Jr.)
                                                                          
                                                                          (Principal
      Financial andAccounting
      Officer)/s/ MICHAEL J. BRENNAN
                                                                          
                                                                          Director
                                                                          
                                                                          March
      17, 2009(Michael
      J. Brennan, M.D., Ph.D.)/s/ MARK D.
      GESSLER
                                                                          
                                                                          Director
                                                                          
                                                                          March
      17, 2009(Mark
      D. Gessler)/s/ G. ANTHONY GORRY
                                                                          
                                                                          Director
                                                                          
                                                                          March
      17, 2009(G.
      Anthony Gorry, Ph.D.)/s/ J. STARK THOMPSON
                                                                          
                                                                          Chairman
      of the Board
                                                                          
                                                                          March
      17, 2009(J.
      Stark Thompson, Ph.D.)/s/ DAVID URDAL
                                                                          
                                                                          Director
                                                                          
                                                                          March
      17, 2009(David
      Urdal, Ph.D.)
  29












Ore
Pharmaceuticals Inc.


Index
to Consolidated Financial Statements
 
 PageReport
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                F-3Consolidated
      Statements of Operations for the two years ended December 31,
      2008
                F-4Consolidated
      Statements of Stockholders’ Equity for the two years ended December 31,
      2008
                F-5Consolidated
      Statements of Cash Flows for the two years ended December 31,
      2008
                F-6Notes
      to Consolidated Financial Statements
                F-7
       
  Report
of Independent Registered Public Accounting Firm –
 
 Consolidated
Financial Statements
 
 The Board
of Directors and Stockholders Ore Pharmaceuticals Inc.:
 
 We have
audited the accompanying consolidated balance sheets of Ore Pharmaceuticals Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the two years in
the period ended December 31, 2008. 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, assessing the
accounting principles used and significant estimates made by management, and
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 Ore Pharmaceuticals
Inc. at December 31, 2008 and 2007, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2008 in conformity with U.S. generally accepted accounting
principles.
 
 
 /s/ Ernst
& Young LLP
 
 
 Baltimore,
Maryland
 March 11,
2009
 
 F-2
 
 ORE
PHARMACEUTICALS INC.
 
 Consolidated
Balance Sheets
 as
of December 31, 2008 and 2007
 (in
thousands, except share data)
  2008
                                                  
                                                  
                                                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                  
                                                  $
                                                  10,784
                                                  
                                                  
                                                  $
                                                  26,323Marketable
      securities available-for-sale
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  6,477Accounts
      receivable
                                                  
                                                  
                                                  8
                                                  
                                                  
                                                  
                                                  1,953Prepaid
      expenses
                                                  
                                                  
                                                  200
                                                  
                                                  
                                                  
                                                  910Current
      portion of notes receivable, net
                                                  
                                                  
                                                  3,252
                                                  
                                                  
                                                  
                                                  -Other
      current assets
                                                  
                                                  
                                                  62
                                                  
                                                  
                                                  
                                                  1,185Total
      current assets
                                                  
                                                  
                                                  14,306
                                                  
                                                  
                                                  
                                                  36,848Property
      and equipment, net
                                                  
                                                  
                                                  483
                                                  
                                                  
                                                  
                                                  2,101Long-term
      investment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,964Goodwill
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  554Other
      intangibles, net
                                                  
                                                  
                                                  573
                                                  
                                                  
                                                  
                                                  836Notes
      receivable, net
                                                  
                                                  
                                                  338
                                                  
                                                  
                                                  
                                                  2,676Total
      assets
                                                  
                                                  $
                                                  15,700
                                                  
                                                  
                                                  $
                                                  45,979LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                                  
                                                  $
                                                  623
                                                  
                                                  
                                                  $
                                                  1,120Accrued
      compensation and employee benefits
                                                  
                                                  
                                                  1,185
                                                  
                                                  
                                                  
                                                  2,516Other
      accrued expenses
                                                  
                                                  
                                                  1,267
                                                  
                                                  
                                                  
                                                  2,912Current
      portion of long-term debt
                                                  
                                                  
                                                  477
                                                  
                                                  
                                                  
                                                  501Deferred
      revenue
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,500Total
      current liabilities
                                                  
                                                  
                                                  3,552
                                                  
                                                  
                                                  
                                                  8,549Long-term
      debt, net of current portion
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  27Deferred
      rent
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  32Total
      liabilities
                                                  
                                                  
                                                  3,552
                                                  
                                                  
                                                  
                                                  8,608Commitments
      and contingencies
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Stockholders'
      equity:Preferred
      stock, $.01 par value; 10,000,000 shares authorized; and no shares
      issuedand
      outstanding as of December 31, 2008 and 2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Common
      stock, $.01 par value; 60,000,000 shares authorized; 5,483,519
      and6,448,864
      shares issued and outstanding as of December 31, 2008 and 2007,
      respectively
                                                  
                                                  
                                                  55
                                                  
                                                  
                                                  
                                                  64Additional
      paid-in-capital
                                                  
                                                  
                                                  384,922
                                                  
                                                  
                                                  
                                                  387,721Accumulated
      other comprehensive loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (46
                                                  )Accumulated
      deficit
                                                  
                                                  
                                                  (372,829
                                                  )
                                                  
                                                  
                                                  (350,368
                                                  )Total
      stockholders' equity
                                                  
                                                  
                                                  12,148
                                                  
                                                  
                                                  
                                                  37,371Total
      liabilities and stockholders' equity
                                                  
                                                  $
                                                  15,700
                                                  
                                                  
                                                  $
                                                  45,979See
      accompanying
notes.
  F-3
 
 ORE
PHARMACEUTICALS INC.
 
 Consolidated
Statements of Operations
 For
the Years Ended December 31, 2008 and 2007
 (in
thousands, except per share data)
 
 2008
                        
                        
                        2007Services
      revenue
                        
                        $
                        1,950
                        
                        
                        $
                        1,596Expenses:Research
      and development
                        
                        
                        9,676
                        
                        
                        
                        10,260Selling,
      general and administrative
                        
                        
                        12,686
                        
                        
                        
                        11,101Total
      expenses
                        
                        
                        22,362
                        
                        
                        
                        21,361Loss
      from operations
                        
                        
                        (20,412
                        )
                        
                        
                        (19,765
                        )Interest
      (income), net
                        
                        
                        (769
                        )
                        
                        
                        (1,988
                        )Write-down
      of long-term equity investment
                        
                        
                        2,964
                        
                        
                        
                        -Gain
      on sale of DioGenix Inc.
                        
                        
                        (146
                        )
                        
                        
                        -Loss
      from continuing operations
                        
                        
                        (22,461
                        )
                        
                        
                        (17,777
                        )Loss
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        (16,911
                        )Net
      loss
                        
                        $
                        (22,461
                        )
                        
                        $
                        (34,688
                        )Basic
      and diluted net loss per share:Loss
      from continuing operations
                        
                        $
                        (3.97
                        )
                        
                        $
                        (2.79
                        )Loss
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        (2.65
                        )Net
      loss
                        
                        $
                        (3.97
                        )
                        
                        $
                        (5.44
                        )Shares
      used in computing basic and diluted net loss per share
                        
                        
                        5,659
                        
                        
                        
                        6,375See
      accompanying notes.


F-4
 
 ORE
PHARMACEUTICALS INC.
 
 Consolidated
Statements of Stockholders’ Equity
 For
the Years Ended December 31, 2007 and 2008
 (in
thousands, except number of shares)
 
 Common
      Stock
                          
                          
                          Additional
                          
                          
                          OtherNumber
                          
                          
                          Par
                          
                          
                          Paid-In
                          
                          
                          Comprehensive
                          
                          
                          Accumulated
                          
                          
                          Comprehensiveof
      Shares
                          
                          
                          Value
                          
                          
                          Capital
                          
                          
                          Income
      (Loss)
                          
                          
                          Defecit
                          
                          
                          LossBalance
      at January 1, 2007
                          
                          
                          6,364,401
                          
                          
                          $
                          63
                          
                          
                          $
                          386,785
                          
                          
                          $
                          (78
                          )
                          
                          $
                          (315,680
                          )Issuance
      of common stock in connection withrestricted
      stock awards (net of 18,380 restictedstock
      awards forfeited)
                          
                          
                          77,621
                          
                          
                          
                          1
                          
                          
                          
                          (1
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Issuance
      of common stock in connection withexercise
      of stock options
                          
                          
                          6,842
                          
                          
                          
                          -
                          
                          
                          
                          10
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Non-cash
      stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          927
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Foreign
      currency translation adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (7
                          )
                          
                          
                          -
                          
                          
                          $
                          (7
                          )Net
      change in unrealized gains frommarketable
      securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          39
                          
                          
                          
                          -
                          
                          
                          
                          39Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (34,688
                          )
                          
                          
                          (34,688
                          )Comprehensive
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          (34,656
                          )Balance
      at December 31, 2007
                          
                          
                          6,448,864
                          
                          
                          $
                          64
                          
                          
                          $
                          387,721
                          
                          
                          $
                          (46
                          )
                          
                          $
                          (350,368
                          )Cancellation
      of common stock in connection withrestricted
      stock awards forfeited
                          
                          
                          (37,525
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Cancellation
      of other common stock
                          
                          
                          (7,394
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Purchase
      of common stock
                          
                          
                          (920,426
                          )
                          
                          
                          (9
                          )
                          
                          
                          (2,982
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Non-cash
      stock-based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          183
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Foreign
      currency translation adjustments
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          45
                          
                          
                          
                          -
                          
                          
                          $
                          45Net
      change in unrealized gains frommarketable
      securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          1Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (22,461
                          )
                          
                          
                          (22,461
                          )Comprehensive
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          (22,415
                          )Balance
      at December 31, 2008
                          
                          
                          5,483,519
                          
                          
                          $
                          55
                          
                          
                          $
                          384,922
                          
                          
                          $
                          -
                          
                          
                          $
                          (372,829
                          )See
      accompanying notes.
  F-5
 ORE
PHARMACEUTICALS INC.
 
 Consolidated
Statements of Cash Flows
 For
the Years Ended December 31, 2008 and 2007
 (in
thousands)
  2008
                          
                          
                          2007Cash
      flows from operating activities:Loss
      from continuing operations
                          
                          $
                          (22,461
                          )
                          
                          $
                          (17,777
                          )Adjustments
      to reconcile loss from continuing operations to net cash flows from
      continuing operating activities:Depreciation
      and amortization
                          
                          
                          974
                          
                          
                          
                          1,114Non-cash
      stock-based compensation expense
                          
                          
                          183
                          
                          
                          
                          683Write-down
      of long-term equity investment
                          
                          
                          2,964
                          
                          
                          
                          -Gain
      on sale of DioGenix Inc.
                          
                          
                          (146
                          )
                          
                          
                          -Loss
      on sale of property and equipment
                          
                          
                          274
                          
                          
                          
                          -Other
      non-cash items
                          
                          
                          (32
                          )
                          
                          
                          -Changes
      in continuing operating assets and liabilities:Accounts
      receivable
                          
                          
                          1,945
                          
                          
                          
                          1,374Prepaids
      and other assets
                          
                          
                          899
                          
                          
                          
                          (220
                          )Accounts
      payable
                          
                          
                          (483
                          )
                          
                          
                          (2,583
                          )Accrued
      expenses and deferred rent
                          
                          
                          (2,918
                          )
                          
                          
                          147Accrued
      restructuring
                          
                          
                          -
                          
                          
                          
                          (1,941
                          )Deferred
      revenue
                          
                          
                          (1,500
                          )
                          
                          
                          1,500Net
      cash flows from continuing operating activities
                          
                          
                          (20,301
                          )
                          
                          
                          (17,703
                          )Loss
      from discontiuned operations
                          
                          
                          -
                          
                          
                          
                          (16,911
                          )Adjustments
      to reconcile loss from discontinued operations to net cash flows from
      discontinued operating activities:Loss
      on disposal, depreciation and amortization and other non-cash
      items
                          
                          
                          -
                          
                          
                          
                          12,024Changes
      in discontinued operating assets and liabilities
                          
                          
                          -
                          
                          
                          
                          2,920Net
      cash flows from discontinued operating activities
                          
                          
                          -
                          
                          
                          
                          (1,967
                          )Net
      cash flows from operating activities
                          
                          
                          (20,301
                          )
                          
                          
                          (19,670
                          )Cash
      flows from investing activities:Purchases
      of property and equipment
                          
                          
                          (171
                          )
                          
                          
                          (552
                          )Proceeds
      from sale of property and equipment
                          
                          
                          700
                          
                          
                          
                          -Purchases
      of licenses and patent costs
                          
                          
                          (432
                          )
                          
                          
                          (276
                          )Proceeds
      from sale of marketable securities available-for-sale
                          
                          
                          11,024
                          
                          
                          
                          38,222Purchase
      of marketable securities available-for-sale
                          
                          
                          (4,501
                          )
                          
                          
                          (20,250
                          )Proceeds
      received from sale of DioGenix Inc.
                          
                          
                          500
                          
                          
                          
                          -Net
      proceeds received from sale of Genomics Assets
                          
                          
                          412
                          
                          
                          
                          5,110Net
      proceeds received from sale of Preclinical Division
                          
                          
                          272
                          
                          
                          
                          1,146Payments
      related to the sale of Preclinical Division
                          
                          
                          -
                          
                          
                          
                          (1,843
                          )Net
      investing activities of discontinued operations
                          
                          
                          -
                          
                          
                          
                          (1,225
                          )Net
      cash flows from investing activities
                          
                          
                          7,804
                          
                          
                          
                          20,332Cash
      flows from financing activities:Proceeds
      from issuance (payments for purchase) of common stock
                          
                          
                          (2,991
                          )
                          
                          
                          10Repayments
      of long-term debt
                          
                          
                          (51
                          )
                          
                          
                          (49
                          )Net
      cash flows from financing activities
                          
                          
                          (3,042
                          )
                          
                          
                          (39
                          )Net
      increase (decrease) in cash and cash equivalents
                          
                          
                          (15,539
                          )
                          
                          
                          623Cash
      and cash equivalents, beginning of year
                          
                          
                          26,323
                          
                          
                          
                          25,700Cash
      and cash equivalents, end of year
                          
                          $
                          10,784
                          
                          
                          $
                          26,323Supplemental
      disclosure:Interest
      paid
                          
                          $
                          3
                          
                          
                          $
                          6Non-cash
      investing transaction:Fair
      value of promissory note received in connection with the sale of Genomics
      Assets
                          
                          $
                          -
                          
                          
                          $
                          2,668Fair
      value of promissory note received in connection with the sale of DioGenix
      Inc.
                          
                          $
                          673
                          
                          
                          $
                          -See
      accompanying notes.
 
 F-6
 ORE
PHARMACEUTICALS INC.
  Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 (in
thousands, except share and per share data)
 
 Note
1 – Organization and summary of significant accounting policies
 
 Description
of Business
 
 Ore
Pharmaceuticals Inc. (the “Company”), is a drug development company focused on
advancing its pipeline of drug candidates for uses previously identified by its
discontinued drug repositioning program.  Over the past four years,
the Company identified new therapeutic indications for a number of compounds
using its drug repositioning technology and obtained development rights to
certain of those compounds.  The Company is pursuing clinical
development of its drug candidates while it explores commercial arrangements to
advance those drug candidates.  In the fourth quarter of 2008, the
Company completed a multiple ascending dose Phase 1 clinical trial for its lead
drug candidate, GL1001.
 
 In 2008,
the Company sold its wholly owned subsidiary, DioGenix Inc., its molecular
diagnostics business (see Note 4).  In 2007, the Company sold the
assets of its Genomics Division (“Genomics Assets”) (see Note 3).  In
2006, the Company sold its Preclinical Division (see Note 3).
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of Ore Pharmaceuticals
Inc. and its wholly owned subsidiary, DioGenix Inc., through the date of its
sale.  At December 31, 2008, the Company was comprised of only Ore
Pharmaceuticals Inc.  All material inter-company accounts,
transactions and profits have been eliminated in consolidation.
 
 Use of 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 reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Basis
of Presentation
 
 As a
result of the Company’s sale of its Genomics Assets and in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the Company has classified the
results of operations of the Genomics Division (not including its molecular
diagnostic business) as a discontinued operation through the date of its sale
(see Note 3).  The results of operations and associated assets for the
Company’s molecular diagnostics business are not considered material and,
therefore, have not been classified as a discontinued operation.
 
 Concentration
of Credit Risk
 
 Cash, cash
equivalents and marketable securities available-for-sale are financial
instruments that potentially subject the Company to concentrations of investment
risk.  The Company primarily invests its excess available funds in
money market funds, commercial paper, corporate bonds and securities issued by
the U.S. Government and its agencies and, by policy, seeks to ensure both
liquidity and safety of principal.  The policy also limits investments
to certain types of instruments issued by institutions with strong investment
grade credit ratings and places restrictions on their terms, geographic origin
and concentrations by type and issuer.
  F-7
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents are defined as liquid investments with maturities of 90 days or
less when purchased.  All other investments are reported as marketable
securities available-for-sale and are not reflected in the table
below.  Cash and cash equivalents as of December 31 are comprised
of:
 
 2008
                      
                      
                      2007Cash
                      
                      $
                      276
                      
                      
                      $
                      763Money
      market funds
                      
                      
                      10,508
                      
                      
                      
                      19,081Commercial
      paper
                      
                      
                      -
                      
                      
                      
                      6,479Total
                      
                      $
                      10,784
                      
                      
                      $
                      26,323
  Marketable
Securities Available-for-Sale
 
 All
marketable securities are classified as
available-for-sale.  Available-for-sale securities are carried at fair
value, with unrealized gains and temporary losses reported as accumulated other
comprehensive income (loss) included in stockholders’
equity.  Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in the
Consolidated Statements of Operations.  The cost of securities sold is
based on the specific identification method.  In 2008 and 2007,
realized gains and/or losses resulting from the sale of marketable securities
were immaterial.
 
 At
December 31, 2008, the Company’s investment portfolio did not include any
marketable securities available-for-sale.At December 31, 2007,
the Company’s investment portfolio consisted of commercial paper.  All
marketable securities had original maturities greater than 90 days, but less
than two years.  All marketable securities with a gross unrealized
loss as of December 31, 2007 had been in an unrealized loss position for less
than 12 months.  The Company reviews marketable securities for
impairment based on criteria that include the extent to which the investment’s
carrying value exceeds its related market value, the duration of the market
decline, the Company’s ability to hold the investment to recovery and the
financial strength and specific prospects of the issuer of the
security.  At December 31, 2007, all of the Company’s investments were
classified as current because the Company’s intent was not to hold its
investments until maturity.
 
 Marketable
securities available-for-sale as of December 31, 2007 were comprised
of:
  Gross
                      
                      
                      GrossAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueCommercial
      paper
                      
                      $
                      6,478
                      
                      
                      $
                      -
                      
                      
                      $
                      (1
                      )
                      
                      $
                      6,477Total
                      
                      $
                      6,478
                      
                      
                      $
                      -
                      
                      
                      $
                      (1
                      )
                      
                      $
                      6,477
  Allowance
for Doubtful Accounts
 
 The
Company uses estimates to determine the amount of the allowance for doubtful
accounts necessary to reduce accounts receivable to their expected net
realizable value.  The Company estimates the amount of the required
allowance by reviewing the status of past-due receivables and by establishing
general provisions for estimated losses by analyzing current customer credit
worthiness and historical bad debt trends.  Actual collection
experience has not varied significantly from the Company’s estimates, due
primarily to collection policies and the financial strength of the Company’s
customers.  Receivables that are ultimately deemed uncollectible are
written-off as a reduction of accounts receivable and the allowance for doubtful
accounts.
 
 Property
and Equipment
 
 Property
and equipment is carried at cost, less accumulated depreciation and
amortization.  Depreciation and amortization is recorded using the
straight-line method over the estimated useful lives of the assets as
follows:
  Furniture
                      10
      yearsComputer
      and office equipment
                      1-5
      yearsLaboratory
      equipment
                      5
      yearsLeasehold
      improvements
                      Lesser
      of the lease term or the useful
life
  F-8
 Long-Term
Investments
 
 The
Company previously made equity investments in privately held companies whose
businesses were complementary to the Company’s business.  All of the
Company’s current equity investments are accounted for under the cost method of
accounting, as the Company held less than 20% of the voting stock outstanding
under such arrangements and did not exert significant influence over these
companies.  The Company records an impairment to its investments when
a decline in value in such investments is determined to be
other-than-temporary.
 
 Goodwill
 
 The
Company accounted for goodwill under the provisions of SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS 142”).  Under SFAS 142, the
Company was required to perform an annual impairment test of its
goodwill.  The Company’s annual impairment test date was October
1.  In addition, the Company was required to test for impairment at
any point at which it had an indication that an impairment may
exist.  Goodwill at December 31, 2007 was allocated to DioGenix Inc.,
which was sold in 2008 (see Note 4).
 
 The
goodwill impairment test involves a two-step approach.  Under the
first step, the Company determines the fair value of the reporting unit to which
goodwill has been assigned.  Reporting units are defined as the
Company’s operating segments.  The Company then compares the fair
value of the reporting unit to its carrying value, including
goodwill.  The Company estimates the fair value of the reporting unit
by estimating the reporting unit’s future net cash flows.  If the fair
value exceeds the carrying value, no impairment loss is
recognized.  If the carrying value exceeds the fair value, the
goodwill of the reporting unit is considered potentially impaired and the second
step is to measure the impairment loss.  Under the second step, the
Company calculates the implied fair value of goodwill by deducting the fair
value of all tangible and intangible net assets, including any unrecognized
intangible assets, of the reporting unit from the fair value of the reporting
unit, as determined in the first step.  The Company then compares the
implied fair value of goodwill to the carrying value of goodwill.  If
the implied fair value of goodwill is less than the carrying value of goodwill,
the Company recognizes an impairment loss equal to the difference.
 
 Other
Intangible Assets
 
 Other
intangible assets consist of licenses and patent costs.
 
 The
Company has licensed from third parties certain proprietary rights and technical
information covered by various patents and patent applications.  These
licenses will continue for the term of the agreement or the life of the
respective patent, whichever is shorter.  License costs are being
amortized over their expected useful lives, but not greater than the lesser of
the term of the agreement or the life of the respective
patent.  Certain agreements call for the payment of milestones,
royalties and/or other fees.
 
 Patent
costs include issued patents and patent applications and are stated at
cost.  Amortization of costs for issued patents is recorded using the
straight-line method over the shorter of their expected useful lives or the
legal lives of the patents, generally for periods ranging up to 20
years.
 
 Impairment
of Long-Lived Assets
 
 Long-lived
assets, consisting principally of property and equipment and other intangible
assets (including licenses and patent costs), are evaluated for possible
impairment.  If an impairment loss is indicated, the Company will
measure the amount of the impairment by comparing the carrying value of the
asset to the present value of the expected future cash flows associated with the
use of the asset (or asset group).
 
 Fair
Value Measurements
 
 The
Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”) for
financial assets and liabilities on January 1, 2008.  The adoption had
no impact on the Company’s financial position or results of
operations.
 
 SFAS
No. 157 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow) and the cost approach (cost to replace the service capacity of an
asset or replacement cost).  The statement utilizes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels.  The following is a brief
description of those three levels:
 
 ·
              Level
      1:  Observable inputs such as quoted prices (unadjusted) in
      active markets for identical assets or
  liabilities.
  F-9
 ·
              Level
      2:  Inputs other than quoted prices that are observable for the
      asset or liability, either directly or indirectly.  These
      include quoted prices for similar assets or liabilities in active markets
      and quoted prices for identical or similar assets or liabilities in
      markets that are not active.
 ·
              Level
      3:  Unobservable inputs that reflect the reporting entity’s own
      assumptions.
  The
Company’s financial assets subject to fair value measurements and the necessary
disclosures are as follows:
  Fair
      Valueas
      of
                        
                        
                        Fair
      Value Measurements at December 31, 2008December
      31,
                        
                        
                        Using
      Fair Value Hierarchy2008
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Cash
      and cash equivalents
                        
                        $
                        10,784
                        
                        
                        $
                        10,784
                        
                        
                        $
                        -
                        
                        
                        $
                        -Marketable
      securities available-for-sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        10,784
                        
                        
                        $
                        10,784
                        
                        
                        $
                        -
                        
                        
                        $
                        -
 Research
and Development
 
 Research
and development costs, including those costs previously incurred in acquiring
and developing the Company’s drug repositioning technologies and analyzing and
further developing its compounds, are charged to operations when incurred or
acquired.
 
 Revenue
Recognition
 
 Revenue
associated with non-refundable license fees for which the Company is not
obligated to provide continuing research and development activities is generally
recognized when the license becomes effective. Revenue associated with
non-refundable license fees under arrangements where the license fees and
research and development activities cannot be accounted for as separate units of
accounting are deferred and recognized as revenue over the expected term of the
Company’s continued performance of such research and development
activities.
 
 Revenue
recognized for any multiple-element contract is allocated to each element of the
arrangement based on the relative fair value of the element.  The
determination of fair value of each element is based on the Company’s analysis
of objective and reliable evidence from comparable internal or third-parties’
sales of the individual element.  If the Company is unable to
determine evidence of fair value for an undelivered element of the arrangement,
revenue for the arrangement is deferred and recognized using the revenue
recognition method appropriate to the predominant undelivered
element.
 
 In 2007,
the Company entered into a contractual arrangement with multiple
deliverables.  The Company was unable to determine objectively and
reliably the fair value of the undelivered elements.  Therefore, the
Company recognized revenue using the revenue recognition method appropriate to
the predominant undelivered element.  The Company also deferred the
direct and incremental expenses associated with the arrangement for which
revenue had been deferred and recognized these expenses as the Company
recognized the related revenue.  This arrangement resulted in an
increase in the Company’s deferred costs and deferred revenue as of December 31,
2007, all of which was recognized in 2008.  The timing of revenue
recognition associated with future agreements may also be dependent on its
ability to objectively and reliably determine the fair value of deliverables
included in those agreements.
 
 Deferred
revenue is recorded for cash received from customers for whom services have not
yet been performed or revenue recognition criteria has not been met as of the
balance sheet date.
 
 Income Taxes
 
 The
Company accounts for income taxes under the provisions of SFAS No. 109,
“Accounting for Income Taxes” (“SFAS 109”).  Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit
carryforwards.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date.
 
 F-10
 Basic and Diluted Net Loss Per
Share
 
 Net loss
per share is computed using the weighted average number of shares of Common
Stock outstanding.  Common equivalent shares from all outstanding
stock options and unvested restricted stock awards are excluded from the
computation, as their effect is anti-dilutive.
 
 Stock-Based
Compensation
 
 Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment,” which requires all share-based payments to employees,
including grants of employee stock options and restricted stock awards, to be
recognized in the financial statements based upon their respective grant-date
fair values.  The Company recognizes compensation expense on a
straight-line basis over the requisite service period of the award, which
typically occurs ratably over periods ranging from one to four
years.  See Note 13 for a further discussion on stock-based
compensation.
 
 Segment
Information
 
 Subsequent
to the sale of the Genomics Assets (see Note 3) and prior to the sale of
DioGenix Inc. (see Note 4), the Company managed its business as two operating
segments: drug development and molecular diagnostics; however, because these
operating segments meet the aggregation criteria of SFAS 131 “Disclosures about
Segments of an Enterprise and Related Information,” the Company has aggregated
its operating segments into one reporting segment.  Subsequent to the
sale of DioGenix Inc., the Company now manages its business as one operating
segment.  For 2008, two customers accounted for 97% of the Company’s
revenue from continuing operations.  For 2007, one customer accounted
for 94% of the Company’s revenue from continuing operations.
 
 New
Accounting Pronouncements
 
 In
February 2008, the Financial Accounting Standards Board (“FASB”) issued a
one-year deferral for non-financial assets and liabilities to comply with
SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”).  The Company adopted
SFAS No. 157 for financial assets and liabilities effective
January 1, 2008 (see Note 1, Fair Value Measurements) and
the adoption had no impact on the Company’s financial position or results of
operations.  The Company does not expect the adoption of
SFAS No. 157 as it pertains to non-financial assets and liabilities to
have a material impact on its financial position or results of
operations.
 
 In
December 2007, the FASB issued SFAS No. 141 Revised, “Business Combinations”
(“SFAS 141R”).  SFAS 141R requires an acquirer to determine the fair
value of the consideration exchanged as of the acquisition date (i.e. the date
the acquirer obtains control).  Previously, an acquisition was valued
as of the date the parties agreed upon the terms of the
transaction.  SFAS 141R also modifies, among other things, the
accounting for direct costs associated with an acquisition, contingencies
acquired and contingent consideration.  The Company will adopt SFAS
141R for business combinations for which the acquisition date occurs on or after
January 1, 2009.
 
 In
December 2007, the FASB ratified Emerging Issues Task Force No. 07-1,
“Accounting for Collaborative Agreements” (“EITF 07-1”).  EITF 07-1
provides guidance regarding financial statement presentation and disclosure of
collaborative arrangements, as defined therein.  EITF 07-1 is
effective for the Company as of January 1, 2009.  The Company
does not expect the adoption of this statement will have a material effect on
its financial position of results of operations.
 
 Note
2 – Liquidity and management’s plans
 
 Since
inception, the Company has incurred, and continues to incur, significant losses
from operations.  At December 31, 2008, the Company had $10,784 in
cash and cash equivalents.  In 2008, the Company realigned its
corporate resources and as a result significantly reduced its workforce from 71
employees on December 31, 2007 to 14 employees as of December 31,
2008.  In addition, the Company assigned its Cambridge, Massachusetts
lease and subleased back a smaller portion (see Note 11).  The Company
believes through its ongoing realignment efforts and cash conservation programs,
including further employee reductions expected in 2009, nine of which are
expected to occur prior to May 2009, and anticipated collection of its
outstanding notes receivable, that the Company would have the resources to
initiate and complete the Phase Ib/IIa clinical trial for GL1001, which is
expected to be completed in mid to late 2010.  However, there can be
no assurance that the Company will be successful in its realignment efforts,
cash conservation programs or collection of its outstanding notes receivable to
allow the Company to complete the clinical trial.  The balance sheet
at December 31, 2008 does not include any adjustments relating to recoverability
and classification of recorded asset amounts or the amounts and classifications
of liabilities that might be necessary should the Company be unable to complete
the clinical trial or attract additional financing.
 
 F-11
 Note
3 – Discontinued operations
 
 Genomics
Assets
 
 In 2007,
the Company sold its Genomics Assets to Ocimum Biosolutions Ltd. (“Ocimum”) for
a sales price of $10,000, of which $7,000 was received at closing, less
transaction costs of $1,890, and the balance of the sales price is payable
pursuant to a $3,000 non-interest bearing promissory note due June
2009.  The note has been recorded net of a discount of $103 for
imputed interest as of December 31, 2008.  In connection with the sale
of its Genomics Assets, the Company agreed to indemnify Ocimum in the event of a
breach of its representations and warranties to, and agreements with,
Ocimum.  Ocimum also assumed certain liabilities relating to the
Genomics Assets and the lease obligations of the Company’s former Genomics
laboratory and office facility, subject to the Company’s agreement to reimburse
Ocimum for 50% of the lease obligations for 2008.  In the event of
Ocimum’s default under the lease, the Company could be liable for amounts due
under the lease that could total $2,218 at December 31, 2008.  The
Company’s liability expires for obligations under this lease in February
2011.  At December 31, 2008, Ocimum had on deposit in escrow $750 to
partially secure both Ocimum’s performance under the lease and payment of the
$3,000 promissory note.  The Company retained full rights in
perpetuity to use the databases of its former Genomics business, existing as of
closing, for its drug development business.  The Company also retained
certain assets associated with its molecular diagnostic business, which it sold
in 2008 (see Note 4).
 
 As a
result of the Company’s sale of its Genomics Assets, the Company recorded a loss
on disposal of $3,880, which represented the excess carrying value of the net
assets of the Genomics Assets over the net sales proceeds, which is included in
the loss from discontinued operations for the year ended December 31,
2007.
 
 Due to the
Company’s sale of its Genomics Assets, the results of operations of the former
Genomics Division have been classified as discontinued
operations.  Summarized operating results for the discontinued
operations included in the Company’s Consolidated Statements of Operations are
as follows:
  2007Revenue
                          
                          $
                          16,738Loss
      from discontinued operations (1)
                          
                          $
                          (16,911
                          )(1)
      Includes $3,880 loss on disposal.
 During
2006, the Company initiated a restructuring of its Genomics Division, which was
completed and the restructuring liabilities paid as of December 31,
2007.
 
 Preclinical
Division
 
 In 2006,
the Company sold its Preclinical Division for a sales price of $15,000,
including $13,500 received at closing, less transaction costs of $1,383, and
$1,500 held in escrow for 12 months to guarantee certain obligations under the
agreement. Of the amount held in escrow, $1,418 has been paid and the remaining
amount of $82 is pending resolution between the parties.  In
connection with the sale of its Preclinical Division, the Company agreed to
indemnify the purchaser in the event of a breach of its representations and
warranties to, and agreements with, the purchaser and retained certain
liabilities relating to the activities of the business prior to the
sale.  The Company’s guarantees of two leases formerly used by the
Company’s Preclinical Division also continue in effect.  In the event
the purchaser defaults under these leases, which expire in February 2011 and
December 2013, the Company could be liable for amounts due under the leases
totaling $1,206 and $3,551, respectively, at December 31, 2008.
 
 Note 4–Sale of DioGenix
Inc.
 
 In 2008,
the Company sold to Nerveda, Inc. (“Nerveda”) the Company’s wholly owned
subsidiary, DioGenix Inc., its molecular diagnostics business, for a sales price
of $1,250, of which $500 was received at closing and the balance is payable
pursuant to a $750 promissory note from Nerveda bearing interest at 2.38%,
with two principal payments of $375 plus interest due December 2009 and June
2010.  Payments due under the note are subject to acceleration if
DioGenix secures institutional investment or reaches a certain development
milestone.  The note has been recorded net of a discount of $62 for imputed
interest as of December 31, 2008.  In addition, if DioGenix
commercializes a diagnostic product or service for multiple sclerosis, DioGenix
would pay the Company a royalty equal to 3.5% on net sales of such tests
and services, capped at an aggregate of $1,500.  The Company and
Nerveda have each agreed to indemnify the other for the breach by either of any
representation, warranty, covenant or obligation made or undertaken pursuant to
the agreement.  During 2008, the Company recorded a gain on the sale
of DioGenix Inc. of $146.  Expenses and associated assets are not
considered material and there was no revenue from this business recorded for the
periods presented.  The results for the Company’s molecular diagnostic
business are included in the Company’s operating expenses from continuing
operations.
 
 F-12
 Note
5 – Property and equipment
 
 Property
and equipment includes the following as of December 31:
 
 2008
                          
                          
                          2007Furniture
                          
                          $
                          301
                          
                          
                          $
                          985Computer
      and office equipment
                          
                          
                          857
                          
                          
                          
                          855Laboratory
      equipment
                          
                          
                          26
                          
                          
                          
                          2,750Leasehold
      improvements
                          
                          
                          316
                          
                          
                          
                          7541,500
                          
                          
                          
                          5,344Less
      -- accumulated depreciation and amortization
                          
                          
                          (1,017
                          )
                          
                          
                          (3,243
                          )Property
      and equipment, net
                          
                          $
                          483
                          
                          
                          $
                          2,101
 Depreciation
expense was $772 and $922 for the years ended December 31, 2008 and 2007,
respectively.
 
 Note
6 – Long-term investments
 
 In
November 2003, the Company’s subsidiary, then named MetriGenix, Inc., sold
substantially all of its assets to a privately held company (the “Buyer”,
referred to herein as “Xceed”, formerly MetriGenix).  In connection
with the sale, the Company received convertible preferred stock of Xceed at the
time representing 15% of the equity of Xceed.  The Company also
received the right to appoint a person to the Board of Directors of the
Buyer.  The Company accounts for its investment in Xceed using the
cost method of accounting.  During 2008, the Company recorded a $2,964
write-down of the remaining book value of its investment in Xceed, due to an
other-than-temporary decline in its estimated fair value caused by Xceed’s
difficulty in obtaining capital, which significantly impacted the fair value of
Xceed.
 
 Note
7 – Other intangible assets
 
 Information
regarding the Company’s other intangible assets at December 31 is as
follows:
  2008
                              
                              
                              2007Carrying
      amount:Licenses
                              
                              $
                              -
                              
                              
                              $
                              144Patent
      costs
                              
                              
                              575
                              
                              
                              
                              890Total
      carrying amount
                              
                              $
                              575
                              
                              
                              $
                              1,034Accumulated
      amortization:Licenses
                              
                              $
                              -
                              
                              
                              $
                              120Patent
      costs
                              
                              
                              2
                              
                              
                              
                              78Total
      accumulated amortization
                              
                              $
                              2
                              
                              
                              $
                              198Net
      carrying value:Licenses
                              
                              $
                              -
                              
                              
                              $
                              24Patent
      costs
                              
                              
                              573
                              
                              
                              
                              812Total
      net carrying value
                              
                              $
                              573
                              
                              
                              $
                              836
  Amortization
expense for the years ended December 31, 2008 and 2007 was $202 and $192,
respectively.  Estimated future amortization expense for existing
intangible assets is not significant since most patents costs are not related to
issued patents as of December 31, 2008 and therefore are not subject to
amortization.
 
 F-13
 Note
8 – Long-term debt
 
 Long-term
debt as of December 31 consists of the following:
 
 2008
                          
                          
                          2007Loan
      bearing interest at 5.0% per annum and due inquarterly
      installments of $14 through June 2009
                          
                          $
                          27
                          
                          
                          $
                          78Loan
      bearing interest at 4.5% and due upon demand
                          
                          
                          450
                          
                          
                          
                          450477
                          
                          
                          
                          528Less
      -- current portion
                          
                          
                          (477
                          )
                          
                          
                          (501
                          )Long-term
      debt
                          
                          $
                          -
                          
                          
                          $
                          27
 The
Company has had discussions with the lender concerning repayment and/or
forgiveness of the loan that is currently due upon demand, as well as $139 of
accrued interest that has been recorded in Other Accrued Expenses.
 
 Interest
expense was $10 and $53 for the years ended December 31, 2008 and 2007,
respectively.
 
 Note
9 – Stockholders’ equity
 
 In 2008,
the Company entered into an agreement with a then member of its Board of
Directors to purchase 920,426 shares owned directly or indirectly by that
Director for $3,263 (the “Share Purchase”).  In addition, the Company
agreed to pay the director $126 for certain fees and expenses.  In
connection with the Share Purchase, the director resigned from the Company’s
Board of Directors and surrendered stock options for 6,000 shares of the
Company’s Common Stock.  Of the purchase price of $3,263, the Company
allocated $272 to the price paid in excess of the fair value of the shares,
which was recorded as a Selling, General and Administrative
expense.  The remaining $2,991 was recorded as a reduction to Common
Stock, based on the par value, and to Additional Paid-in Capital.  The
shares purchased were cancelled and returned to the status of authorized and
unissued shares.
 
 On May 23,
2008, the Company’s stockholders of record as of April 17, 2008 approved a
one-for-five reverse stock split of the Company’s outstanding Common
Stock.  The number of authorized shares of Common Stock and Preferred
Stock of the Company was not affected and remains at 60,000,000 and 10,000,000,
respectively, but the number of shares of Common Stock outstanding was reduced
from 27,515,461 to 5,503,438.  The aggregate par value of the issued
Common Stock was reduced by reclassifying a portion of the par value amount of
the outstanding common shares from Common Stock to Additional Paid-in-Capital
for all periods presented.  In addition, all per share and share
amounts, including stock options and restricted stock awards, have been
retroactively restated in the accompanying Consolidated Financial Statements and
Notes to Consolidated Financial Statements for all periods presented to reflect
the reverse stock split.
 
 Note
10 – Income taxes
 
 The actual
income tax expense for the years ended December 31, 2008 and 2007 is different
from the amount computed by applying the statutory federal income tax rates to
loss before income tax expense.  The reconciliation of these
differences for the years ended December 31 is as follows:
 
 2008
                    
                    
                    2007Tax
      benefit at federal statutory rate
                    
                    $
                    (7,637
                    )
                    
                    $
                    (11,806
                    )State
      income taxes, net of federal income tax effect
                    
                    
                    (509
                    )
                    
                    
                    (1,860
                    )Change
      in state tax rate
                    
                    
                    -
                    
                    
                    
                    (3,309
                    )Other
                    
                    
                    113
                    
                    
                    
                    221Increase
      in valuation allowance
                    
                    
                    8,033
                    
                    
                    
                    16,754Income
      tax expense
                    
                    $
                    -
                    
                    
                    $
                    -




F-14
 The tax
effect of cumulative temporary differences at December 31 is as
follows:
 
 2008
                          
                          
                          2007Deferred
      tax assets:NOL
      and tax credit carryforwards
                          
                          $
                          123,471
                          
                          
                          $
                          127,130Net
      loss in unconsolidated investee
                          
                          
                          3,259
                          
                          
                          
                          3,581Purchased
      research and development
                          
                          
                          2,244
                          
                          
                          
                          2,685Depreciation
                          
                          
                          2,527
                          
                          
                          
                          2,353Other
                          
                          
                          2,337
                          
                          
                          
                          2,739133,838
                          
                          
                          
                          138,488Less
      -- valuation allowance
                          
                          
                          (133,838
                          )
                          
                          
                          (138,488
                          )Net
      deferred tax assets
                          
                          $
                          -
                          
                          
                          $
                          -Deferred
      tax liabilities:Other
                          
                          $
                          -
                          
                          
                          $
                          -Deferred
      tax liabilities
                          
                          $
                          -
                          
                          
                          $
                          -
 At
December 31, 2008, net operating loss carryforwards (“NOLs”) for income tax
purposes were $324,148.  The Company also has research and development
tax credit carryforwards of $5,630 as of December 31, 2008.  The
carryforwards, if not utilized, will expire in increments from 2009 through
2028.  Utilization of the net operating losses and credits may be
subject to an annual limitation as provided by the Internal Revenue Code of
1986, and there can be no guarantee that such NOLs and tax credits will ever be
fully utilized.  As a result of cumulative losses, the Company has
recorded a full valuation allowance against its net deferred tax assets as
management believes it is more likely than not that the assets will not be
realizable.
 
 Note
11 – Commitments and contingencies
 
 Operating
Leases
 
 The
Company conducts its operations from two subleased facilities, with terms
expiring in 2009 for Cambridge, Massachusetts and 2013 for Gaithersburg,
Maryland.  These subleases obligate the Company to pay building
operating costs.
 
 Future
minimum lease payments under sublease agreements for the years ending December
31 are as follows:
 
 2009
                        
                        $
                        2292010
                        
                        
                        1342011
                        
                        
                        1372012
                        
                        
                        1412013
                        
                        
                        144$
                        785
 Rent
expense for the years ended December 31, 2008 and 2007 was $1,245 and
$1,315,respectively.
 
 In March
2009, the Company decided to close its Gaithersburg, Maryland
facility.  Upon closing the facility, which is anticipated to occur in
the second quarter of 2009, the Company expects to record a non-cash accelerated
lease expense and write-down of leasehold improvements and other related assets
of approximately $900.
 
 In 2008,
the Company assigned its lease in Cambridge, Massachusetts to Agios
Pharmaceuticals, Inc. (“Agios”), a privately held biopharmaceuticals company,
and subleased from Agios a smaller space at that location for a term to expire
on or before, at the Company’s election, June 30, 2009.  The Company
will remain liable under the lease in the event of Agios’ default for the
balance of the term of the lease, which ends August 2013, that could amount to
$5,210 at December 31, 2008.
 
 In
connection with this arrangement, the Company received $700 for the sale of
laboratory equipment associated with drug repositioning not required to further
advance the Company’s drug candidates.  As a result, the Company
recorded a loss on disposal of $274 related to the sale.
 
 F-15
 Contingencies
 
 The
Company is subject to certain contingencies associated with the sales of its
Genomics Assets and Preclinical Division (see Note 3) and DioGenix Inc. (see
Note 4).
 
 Litigation
 
 The
Company is not currently a party to any legal proceedings that could have a
material adverse effect on the Company’s financial condition or results of
operations.
 
 Note
12 – 401(k) retirement plan
 
 The
Company has an Ore Pharmaceuticals Inc. 401(k) Retirement Plan (the “401(k)
Plan”) for its employees under Section 401(k) of the Internal Revenue Code, as
amended.  Under the 401(k) Plan, all employees 18 years of age or
older are eligible, starting on the calendar quarter, to contribute up to 100%
of their eligible compensation and, in the case of employees age 50 or older,
make certain catch-up contributions, subject to maximum deferrals allowed under
IRS regulations.  Employee contributions are 100%
vested.  Beginning in 2008, the Company matching contributions
increased to 100% of up to 3% of an employee’s eligible compensation and 50% of
up to the next 2%.  For 2007, the Company’s matching contributions
were 50% of up to 6% of an employee’s eligible
compensation.  Employees hired before January 1, 2004 and after
January 1, 2008 are fully vested in the Company’s matching
contributions.  For employees hired between these dates, the Company’s
matching contributions are subject to variable vesting.  These
matching contributions, which are expensed, amounted to $229 and $171 in 2008
and 2007, respectively.
 
 Note 13 – Stock-based compensation
 
 At
December 31, 2008, the Company has the following stock-based compensation plans:
1997 Equity Incentive Plan (the “Stock Plan”) and 1997 Non-Employee Directors’
Stock Option Plan (the “Directors’ Plan”).
 
 Stock
Plan
 
 The
Company has a Stock Plan, under which the Compensation Committee (the
“Committee”) of the Company’s Board of Directors, at its discretion, can grant
stock options and, beginning in 2006, restricted stock awards, to employees of
the Company and its affiliates.  The Stock Plan currently authorizes
the grant of stock options for up to 2,120,000 shares of Common Stock, of which
only 600,000 shares may be issued as restricted stock awards.  The
stock options granted under the Stock Plan generally expire at the earlier of a
specified period after termination of service or the date specified by the
Committee at the date of grant, but not more than ten years from such grant
date.  Grants of restricted stock awards are generally subject to
conditions for vesting within a specified time period.  Such awards
are generally forfeited at the earlier of not meeting such vesting conditions or
upon termination of service.  At December 31, 2008, there were 786,245
shares available for issuance under the Stock Plan.
 
 Directors’
Plan
 
 The
Company has a Directors’ Plan to provide for granting of stock options to
purchase up to 180,000 shares of Common Stock to non-employee directors of the
Company.  Stock options are to be granted at the fair market value of
the Common Stock at the grant date.  The stock options granted under
the Directors’ Plan expire at the earlier of a specified period after
termination of service or ten years from such grant date.  At December
31, 2008, there were 44,000 shares available for issuance under the Director’s
Plan.
 
 F-16
 Stock
Option Awards
 
 The
following is a summary of option activity for the year ended December 31,
2008:
 
 Shares
      Subject toOutstanding
      OptionsWeightedPer
      Share
                                        
                                        AverageWeighted
                                        
                                        Remaining
                                        
                                        
                                        AggregateAverage
                                        
                                        Contractual
                                        
                                        
                                        IntrinsicShares
                                        
                                        
                                        Exercise
      Price
                                        
                                        Life
      (Years)
                                        
                                        
                                        ValueBalance
      at January 1, 2008
                                        
                                        
                                        904,856
                                        
                                        
                                        $
                                        28.60Options
      granted
                                        
                                        
                                        317,140
                                        
                                        
                                        $
                                        2.18Options
      exercised
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -Options
      cancelled
                                        
                                        
                                        (538,149
                                        )
                                        
                                        $
                                        18.75Balance
      at December 31, 2008
                                        
                                        
                                        683,847
                                        
                                        
                                        $
                                        24.10Vested
      and expected to vest at December 31, 2008
                                        
                                        
                                        647,714
                                        
                                        
                                        $
                                        25.16
                                        
                                        5.2
                                        
                                        $
                                        -
 Options to
purchase a total of 532,096 and 647,866 shares at December 31, 2008 and 2007,
respectively, were exercisable.  The weighted-average grant-date fair
value of options granted during the years ended December 31, 2008 and 2007 was
$0.97 and $3.64, respectively.
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model for the years ended December 31, 2008 and
2007 with the following assumptions:
 
 2008
                      
                      2007Expected
      volatility
                      63%
                      
                      59%Risk-free
      interest rate
                      2.53%
      to 3.04%
                      
                      3.04%
      to 4.51%Expected
      lives
                      3
      years
                      
                      3
      yearsDividend
      rate
                      0%
                      
                      0%
 The
aggregate intrinsic value in the table above represents the total intrinsic
value (the excess of the Company’s closing stock price on the last trading day
of 2008 over the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2008.  This amount is
subject to change based on changes to the fair market value of the Company’s
Common Stock.  Total intrinsic value of options exercised for 2008 and
2007 was not significant.
 
 No option
exercises occurred in 2008.  Cash received from option exercises in
2007 was $10.
 
 The
following table summarizes information about stock options outstanding at
December 31, 2008:
 
 Options
      Outstanding
                                                                  
                                                                  
                                                                  Options
      ExercisableWeighted
                                                                  
                                                                  Per
      Share
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Per
      ShareNumber
                                                                  
                                                                  Average
                                                                  
                                                                  Weighted
                                                                  
                                                                  
                                                                  Number
                                                                  
                                                                  
                                                                  WeightedOutstanding
      at
                                                                  
                                                                  Remaining
                                                                  
                                                                  Average
                                                                  
                                                                  
                                                                  Exercisable
      at
                                                                  
                                                                  
                                                                  AverageRange
      of
                                                                  
                                                                  
                                                                  December
      31,
                                                                  
                                                                  Contractual
                                                                  
                                                                  Exercise
                                                                  
                                                                  
                                                                  December
      31,
                                                                  
                                                                  
                                                                  ExerciseExercise
      Price
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  Life
                                                                  
                                                                  Price
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  Price$
                                                                  1.70--$10.00
                                                                  
                                                                  
                                                                  
                                                                  278,429
                                                                  
                                                                  8.7
      Years
                                                                  
                                                                  $
                                                                  4.51
                                                                  
                                                                  
                                                                  
                                                                  142,446
                                                                  
                                                                  
                                                                  $
                                                                  5.02$
                                                                  10.01--$20.00
                                                                  
                                                                  
                                                                  
                                                                  113,465
                                                                  
                                                                  5.4
      Years
                                                                  
                                                                  $
                                                                  16.47
                                                                  
                                                                  
                                                                  
                                                                  97,709
                                                                  
                                                                  
                                                                  $
                                                                  17.12$
                                                                  20.01--$30.00
                                                                  
                                                                  
                                                                  
                                                                  139,257
                                                                  
                                                                  2.2
      Years
                                                                  
                                                                  $
                                                                  25.72
                                                                  
                                                                  
                                                                  
                                                                  139,245
                                                                  
                                                                  
                                                                  $
                                                                  25.72$
                                                                  30.01--$314.38
                                                                  
                                                                  
                                                                  
                                                                  152,696
                                                                  
                                                                  2.3
      Years
                                                                  
                                                                  $
                                                                  64.01
                                                                  
                                                                  
                                                                  
                                                                  152,696
                                                                  
                                                                  
                                                                  $
                                                                  64.01$
                                                                  1.70--$314.38
                                                                  
                                                                  
                                                                  
                                                                  683,847
                                                                  
                                                                  5.4
      Years
                                                                  
                                                                  $
                                                                  24.10
                                                                  
                                                                  
                                                                  
                                                                  532,096
                                                                  
                                                                  
                                                                  $
                                                                  29.59


F-17
 Restricted
Stock Awards
 
 During
2007, the Committee approved grants for shares of restricted stock under the
Stock Plan subject to certain performance- or time-based vesting conditions
which, if not met, would result in forfeiture of the shares and reversal of any
previously recognized related stock-based compensation expense.
 
 The
following is a summary of restricted stock awards activity for the year ended
December 31, 2008:
  Per
      ShareWeighted-AverageNumber
      of
                      
                      
                      Grant-DateShares
                      
                      
                      Fair
      ValueOutstanding
      at January 1, 2008
                      
                      
                      61,525
                      
                      
                      $
                      6.53Restricted
      stock granted
                      
                      
                      -
                      
                      
                      $
                      -Restricted
      stock vested
                      
                      
                      (14,000
                      )
                      
                      $
                      6.65Restricted
      stock forfeited
                      
                      
                      (37,525
                      )
                      
                      $
                      6.59Outstanding
      at December 31, 2008
                      
                      
                      10,000
                      
                      
                      $
                      6.15
 Performance-based
nonvested share awards are recognized as compensation expense over the expected
vesting period based on the fair value at the date of grant and the number of
shares ultimately expected to vest.  The shares of restricted stock
outstanding at December 31, 2008 will only vest if certain performance
milestones are achieved, which the Company does not believe is
probable.  During 2008, 37,525 restricted stock awards were forfeited
as the performance milestones were not achieved.  As a result, the
Company recognized the reversal of $148 stock-based compensation expense during
2008 related to these awards since the Company had previously considered the
vesting of these awards to be probable.
 
 As of
December 31, 2008, $156 of total unrecognized compensation cost related to stock
option and restricted stock awards is expected to be recognized over a
weighted-average period of 1.7 years.  This estimate does not include
the impact of other possible stock-based awards that may be made during future
periods.
 F-18