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





 ̈
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: 000-28347





ONCOVISTA
INNOVATIVE THERAPIES, INC.


(Exact
name of registrant as specified in its charter)





Nevada
              33-0881303(State
      or other jurisdiction of
                incorporation
      or organization)
              (IRS
      Employer Identification No.)





14785
Omicron Drive


Suite
104


San
Antonio, Texas 78245


(Address
of principal executive offices)





(210)
677-6000


(Registrant's
telephone number, including area code)





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





Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001
par value





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





Indicate
by check mark if the Company 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 Company (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 Company 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 in response to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the Company’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 Company is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated file and
larger accelerated filer” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o
            
            Accelerated filer oNon-accelerated filer o
            
            Smaller ReportingCompany x








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


Yes   ̈ No  x


1





The
aggregate market value of the voting common equity held by non-affiliates of the
Company as of June 30, 2008 was approximately $28,030,062 based upon the closing
price of the Company’s common stock on the OTC Bulletin Board, on June 30, 2008.
(For purposes of determining this amount, only directors, executive officers,
and, based on Schedule 13(d) filings on June 30, 2008, 10% or greater
stockholders and their respective affiliates have been deemed
affiliates).





As of
March 20, 2009, there were 20,316,475 shares of common stock outstanding (after
giving effect to 20,000 shares of common stock which the Company is obligated to
issue).


2


ONCOVISTA
INNOVATIVE THERAPIES, INC.





FORM
10-K


FOR
THE YEAR ENDED DECEMBER 31, 2008


TABLE
OF CONTENTS





PART
      I
                        
                        4ITEM
      1 – BUSINESS
                        
                        4ITEM
      1A – RISK FACTORS
                        
                        22ITEM
      1B – UNRESOLVED STAFF COMMENTS
                        
                        33ITEM
      2 – PROPERTIES
                        
                        33ITEM
      3 – LEGAL PROCEEDINGS
                        
                        33ITEM
      4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                        
                        33PART
      II
                        
                        34ITEM
      5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                        
                        34ITEM
      6 – SELECTED FINANCIAL DATA
                        
                        35ITEM
      7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                        
                        35ITEM
      7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                        
                        43ITEM
      8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                        
                        43ITEM
      9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                        
                        43ITEM
      9A(T) – CONTROLS AND PROCEDURES
                        
                        44ITEM
      9B – OTHER INFORMATION
                        
                        46PART
      III
                        
                        47ITEM
      10 – DIRECTORS, EXECUTIVE OFFICERS  AND CORPORATE
      GOVERNANCE
                        
                        47ITEM
      11 – EXECUTIVE COMPENSATION
                        
                        51ITEM
      12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                        
                        58ITEM
      13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
      INDEPENDENCE
                        
                        61ITEM
      14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
                        
                        63ITEM
      15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                        
                        63


3


PART
I





This Annual Report on Form 10-K
(including the section regarding Management's Discussion and Analysis of
Financial Condition and Results of Operations) contains forward-looking
statements regarding our business, financial condition, results of operations
and prospects.  Words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “seeks,” “estimates” and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
deemed to represent an all-inclusive means of identifying forward-looking
statements as denoted in this Annual Report on Form
10-K.  Additionally, statements concerning future matters are
forward-looking statements.





Although forward-looking statements in
this Annual Report on Form 10-K reflect the good faith judgment of our
management, such statements can only be based on facts and factors currently
known by us.  Consequently, forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in or anticipated by the
forward-looking statements.  Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Related to Our
Business” below, as well as those discussed elsewhere in this Annual
Report on Form 10-K.  Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K.  We file reports with the Securities and Exchange
Commission (the “SEC”
or “Commission”).  We
make available on our website under "Investor Relations/SEC Filings,” free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports as soon as reasonably
practicable after we electronically file such materials with or furnish them to
the SEC.  Our website address is www.oncovista.com. You can also read
and copy any materials we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549.  You can obtain
additional information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an
internet site (www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, including us.





We undertake no obligation to revise or
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Annual Report on Form
10-K.  Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this Annual Report, which attempt to
advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.





As used in this Annual Report, the
terms “we”, “us”, “our”, and “OncoVista” mean OncoVista
Innovative Therapies, Inc. and our subsidiaries, OncoVista, Inc. (“OncoVista-Sub”) and AdnaGen
A.G., unless otherwise indicated.





All dollar amounts refer to US dollars,
unless otherwise indicated.





ITEM
1 – BUSINESS





Overview





We are a
biopharmaceutical company commercializing diagnostic tests for metastatic
tumors, as well as developing targeted anticancer therapies by utilizing
tumor-associated biomarkers. We have developed diagnostic kits for breast,
colon, ovarian, and prostate cancers, and currently market diagnostic kits in
Europe for the detection of circulating tumor cells (“CTCs”) in patients with
breast and colon cancer. We believe we are positioned to leverage our
ownership in our diagnostics company, AdnaGen, to realize short-term revenues
from sales of AdnaGen’s CE-marked diagnostic kits in Europe, while utilizing the
diagnostic technology to guide and expedite our anticancer drug development
efforts.


4


Our
primary therapeutic strategy is based on targeting the patient’s tumor(s) with
treatments that will deliver drugs selectively based upon specific biochemical
characteristics of the cancer cells comprising the tumor. Through a combination
of licensing agreements as well as mergers and acquisitions, we have acquired
the rights to several technologies with the potential to more effectively treat
cancers and significantly improve quality-of-life for patients. We believe that
the use of methods to detect and analyze biomarkers in CTCs to determine
suitability of specific treatments as well as provide an early indication of
treatment success or failure will be key to bringing personalized targeted
medicines to market. We expect our proprietary diagnostic technology to
facilitate selection and stratification of clinical trial patients, as well as
monitor and predict the response of patients to treatment. We believe that the
development of targeted approaches to the administration of anticancer agents
should lead to improved outcomes and/or reduced toxicity.





We expect
to be a major participant in the oncology arena through the successful
development and commercialization of innovative therapies which, as a result of
their lower toxicity and/or greater efficacy, will increase patient survival
rates and enhance patient quality of life. In targeting compounds for
acquisition, we focus on candidates that have been previously tested in human
clinical trials or animal models, as well as technologies that may improve the
delivery or targeting of previously tested, and in some cases marketed,
anticancer agents. Our senior management team and our panel of
internationally-recognized clinical advisors have made significant contributions
to the development of leading drugs currently used in cancer treatment.
Management, in conjunction with our advisors, will evaluate in-licensing
candidates based on several criteria, including development and registration
strategies to be employed, commercialization opportunities and competitive
technologies being developed elsewhere.




We intend
to initiate a Phase II clinical trial program for our lead compound, OVI-237,
during 2009. OVI-237 is a liposomal formulation of a potent inhibitor of
thymidylate synthase. In the second quarter of 2008, we launched the Phase
I/II clinical trial for Cordycepin (OVI-123) at two sites in the US and,
following completion of the Phase I portion of the trial, we plan to collect
initial Phase II efficacy data in a small cohort of refractory leukemia patients
who express the marker, TdT. We intend to commence human clinical trials within
the next six months on our L-nucleoside conjugate candidate drug (OVI-117) which
takes advantage of cancer cell membrane changes to allow for selective, site
specific targeting. Finally, we have a proprietary screening technology for
designing novel anti-tubulin (or anti-mitotic) agents and discovering variants
of existing anti-tubulin agents which have improved specificity for the tumor
cells being targeted. We anticipate that these new anti-tubulin drugs will
elicit an improved clinical response and be less toxic. We intend to develop our
key candidates into novel, highly efficacious therapies to be marketed by means
of corporate alliances.





To date,
we have financed our operations principally through offerings of securities
exempt from the registration requirements of the Securities Act. We have also
loaned or advanced to AdnaGen approximately €600,000 ($850,000) during the
previous twelve months to support their operations.  We believe the
ability to execute our strategy relies on the continued viability of AdnaGen. As
such, we will likely continue to provide advances to AdnaGen until they achieve
positive cash flows adequate to support their continued operations. We estimate
that our cash reserves will be sufficient to permit us to continue at our
anticipated level of operations for at least two to three months. Accordingly,
we will need to raise additional capital to support our current operations and
fund in-licensing and research and development programs and will further require
substantial additional financing at various intervals in the future. We can
provide no assurance that additional funding will be available on a timely
basis, terms acceptable to us, or at all. As a result of the unavailability of
sufficient capital resources and AdnaGen’s cash needs, we were forced to scale
back our research and development operations during the previous twelve
months.





If we are
unsuccessful raising additional funding, our business may not continue as a
going concern and if sufficient capital is not available, we may be required to
delay, further scale back or eliminate one or more of our research and
development or acquisition and in-licensing programs or to enter into license or
other arrangements with third parties to commercialize products or technologies
that we would otherwise seek to develop ourselves and commercialize ourselves.
In such event, our business, prospects, financial condition, and results of
operations would be adversely affected. Even if we do find additional
funding sources, we may be required to issue securities with greater rights than
those currently possessed by holders of our common stock. We may also be
required to take other actions that may lessen the value of our common stock or
dilute our common stockholders, including borrowing money on terms that are not
favorable to us or issuing additional equity securities. If we experience
difficulties raising money in the future, our business, prospects, financial
condition and results of operation will be materially adversely affected. See
“Risk Factors” and
“Report of Independent
Registered Public Accounting Firm”.


5





During
the last three fiscal years we spent approximately $11.2 million on research and
development.





Our
Corporate Strategy




We have
implemented a comprehensive, multi-faceted approach to candidate identification
and product development in the oncology treatment and diagnostic market
segments. Our strategic plan consists of the following elements:




·
            An Integrated Diagnostics
      Strategy. AdnaGen’s proprietary diagnostics platform represents an
      opportunity, we believe, to improve the probability of attaining FDA
      approval for our drugs. AdnaGen’s proprietary
      “combination-of-combinations” platform detects and analyzes circulating
      tumor cells for clinical diagnosis and staging. AdnaGen currently offers
      diagnostic products for colon and breast cancer diagnosis in the European
      market. AdnaGen’s platform is expandable to screen for the markers for
      virtually all cancer types. These assays are highly specific and
      sensitive, with the ability to detect as few as two circulating tumor
      cells per 5ml of blood (which contains approximately 107
      normal nucleated cells) at a 95+% likelihood, thereby enabling the
      reproducible detection of low levels (better than 1 part per million) of
      circulating tumor cells in the blood. As part of our oncology drug
      development process, we expect to employ AdnaGen’s diagnostic technology
      to design clinical trial protocols which stratify the patient population
      to include patients most likely to respond based on the expression of
      specific tumor associated biomarkers. In addition, these tests may provide
      insight into the extent of the metastatic process thereby enabling the
      monitoring of disease progression as well as the effectiveness of
      treatment regimens.





·
            In-licensing Candidate
      Selection and Acquisition Program. We believe that the
      relationships and reputation the members of both our management and our
      clinical advisory board positions us to be exposed to many acquisition and
      in-licensing opportunities that would not normally be available to a
      company of our size. In many instances, the acquisition of
      biopharmaceutical companies by larger companies has resulted in drug
      programs being delayed or discontinued, due to such factors as loss of
      internal sponsorship (not created at the acquiring company), a perceived
      lack of market size (the desire for drugs with annual sales in excess of
      $1 billion) by the larger combined entity, or an overcrowded pipeline (too
      many product candidates to investigate, too many products to develop and a
      lack of sufficient resources). Indeed, the development of hundreds of
      potential oncology compounds that had been on the development track have
      been delayed or discontinued. We view many of these product candidates,
      together with some of the 400 plus compounds in the development pipeline,
      as potential candidates for
in-licensing.







By
leveraging the experience of our management team and clinical advisory board in
selecting, developing and obtaining approval for many important
chemotherapeutics, we believe that we will be able to discern those
opportunities that truly possess the potential to become approved drugs within a
targeted three-to-five year horizon. We involve our clinical advisory board in
all major acquisition and in-licensing decisions. Given the experience and the
active network of our management team and clinical advisory board, we expect to
uncover many other promising candidates. Coupled with this, we generally attempt
to structure our in-licensing deals so that if the in-licensed technology fails
to perform as represented, we are able to recover any payments made by us
in acquiring the technology.




6




·
            A Practical, Rational Approach
      to Drug Development. Our management is well versed in the nuances
      associated with successful execution of the drug development and
      registration process. Registration strategies will be designed to address
      those issues which are critical to achieving success with respect to both
      the acceptability of a specific plan in the eyes of the FDA and the
      achievability of that plan with respect to the designated end points for
      that phase of the clinical trial. Furthermore, wherever possible these
      strategies will be designed to take advantage of the FDA’s accelerated
      approval paths for certain drugs and/or orphan drug
      designation.




·
            A Disciplined Internal
      Development Strategy for Therapeutics. Besides opportunistically
      evaluating candidates for potential in-licensing or acquisition, we
      possess two proprietary technologies which we believe will produce
      candidates for potential out-licensing. Both technologies target aspects
      of cell biology specific to most cancer cells, but not found in healthy
      cells. We expect these technologies to produce an array of candidates. We
      believe that, in many instances, the potential candidates will address
      opportunities with unmet needs, such as cancers which are very resistant
      to therapy or have high recurrence rates. In other instances, we believe
      that the candidates will address opportunities where the effectiveness of
      existing chemotherapeutics is hampered by the toxic side effects which the
      drugs produce. In these circumstances, we believe that by using our
      products in combination with existing drug therapies administered at lower
      dosage levels will produce comparable or improved effectiveness with
      diminished side effects versus the single agent
  therapy.




Our
L-nucleoside conjugate technology selectively targets certain cancer cell
characteristics which make those cancer cells vulnerable to the actions of the
drug, but leaves the healthy cells unaffected. In effect a new drug is created
by conjugating an L-nucleoside to an existing chemotherapeutic agent that would
be too toxic if delivered systemically. Several product candidates have been
evaluated by us and one candidate (OVI-117) has been tested in animal models. We
believe OVI-117 is a thymidylate synthase (“TS”) inhibitor with
enhanced pharmacological properties which results in a retention of efficacy and
a reduction of toxicity. OVI-117 has shown tumor growth inhibitory activity in
human colon, breast and prostate tumors growing in animal models. We are in the
process of preparing the Investigational New Drug (“IND”) application with
the intent of submitting the application to the FDA in the second quarter of
2009 subject to the availability of sufficient capital resources.




Our other
platform technology relates to a proprietary database of tubulin isotypes as
potential candidates for targeting by certain chemotherapeutics. Microtubules,
comprised of tubulin proteins, are instrumental in cell mitosis, and have been
proven as cancer targets by drugs such as the taxanes. We intend to screen our
proprietary database for candidates to be targeted either by drugs to be
developed by us, or by drugs already developed by other companies that are not
aware of the potential for selective tubulin targeting of their products. During
the second half of 2009 and subject to the availability of sufficient capital
resources, we expect to identify our first antimitotic tubulin compound to take
forward into the clinic.




Merger
and Private Placement





On August
16, 2007, OncoVista-Sub acquired from Torbjorn Lundqvist (“Lundqvist”) and a number of
minority stockholders an aggregate of 10,963,851 shares of our (formerly
Aviation Upgrade Technologies, Inc.) common stock (or 16,160,430 shares of our
common stock after giving effect to the forward split that went effective on
October 22, 2007) constituting approximately 95.7% of our then issued and
outstanding capital stock. In connection with OncoVista-Sub’s acquisition of our
shares, the license agreement with Lundqvist granting us worldwide marketing
rights for an electronic tire valve cap was terminated and all shares of
Automotive Upgrade Technologies, Inc., formerly a wholly owned subsidiary of
ours, were transferred to Lundqvist. As a result of the termination of this
license, we ceased business operations.





On
October 26, 2007, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
OncoVista Acquisition Corp. (“NewSub”), our then wholly
owned subsidiary, and OncoVista-Sub. On November 13, 2007, NewSub merged with
and into OncoVista-Sub with OncoVista-Sub remaining as the surviving corporation
(the “Merger”). As a
result of the Merger, OncoVista-Sub became our wholly-owned subsidiary and
OncoVista-Sub’s existing business operations became our sole line of business.
On the closing date of the Merger, each outstanding share of common stock of
OncoVista-Sub was exchanged for one share of our common stock such that
OncoVista-Sub's shareholders became holders of approximately 96.3% of our then
issued and outstanding capital stock. In addition, all our shares acquired by
OncoVista-Sub on August 16, 2007 were cancelled and became authorized but
unissued shares of our common stock.


7





The
Merger was accounted for as a reverse acquisition and recapitalization of
OncoVista-Sub for financial accounting purposes. Consequently, the assets and
liabilities and the historical operations that are reflected in our financial
statements for periods prior to the Merger are those of OncoVista-Sub and have
been recorded at the historical cost basis of OncoVista-Sub, and our
consolidated financial statements for periods after completion of the Merger
include both our and OncoVista-Sub’s assets and liabilities, the historical
operations of OncoVista-Sub and our operations from the closing date of the
Merger.





In
contemplation of the Merger, on August 15, 2007, OncoVista-Sub completed the
closing of a private placement (the “2007 Private Placement”)
whereby it sold to accredited investors a total of 970,712 units at $7.00 per
unit, each unit consisting of four shares of OncoVista-Sub common stock and a
warrant to acquire one share of OncoVista-Sub common stock. The net proceeds of
the private placement after payment of placement agent fees and other expenses
was approximately $6,223,000. In connection with the private placement,
OncoVista-Sub issued warrants to its placement agent, Maxim Group, LLC, to
acquire 278,857 shares of OncoVista-Sub common stock. The warrants and placement
agent warrants (collectively, the “Warrants”) are exercisable
through August 15, 2012 at the exercise price of $2.50 per share, subject to
adjustment for stock splits, stock dividends, distributions, reorganizations,
reclassifications, consolidations and mergers. The Warrants may also be
exercised on a cashless or net issuance basis if after August 15, 2008 there is
no effective registration statement covering the resale of the shares of common
stock and shares underlying the warrants. The offering was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and
Rule 506 of Regulation D as promulgated by the SEC.





As a
result of the Merger, all shares issued in the 2007 Private Placement were
exchanged for our shares of common stock and the Warrants became exercisable for
shares of our common stock.




Our
Current Product and Product Candidate Pipeline




Our
current portfolio of compounds and technologies under development or planned
development include:




·
            AdnaGen
      Oncology Diagnostics


·
            A
      Liposomal TS Inhibitor;


·
            Cordycepin;


·
            L-Nucleoside
      Conjugates; and


·
            Novel
      Tubulin Isotype-Specific
Anti-Mitotics




The
following table summarizes the status of our various pre-clinical and clinical
development programs underway, including both chemotherapeutic agents and
oncology diagnostic products:




Program
            
            Indication
            
            Status
            
            Planned Activities
            
            Commercial RightsAdnaGen
      Diagnostic
              Products
            
            Metastatic
      Solid Tumors; cancer stem cells
            
            Tests
              Commercialized
      in
              EU
      for Colon, Breast and Prostate Cancer
            
            Seeking
      Approval of Breast Test in the United States
            
            AdnaGenLiposomal
      TS Inhibitor
              (OVI
      -237)
            
            Metastatic
      Solid Tumors
            
            Phase
      II Clinical Development
            
            Phase
      II Clinical Trial to be initiated in Second Half of 2009
            
            OncoVista-SubCordycepin
      (OVI-123)
            
            Refractory
      TdT Positive Leukemias
            
            In
      Phase I/II Clinical Development; Open IND; Orphan Drug Designation
      Received
            
            Phase
      I/II Trial initiated in Second Quarter of 2008
            
            OncoVista-SubL-Nucleoside
      Conjugates (OVI-117)
            
            Colon
      Cancer
            
            Pre-Clinical
              Development;
      Initiated GLP animal safety studies
            
            Anticipated
      IND Filing in the Second Quarter of 2009 to Commence Phase I
      Trial
            
            OncoVista-SubTubulin
      Isotype-Specific
              Anti-Mitotics
            
            Solid
      Tumors Expressing Specific Tubulin Isotypes
            
            Pre-Clinical
              Development
            
            Design
      and Testing of Candidate Compounds
            
            OncoVista-Sub




8




As a result of the unavailability of
sufficient capital resources and AdnaGen’s cash needs, we were forced to scale
back our research and development operations during the previous twelve months
and will require additional capital in the very near term so that we may
continue our operations as currently contemplated. See “Risk Factors -- We will need
additional capital in order to satisfy our business objectives” and
“Report of Independent
Registered Public Accounting Firm”.





The
following sections discuss various aspects of our portfolio of drug candidates
and their respective therapeutic characteristics in more detail.





AdnaGen
Diagnostic Products




We
believe one of our key differentiators is our ability to detect and recognize
the expression of tumor-associated biomarkers in patients with metastatic
cancer. In order to prescribe an optimal chemotherapy regimen, the oncologist
must obtain pertinent diagnostic and staging information for the patient’s
cancer. In addition to analyzing the cancer cells under a microscope to diagnose
the cancer, the pathologist also determines the stage of the cancer by assessing
the aggressiveness of the cancer cells (i.e., staging) and by using a variety of
clinical measures such as size, how deeply the tumor has invaded tissues at the
site of origin, and the extent of any invasion into surrounding organs, lymph
nodes or distant sites. Patient history, physical signs, symptoms, and
information obtained from existing tests are also evaluated and
considered.




The
administration of cytotoxic drugs (by means of chemotherapy) after surgery
and/or radiation therapy aims to kill remaining cancer cells and to reduce
recurrence risk. Since many more lives are claimed by metastatic cancers than by
primary cancers, the early detection of metastatic tumor cells can mean the
difference between life and death in certain instances. However, patients
experience a wide range of side effects due to the long-term exposure to
chemotherapy, including infection, pain in the mouth and throat, weight loss,
fatigue, hair loss, cognitive impairment, cardiac tissue damage and infertility.
The overall benefits of chemotherapy vary significantly across cancer
populations and the benefits of treatment do not always justify the cost of the
therapy or offset the physical and mental burden patients endure. In addition to
the above considerations in assessing the benefits versus the costs of
treatment, the oncologist needs specific grading and staging information to
assess the likelihood of recurrence.




Balancing
the need to kill as many cancer cells as possible against the patient’s
tolerance of toxicities presents a major challenge. While the oncologist might
need specific diagnostic and staging information to optimally treat the patient,
many of the tools available to the radiologist or pathologist are constrained by
their ability to determine that needed information. A test to detect metastatic
tumor cells as early as possible could dramatically increase the probability of
long-term survival. Unfortunately, because tumor pathology and staging are
heavily dependent on visual assessment and human interpretation, many patients
are misclassified as high risk when they are truly low risk for recurrence or
low risk when they are high risk for recurrence, resulting in over-treatment for
some and under-treatment for others.




An
ability to detect meaningful serum tumor-associated biomarkers in a quantitative
manner would significantly improve the treatment process on two fronts. First,
early detection of circulating tumor cells would enable a diagnosis of relapse
and enable the earlier commencement of treatment resulting in favorable
outcomes. Second, the detection of certain tumor-associated biomarkers would
facilitate stratification of patient populations into groups most likely to
respond to a dosing regimen. For those patients who possess a genetic
predisposition that precludes them from responding to cytotoxic drugs, initial
determination would eliminate the unnecessary side effects associated with a
treatment that will have no benefit to the patient.


9




In late
2005, we obtained the rights to our diagnostic technology through the
acquisition of a majority interest in AdnaGen AG of Germany. OncoVista’s
ownership position in AdnaGen is currently approximately 95%. AdnaGen’s
proprietary assay technology has demonstrated the sensitivity and selectivity
required to detect a low number of cancer cells circulating among healthy cells
(at levels of roughly one part per million) early in the metastatic process,
thereby improving the patient’s chances of survival. AdnaGen’s proprietary
“combination-of-combinations” approach led to the first commercial product that
provided a complete solution for the detection and analysis of circulating tumor
cells (“CTCs”) for
clinical diagnosis. The technology also provides quantitative parameters for the
prognosis of disease progression. AdnaGen currently markets AdnaGen kits for
detection of CTCs in metastatic colon and metastatic breast cancer patients in
Europe. AdnaGen’s platform is expandable to encode the markers for virtually all
cancer types. These assays have a specificity of greater than 95% at a
sensitivity of two tumor cells per 5ml of blood, enabling the reproducible
detection of low levels of circulating tumor cells in the blood.




The
advantages of this diagnostic technology include:




·
            Novel
      and highly sensitive detection of circulating tumor
  cells;





·
            Early
      detection of metastatic cancer;





·
            Monitoring
      of treatment efficacy; and





·
            Selection
      and stratification of clinical trial participants and
      patients.




AdnaGen’s
technology could also be utilized in clinical trials to aid in determining the
optimal patient population and in assessing the effectiveness of a drug in
development. By utilizing tumor-associated biomarkers to determine patient
exclusion criteria in a trial’s protocol and thereby target the patients
expected to demonstrate optimal response, the probability of attaining FDA
approval could be enhanced. In addition, the detection of tumor markers could be
used to gauge the effectiveness of a patient’s treatment. This ability to
measure the effects of a chemotherapy regimen could be extended to the
oncologist’s office.





We have
exclusive, worldwide rights for the use of the AdnaGen technology in oncology
drug development. Business development efforts have been initiated with several
major pharmaceutical companies with the goal of establishing partnerships which
apply our CTC technology to external drug development programs.  In
September 2008, AdnaGen entered into an exclusive distribution agreement with
TATAA Molecular Diagnostics s.r.o. (“TATAA”) for the Czech
Republic and Slovak Republic. The term of this agreement continues through
December 31, 2013, automatically renewable for additional twelve month periods,
and requires TATAA to purchase certain minimum quantities. Additionally, in
January 2009, AdnaGen entered into a non-exclusive distribution agreement with
Sysmex Europe GmbH (“Sysmex”) for certain European
countries.




Biomarkers
Partnership





In
September 2008, AdnaGen entered into an exclusive distribution and license
agreement with Biomarkers LLC (“Biomarkers”) granting
Biomarkers the exclusive right to distribute the AdnaGen diagnostic kits in
North America. The term of this agreement continues through December 31, 2010
and is automatically renewable for additional twelve month periods. Pending FDA
approval, Biomarkers is selling the AdnaGen diagnostic kits for research
use  only. Biomarkers plans to have the capability to run
AdnaGen assays in a CLIA laboratory based in New York in order to support
on-going and planned clinical trials.





In
January 2009, AdnaGen also entered into an exclusive distribution and license
agreement with Biomarkers granting Biomarkers the exclusive right to distribute
the AdnaGen diagnostic kits in South America and the Middle East. The term of
this agreement continues through December 31, 2010 and is automatically
renewable for additional twelve month periods. Biomarkers plans on seeking the
necessary approvals in these territories to permit it to sell the AdraGen
diagnostic kits. Our CEO, Chairman of the Board, President and a significant
shareholder, is also a beneficial owner of Biomarkers.


10





Innogenetics
Partnership




In
January 2007, AdnaGen entered into a distribution agreement with Innogenetics
N.V. (“Innogenetics”)
granting Innogenetics the exclusive right to commercialize the AdnaGen
diagnostic kits in the European market.  In September 2007, AdnaGen
entered into a license agreement with Innogenetics granting Innogenetics the
right to use AdnaGen technology in adapting Innogenetics’ proprietary strip
detection technology after successful feasibility studies.





In July
2008, AdnaGen commenced a lawsuit against Innogenetics in the District Court of
Hannover alleging that Innogenetics breached the exclusive distribution
agreement that AdnaGen entered into with them. AdnaGen claimed that Innogenetics
did not order the contractual minimum quantities of diagnostic kits required to
maintain exclusivity. AdnaGen terminated the exclusivity and sought damages of
approximately $550,000 (€369,000).  Following a bench trial, on March
3, 2009, the District Court ruled in favor of Innogenetics ordering AdnaGen to
pay the court costs which have previously been paid and to pay Innogenetics’
attorney’s fees amounting to approximately $8,500.





Gen-Probe
Partnership




In
December, 2004, AdnaGen licensed their technology to Gen-Probe, Inc. with respect to
quantitative detection of specific cells.




Under the
terms of the agreement, Gen-Probe is provided with the right to gain exclusive
access to AdnaGen technology for molecular diagnostic tests for prostate and
bladder cancers. Gen-Probe paid AdnaGen a license fee in 2005. The agreement
also includes additional milestone payments based on certain regulatory and
commercial events. In addition, the agreement provides that Gen-Probe will pay
AdnaGen royalties on sales of any products developed using AdnaGen’s
technology.  In 2008, after lengthy discussions, Gen-Probe chose not
to exercise their option to pursue the research and development
partnership.  Accordingly, AdnaGen is now in discussions with
Gen-Probe to reacquire the rights to the technology for prostate and bladder
cancers.





Liposomal
Thymidylate Synthase (TS) Inhibitor (OVI-237) (solid tumors)





OVI-237
is our most advanced clinical stage drug. It was obtained in November 2007 as a
result of an exclusive worldwide licensing agreement with OSI Pharmaceuticals
(Melville, New York).




The drug
was previously known as “OSI-7904L” and has been studied in a broad range of
preclinical studies as well as several Phase I and Phase II human clinical
trials.





OVI-237
is a liposome encapsulated formulation of a potent thymidylate synthase
inhibitor (TSI) with activity at picomolar concentrations. Salient features of
OVI-237 include:





·
            Most
      potent TSI in its class;


·
            Liposome
      formulation enhances pharmacokinetics: long half life in
      plasma;


·
            Unique
      biodistribution profile; enhanced accumulation and tumor residence
      time;


·
            No
      requirement for polyglutamation for anti-tumor
  activity;


·
            Independent
      of dihydropyrimidine dehydrogenase (DPD)
  activity;


·
            No
      requirement for folate
supplementation;


·
            No
      requirement for leukovorin;


·
            Manageable
      toxicity profile as a single agent and in combination with oxaliplatin and
      cisplatin;


·
            More
      convenient dosing schedule with a 30 minute IV infusion compared to 24-48
      hour 5-FU dosing schedules;





Approximately
150 patients have been treated with the drug in various Phase I and Phase II
trials and the results can be summarized as follows:


11





·
            In
      a Phase I trial (OVI-237 as a single agent), 11 out of 31 patients
      experienced stable disease (SD);


·
            In
      a Phase I trial (OVI-237 in combination with cisplatin), 3 patients (2
      breast and 1 gastric cancer; out of 27 patients total) experienced a
      partial response (PR) and 9 patients had
SD;


·
            In
      a Phase I study (OVI-237 in combination with oxaliplatin), 14 patients
      with colorectal cancer were treated, 2 patients experienced a PR and 11
      had SD;


·
            In
      a Phase II study (OVI-237 as a single agent) in patients with locally
      advanced or metastatic adenocarcinoma of the stomach or gastroesophageal
      junction, 46 patients were treated and evaluable; there was 1 complete
      response (CR), 7 PRs and 21 SDs;


·
            In
      a randomized, open label, Phase II study of OVI-237 vs. 5-FU/LV as
      first-line treatment in patients with unrespectable, locally advanced or
      metastatic adenocarcinoma of the biliary tract, 11 patients were treated
      in each arm and no responses were seen in the OVI-237
  arm;


·
            In
      a Phase II trial (single agent) of OVI-237 in patients with locally
      advanced or metastatic squamous cell carcinoma of the head and neck who
      have failed first line therapy, 10 patients were treated and 4 SDs were
      seen.




From the
responses seen in previous trials, we believe that the drug has intrinsic
anti-tumor activity and that the key to successful clinical development leading
to registration will depend upon increasing response rates among the clinical
trial participants. To this end, we plan to utilize the AdnaGen technology for
characterizing biomarkers in circulating tumor cells to identify patients most
likely to respond to therapy and to monitor the effectiveness of
treatment.





With
OVI-237, we have finalized the protocol and selected clinical sites to conduct a
Phase II Study of OVI-237 monotherapy and combination therapy with cisplatin for
the treatment of metastatic breast cancer. Subject to availability of sufficient
working capital, we plan on initiating the trial in the third quarter of 2009,
enrolling our first patients in the fourth quarter of 2009.





Cordycepin
(OVI-123) (TdT-Positive Refractory Leukemias)




The
American Cancer Society estimated that 44,270 new leukemia cases would be
diagnosed in 2008 in the U.S. While 200,000 individuals are living with, or are
in remission from, leukemia in the U.S., the annual mortality rate is nearly
22,000. The four broad classifications of leukemia are:





·
            Acute
      lymphocytic leukemia (“ALL”);


·
            Chronic
      lymphocytic leukemia (“CLL”);


·
            Acute
      myelogenous leukemia (“AML”);
    and


·
            Chronic
      myelogenous leukemia (“CML”).




Cordycepin,
which was obtained through OncoVista-Sub’s acquisition of Aengus
Pharmaceuticals, Inc., was our first clinical-stage development compound. We are
developing Cordycepin as a treatment option for certain leukemia patients that
are either refractory to currently-used chemotherapeutics or have experienced a
relapse. Cordycepin depends upon the presence of a DNA polymerase, known as
terminal deoxynucleotidyl transferase (TdT), for our therapeutic activity.
Approximately 95% of ALL patients express TdT, and approximately 10% of the AML
cases express TdT. The range of CML cases that express TdT has been estimated at
between 0% and 55% in scientific literature with an average of 21% among the
cited articles. Generally, the TdT-positive patients that would either be
refractory or have experienced a relapse are older adults.





Opportunity





Leukemia
is a malignant cancer of the bone marrow and blood. Leukemia is characterized by
the uncontrolled accumulation of blood cells and is categorized as either
lymphocytic or myelogenous, either of which type can be acute or chronic. The
terms lymphocytic and myelogenous denote the type of blood cell affected
(lymphocytic involving lymphocyte cells in bone marrow and myelogenous
implicating other blood cells). Acute leukemia is a rapidly progressing disease
that results in the accumulation of immature, functionless cells in the marrow
and blood, thereby resulting in a condition whereby the marrow often can no
longer produce enough normal red blood cells, white blood cells and platelets.
Anemia, a deficiency of red cells, develops in virtually all leukemia patients,
and the lack of normal white cells impairs the body’s ability to fight
infections. A shortage of platelets results in bruising and easy bleeding.
Chronic leukemia, on the other hand, progresses more slowly and allows greater
numbers of more mature, functional cells to be made.


12




While AML
and CML have been cancers primarily of adults, with prevalence rates of 94% for
AML in adults over the age of 20 and 97% for CML in adults over 20, ALL is more
evenly distributed between adults and children. Approximately 65% of new cases
diagnosed with ALL are in children under the age of 20, and while the treatment
outcomes for ALL in children have generally been favorable with a five-year
survival rate of 86% for children under the age of 15, the treatment response
rates for adults have resulted in a lower overall five-year survival rate of
65%. Given the toxic profile of the treatment regimens for both adults and
children, we believe that Cordycepin, as a TdT-dependent agent, could be used as
part of a combination therapy regimen in order to minimize toxicities to both
age groups while maintaining effectiveness.





Market




Currently,
approximately 50 different drugs are being used to treat leukemia. In the past
decade, several important new drugs and new uses for existing drugs have greatly
improved cure rates or remission duration for some patients. Because of the
likelihood of increased toxicity for standard- or lower-risk childhood ALL
patients, most centers treat these patients with a less intense treatment
regimen than the four- or five-dose treatment regimen used for higher risk
patients This regimen generally results in a complete remission rate of 95%. For
adult ALL patients, the treatment regimen is similar to the childhood treatment
regimen; however, for the 60% to 80% demonstrating remission during induction,
the median remission duration is approximately 15 months. Unfortunately, those
patients experiencing a relapse can succumb within one year.




AML
treatment should be sufficiently aggressive to achieve complete remission since
partial remission offers no substantial survival benefit. Initial therapy
typically results in 60% to 70% of adults attaining complete remission during
the induction phase. However, with an overall five year survival rate of 20%,
the long-term prognosis in general is not good for adult AML patients.
Unfortunately, while AML is a cancer of older adults, because of the therapy’s
toxicity (from myelosuppression and increased risk of infection), induction
chemotherapy is not generally offered to the very elderly.




Gleevec®, the
standard primary course of treatment in CML, inhibits an enzyme (bcr-abl
tyrosine kinase) resulting from the defective gene translocation. By selectively
inhibiting the activity of this enzyme, Gleevec® offers
dramatic advantages to patients, including decreased side effects, few adverse
effects on normal tissues and a very high response rate. The effectiveness and
tolerance of older patients and the projections from the first several years of
clinical trials suggest that the drug will prolong the duration of hematological
remission and extend the patient’s life, when compared to former
therapies.




Similar
to Gleevec®, our
Cordycepin selectively targets cells expressing a specific enzyme involved in
the disease’s pathway. In this case, Cordycepin is targeting cells expressing
TdT. With an addressable patient population consisting primarily of 46,000
individuals with CML, Gleevec®/Glivec® full
year sales for 2008 were $3.7 billion, according to Novartis. With an
addressable patient population for Cordycepin in leukemia patients nearly half
the addressable population of Gleevec®, we
believe that our product possesses a significant upside potential.




Clinical
Development




Cordycepin
has been studied in a National Cancer Institute-sponsored Phase I clinical trial
for treating TdT-positive ALL leukemia patients. The therapy depends upon the
presence of TdT for our activity. TdT is a polymerase expressed in immature,
pre-B, pre-T lymphoid cells, and acute lymphoblastic leukemia/lymphoma cells.
TdT, and similar enzymes found in fungi and parasites, recognize Cordycepin and
its analogues and add them onto growing nucleic acid chains thereby terminating
synthesis of the nucleic acid and replication of the cell. Importantly, TdT
expression in normal human tissue is limited to primitive lymphoid cells in the
bone marrow and thymus, so most normal cells in the body are unaffected by the
drug. In addition to effectively treating TdT-positive ALL and CML, Cordycepin
can also be used to treat diffuse high-grade lymphoblastic lymphoma, which also
expresses TdT.


13




In a
biological system, Cordycepin is converted to 3’-deoxyinosine by the enzyme
adenosine deaminase (“ADA”), so Cordycepin must be
administered with an ADA inhibitor, such as deoxycoformycin (Nipent®
or pentostatin) to protect Cordycepin and allow it to maintain its antileukemic
activity. If the Phase I/II trial of Cordycepin demonstrates adequate safety and
efficacy, we intend to develop an ADA-resistant analog of Cordycepin
in order to eliminate the need for co-administration of
deoxycoformycin.




The
initial Phase I clinical trial data for the combination therapy was obtained in
an ALL study of fourteen patients between 1997 and 2000. No Cordycepin-related
adverse events were noted. Biological activity in the last three patients of the
escalating dosing study was noted by the transient clearing of peripheral blood
blasts.  Since May 2007, we have had an open IND and in addition, in
July 2007, our request for Orphan Drug designation for Cordycepin was granted by
the FDA.





We
initiated a Phase I/II trial based on the "original" ADA-sensitive compound in
the second quarter of 2008. The trial is on-going at two US centers (The Dana
Farber Cancer Institute in Boston, Massachusetts and the Cancer Therapy Research
Center at the University of Texas Health Sciences Center at San Antonio, Texas)
and is designed to enroll up to 24 patients in the first stage and up to 20
patients in the second stage. The primary objective of the 1st phase
of the study will be to determine the maximally tolerated dose (“MTD”) and the recommended
dose (“RD”) of Cordycepin,
given one hour following a fixed dose of the ADA inhibitor Pentostatin, in
patients with refractory TdT-positive leukemia. The primary objectives of the
2nd
phase of the study will be to determine the single and multiple dose
pharmacokinetics of Cordycepin given one hour following a fixed dose of
Pentostatin and to measure and quantify any clinical responses following
administration of Cordycepin/Pentostatin at the recommended dose in 20 subjects.
Secondary objectives will include assessing the pharmacokinetics efficacy and
safety at the MTD. We anticipate a total time period of 18 months for the trial
during which patients will receive Cordycepin for three consecutive days
repeated every 28 days. Patients will be eligible for re-treatment if all
dose-related toxicities have been resolved by Day 28 and there is no evidence of
disease progression. Subjects may receive treatment until disease progression
and will be followed for at least 30 days after the last administration of study
drug.  A total of  four patients have been enrolled and
treated as of February 28, 2009.





We have
applied for an FDA funded grant ($200,000 a year for two years for a total of
$400,000) to help defray the cost of clinical development of OVI-123. We expect
to learn whether or not the grant will awarded in the second half of
2009.




L-Nucleoside
Conjugate (OVI-117)




Compounds
evolving from our L-nucleoside conjugate technology may take advantage of cell
membrane changes that differentiate cancerous cells from healthy cells. This
anomalous characteristic of cancer cell membranes may present a unique
opportunity for targeting these cells with new products which are uniquely
designed cytotoxic nucleosides that selectively enter cancerous cells. After
entering the cancer cells, these compounds may be enzymatically cleaved to
release their cytotoxic agents causing the death of the cancer cell. The
membranes of healthy cells may deny the L-nucleoside entry, so that cancerous
cells are preferentially killed. As a result, we believe that there should be
reduced side effects associated with this class of drug. Drug candidates using
L-nucleoside conjugate technology have demonstrated efficacy in cell lines for
colorectal, pancreas, melanoma, leukemia and prostate cancers. OVI-117 has shown
anti-tumor activity in animal models of several human cancers (including breast,
prostate and colon), and our initial target indication is expected to be
colorectal cancer.




The
L-nucleoside conjugate technology was obtained through an exclusive, world-wide,
royalty and milestone-bearing right and license to utilize the patents and
technologies of Lipitek International, Inc. relating to L-nucleosides and their
conjugates. Alexander L. Weis, Ph.D., a member of the Board of Directors,
Chief Executive Officer, President and Secretary is the ultimate beneficial
owner of Lipitek International, Inc. and Lipitek Research LLC. Dr. Weis has
agreed not to vote as a director in connection with any matter relating to
Lipitek.





Opportunity




Colorectal
cancer is the third most common form of cancer, and diagnosis of localized colon
cancer is typically made by means of colonoscopy. Symptoms of colorectal cancer
include:


14




·
            Change
      in bowel habits as seen by changes in frequency (due to either
      constipation or diarrhea), changes in stool caliber and changes in stool
      consistency;


·
            Blood
      in stools (melena, hematochezia);


·
            Bowel
      obstruction (rare) by the tumor;


·
            Anemia,
      with symptoms such as tiredness, malaise, pallor;
  and


·
            Unexplained
      weight loss.




The
absence of discernable symptoms in the early stages of this disease is one
reason why periodic screening with fecal occult blood testing and colonoscopy is
so widely recommended.




For 2008,
in the United States, the American Cancer Society estimated there would be
148,810 new colorectal cancer cases of which colon cancer accounted for 108,070
cases. Colon cancer is a highly treatable and often curable disease when
diagnosed early and localized to the bowel. When detected at its earliest stage
(Dukes’ A) as an in situ tumor, the curative rate for colon cancer approaches
90%, or 5 times the curative rate for colon cancers detected at a later stage.
Unfortunately, 40% to 50% percent of patients have metastatic disease at the
time of diagnosis after many of the above symptoms have been exhibited. Surgery
is the primary form of treatment and is typically followed by a regimen of
chemotherapy. Despite the fact that a majority of patients have the entire tumor
removed by surgery, as many as 50% to 60% will ultimately die from either the
metastatic colon cancer or from a recurrence. Deaths from colorectal cancer are
estimated to be 49,960 in 2008 in the United States.




Market




Standard
treatment for patients with colon cancer has been open surgical resection of the
primary and regional lymph nodes for localized disease. Surgery alone is
curative in 25% to 40% of highly selected patients who develop resectable
metastases in the liver and lung.




For 60%
to 75% of the patients with colorectal cancer for whom surgery alone is
insufficient to achieve a cure, adjuvant chemotherapy utilizing such extremely
cytotoxic regimens as 5-FU based therapies, irinotecan or oxaliplatin are
employed. However, due to the non-specific nature of these drugs (which attack
both healthy and cancerous cells), the side effects profile includes severe
diarrhea, neuropathy, nausea, neutropenia and fatigue. The median survival of
these patients has improved from approximately 12 months in the mid-1990s to
more than 20 months in 2003. The industry continues to research treatment
methods that can improve upon both the length of survival and reduce the
toxicity profiles.




Clinical
Development




We have
accumulated in vitro
and in vivo data
indicating that several of the L-nucleoside conjugates are effective against
various types of cancer. One of our L-nucleoside conjugate candidates, OVI-117,
is a conjugate of an L-nucleoside  (L-uridine) and the highly toxic
compound 5’-fluorodeoxyuridine monophosphate (FdUMP), a thymidylate synthase
(TS) inhibitor. To date, OVI-117 has undergone two proof-of-concept studies in
animals, as both a single agent and as a multi-agent combination therapy with
oxaliplatin. OVI-117 has completed the GLP animal drug safety studies that are
necessary prior to submission of an IND. We have begun to compile the IND for
submission to the FDA, which is a key step to conducting human clinical trials.
Subject to availability of sufficient working capital, we plan to submit the
completed IND for review during the second quarter of 2009.





Tubulin
Isotype-Specific Anti-mitotics




We are
currently evaluating several candidates as part of our research and development
in this area. We expect to identify a lead compound in a family of novel
chemotherapeutic compounds capable of distinguishing among the different forms
(isotypes) of tubulin, a subunit protein of microtubules which play a critical
role in the lives of cells. When a cell divides, microtubules constitute the
mitotic spindle, and when a cell is not dividing, microtubules form a
sub-cellular network that is responsible for various cellular activities such as
respiration, protein synthesis, waste elimination, etc. Drugs that bind to
tubulin are capable of interfering with microtubule dynamics and thereby
preventing cells from dividing. Some of the most commercially successful
anti-cancer drugs (the taxanes and Vinca alkaloids, for example) are members of
this class of compounds.


15




One of
our goals is to use rational drug design to create better drugs than the present
ones. Using a proprietary database of 500 different tubulin structures, we are
identifying, synthesizing and screening newly created drugs designed to be
highly specific for isotypes that are prevalent in cancers and rare in normal
cells. The database contains proprietary information regarding tubulin
structures in human and other eukaryotic cells (i.e., cells with nuclei and
organelles) that we believe were previously unknown to medical science. This
combination of information regarding chemical structure and oncological activity
opens the door to dramatic changes in drug design, through
supercomputer-assisted screening procedures. We believe that access to this
proprietary in silico
technology will help us to develop new drugs more quickly, thereby improving
time to market and saving millions of dollars in unfocused laboratory screening
and optimization.




Our
proprietary database also has significant value for use in repositioning
existing compounds to develop new cancer treatments. The database was developed
through large-scale computational modeling of cellular components, cancer
processes and treatments. We believe that the resulting drugs should be more
effective against tumors by targeting the microtubule isotypes which are
preferentially expressed in cancers. Additionally, side effects should be
limited as the targeted isotypes occur in very few healthy tissues, thereby
allowing the use of high therapeutic doses with minimized associated
toxicity.




The first
series of compounds in a series of tubulin isotype-specific drugs has been
designed and synthesized. These drugs are designed to not bind the type of
tubulin which is associated with hematopoetic cells, and are thus intended to
reduce myelosuppression. These candidates are currently undergoing in vitro evaluation for
binding affinity. Computer-assisted in silico testing is also
underway. Subject to availability of sufficient working capital, we expect by
the end of 2009 to select a lead candidate which we will take into the lab for
detailed study.




Drug
Development Expertise and Capabilities




The
strength of our senior management team and our clinical advisory board is in the
breadth and depth of their experience in developing chemotherapeutics. We
believe that the quality of our senior management team and clinical advisory
board rivals that of any other oncology-focused pharmaceutical company,
regardless of size.




Drs. Weis
and Levenson each bring over 25 years of extensive experience in the
biotechnology and pharmaceutical industries to us. Dr. Weis, our Chief Executive
Officer and founder of OncoVista-Sub, was a co-founder of ILEX Oncology. Dr.
Levenson, our Chief Technical Officer, has previously held senior positions at
ILEX Oncology, Roche Molecular Systems and Cetus Corporation.




The
clinical advisory board includes industry opinion leaders and oncologists with
practical, relevant regulatory expertise, who can map out the very efficient
registration strategies. Many individuals on the clinical advisory board have
been instrumental in the development of such primary chemotherapeutics as
Taxol®,
Taxotere®,
Oxaliplatin, Hycamtin®,
Paraplatin®,
Campath® and
Tarceva®. As can
be seen from the biographies below, these individuals have experience very
pertinent to our business.




Cancer
drug development presents unique challenges in clinical development and
registration. Obtaining marketing approval for a new drug depends upon the
drug’s successful attainment of significant clinical endpoints such as increased
overall survival and improvement in quality of life. According to the National
Cancer Institute, less than 5% of cancer patients participate in clinical
trials. This causes intense competition for trial participants, particularly in
indications with the largest market potential (breast, lung, colon and prostate
cancer). The failure rate for drugs in clinical development is high. Fewer than
one in twelve of all drugs entering clinical trials eventually gains approval
according to the FDA. Not surprisingly, the attrition rate for anti-cancer drugs
is even higher with roughly only one in twenty eventually getting to market from
the clinic. Thus, successful clinical development and registration of a new drug
depends, in large part, upon judicious selection of the lead compound,
designation of demonstrable clinical end points and the availability of a
sufficient pool of patients with appropriate characteristics. Our clinical
advisory board gives us a critical advantage in these essential areas.
Furthermore, in order to formulate a successful clinical development plan, it is
critical to know which drugs have already been approved and which drugs
currently in clinical development are likely to be approved, since, ultimately,
any newly approved drug will need to prove itself superior to, or at least equal
to, previously-approved or about-to-be-proven therapies. Well constructed
clinical development plans aimed at rapid marketing approval often take
advantage of the FDA’s accelerated approval process which applies solely to
diseases for which there is an unmet medical need. For cancers in which there
are few treatment options and prognosis is poor, a new drug which shows even a
small improvement in clinical endpoints may be approved based on Phase II
clinical trial data. Taking advantage of this development path can save
significant time and money in getting a drug to market. Our team is familiar
with this path and plans to follow it as a part of our registration strategy
when viable.


16




We
believe that we will be able to bring the strength of our management team and
clinical advisory board experience to bear on our product pipeline by
efficiently identifying candidates, performing due diligence, negotiating
in-license agreements and developing innovative clinical development and
registration plans for strong product candidates. Before either acquiring or
in-licensing any candidate, our senior management reviews the opportunity
thoroughly with the clinical advisory board to determine the
likelihood of successful product registration.




Collaborative
Relationships and Partnerships




We
anticipate that we will enter into strategic relationships with respect to the
research and development, testing, manufacture, and commercialization of our
product candidates. There are significant expenses, capital expenditures and
infrastructure involved in these activities. We believe that working together
with strategic partners will expedite product formulation, production and
approval.




We have
relationships with the University of Texas Health Science Center at San Antonio
(UTHSCSA), the Cancer Therapy and Research Center (CTRC), the Dana-Farber Cancer
Institute, MD Anderson Cancer Center and the San Antonio Cancer Institute
(SACI), one of the leading cancer research institutes in the
nation.





Intellectual
Property




As of
February 28, 2009, we held rights to 41 issued US and worldwide patents and more
than 50 patent applications. Our ability to protect and use our intellectual
property in the continued development and commercialization of our technologies
and products and to prevent others from infringing on our intellectual property
is crucial to our success. Our basic patent strategy is to augment our current
portfolio by continually applying for patents on new developments and obtaining
licenses to promising product candidates and related technologies. We also
maintain various trade secrets which we have chosen not to reveal by filing for
patent protection. Our issued patents and patent applications provide protection
for our core technologies. In addition to the foregoing patent activity, several
continuations-in-part and international patents have been filed. Patent
applications related to our proprietary tubulin database and anti-mitotic agents
have been filed.




We also
rely on trade secrets and unpatentable know-how that we seek to protect, in
part, by confidentiality agreements. Our policy is to require our employees,
consultants, contractors, manufacturers, outside scientific collaborators and
sponsored researchers, board of directors, technical review board and other
advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with us. These agreements provide that
all confidential information developed or made known to the individual during
the course of the individual’s relationship with us are to be kept confidential
and not disclosed to third parties except in specific limited circumstances. We
also require signed confidentiality or material transfer agreements from any
company that is to receive our confidential information. In the case of
employees, consultants and contractors, the agreements provide that all
inventions conceived by the individual while rendering services to us shall be
assigned to us as our exclusive property. There can be no assurance, however,
that all persons who we desire to sign such agreements will sign, or if they do,
that these agreements will not be breached, that we would have adequate remedies
for any breach, or that our trade secrets or unpatentable know-how will not
otherwise become known or be independently developed by
competitors.


17


Our
success will also depend in part on our ability to commercialize our technology
without infringing the proprietary rights of others. Although we have conducted
freedom of use patent searches no assurance can be given that patents do not
exist or could not be filed which would have an adverse affect on our ability to
market our technology or maintain our competitive position with respect to our
technology. If our technology components, products, processes or other subject
matter are claimed under other existing United States or foreign patents or are
otherwise protected by third party proprietary rights, we may be subject to
infringement actions. In such event, we may challenge the validity of such
patents or other proprietary rights or we may be required to obtain licenses
from such companies in order to develop, manufacture or market our technology.
There can be no assurances that we would be able to obtain such licenses or that
such licenses, if available, could be obtained on commercially reasonable terms.
Furthermore, the failure to either develop a commercially viable alternative or
obtain such licenses could result in delays in marketing our proposed technology
or the inability to proceed with the development, manufacture or sale of
products requiring such licenses, which could have a material adverse effect on
our business, financial condition and results of operations. If we are required
to defend ourselves against charges of patent infringement or to protect our
proprietary rights against third parties, substantial costs will be incurred
regardless of whether or not we are successful. Such proceedings are typically
protracted with no certainty of success. An adverse outcome could subject us to
significant liabilities to third parties and force us to curtail or cease our
development and commercialization of our technology.




We
aggressively seek U.S. and international patent protection for the chemical
compounds, processes, and other commercially important technologies which we
develop. While we own specific intellectual property, we also in-license related
technologies determined to be of strategic importance to the commercialization
of our products or to have commercial potential of their own. For example, to
continue developing and commercializing our current products, we may license
intellectual property from commercial or academic entities to obtain technology
rights that are required for our research and development or commercialization
activities.




We have
obtained trademark registration in the U.S. for “OncoVista” further aligning
our intellectual property portfolio with product commercialization.




Government
Regulation




The
Drug and Therapeutic Product Development Process




The FDA
requires that pharmaceutical and certain other therapeutic products undergo
significant clinical experimentation and clinical testing prior to their
marketing or introduction to the general public. Clinical testing, known as
clinical trials or
clinical studies, is
either conducted internally by life science, pharmaceutical, or biotechnology
companies or is conducted on behalf of these companies by contract research
organizations.




The
process of conducting clinical studies is highly regulated by the FDA, as well
as by other governmental and professional bodies. Below is a description of the
principal framework in which clinical studies are conducted, as well as a
description of the number of the parties involved in these studies.




Protocols. Before commencing
human clinical studies, the sponsor of a new drug or therapeutic product must
submit an investigational new drug application, or IND, to the FDA. The
application contains what is known in the industry as a protocol. A protocol is the
blueprint for each drug study. The protocol sets forth, among other things, the
following:




·
            who
      must be recruited as qualified
participants;


·
            how
      often to administer the drug or
product;


·
            what
      tests to perform on the participants;
and


·
            what
      dosage of the drug or amount of the product to give to the
      participants.




Institutional Review Board.
An institutional review board is an independent committee of professionals and
lay persons which reviews clinical research studies involving human beings and
is required to adhere to guidelines issued by the FDA. The institutional review
board does not report to the FDA, but its records are audited by the FDA. Its
members are not appointed by the FDA. All clinical studies must be approved by
an institutional review board. The institutional review board’s role is to
protect the rights of the participants in the clinical studies. It approves the
protocols to be used, the advertisements which the company or contract research
organization conducting the study proposes to use to recruit participants, and
the form of consent which the participants will be required to sign prior to
their participation in the clinical studies.


18




Clinical Trials. Human
clinical studies or testing of a potential product are generally done in three
stages known as phase I through phase III testing. The names of the phases are
derived from the regulations of the FDA. Generally, there are multiple studies
conducted in each phase.




Phase I. Phase I studies
involve testing a drug or product on a limited number of participants, typically
24 to 100 people at a time. Phase I studies determine a product’s basic safety
and how the product is absorbed by, and eliminated from, the body. This phase
lasts an average of six months to a year.




Phase II. Phase II trials
involve testing up to 200 participants at a time who may suffer from the
targeted disease or condition. Phase II testing typically lasts an average of
one to two years. In phase II, the drug is tested to determine its safety and
effectiveness for treating a specific illness or condition. Phase II testing
also involves determining acceptable dosage levels of the drug. If phase II
studies show that a new drug has an acceptable range of safety risks and
probable effectiveness, a company will continue to review the substance in phase
III studies.




Phase III. Phase III studies
involve testing large numbers of participants, typically several hundred to
several thousand persons. The purpose is to verify effectiveness and long-term
safety on a large scale. These studies generally last two to three years. Phase
III studies are conducted at multiple locations or sites. Like the other phases,
phase III requires the site to keep detailed records of data collected and
procedures performed.




New Drug Approval.The
results of the clinical trials are submitted to the FDA as part of a new drug
application (“NDA”).Following the
completion of phase III studies, assuming, the sponsor of a potential product in
the United States believes it has sufficient information to support the safety
and effectiveness of a product, it submits an NDA to the FDA requesting that the
product be approved for marketing. The application is a comprehensive,
multi-volume filing that includes the results of all clinical studies,
information about the drug’s composition, and the sponsor’s plans for producing,
packaging and labeling the product. The FDA’s review of an application can take
a few months to many years, with the average review lasting 18 months. Once
approved, drugs and other products may be marketed in the United States, subject
to any conditions imposed by the FDA.




Phase IV. The FDA may require
that the sponsor conduct additional clinical trials following new drug approval.
The purpose of these trials, known as phase IV studies, is to monitor long-term
risks and benefits, study different dosage levels or evaluate safety and
effectiveness. In recent years, the FDA has increased its reliance on these
trials. Phase IV studies usually involve thousands of participants. Phase IV
studies also may be initiated by the company sponsoring the new drug to gain
broader market value for an approved drug. For example, large-scale trials may
also be used to prove effectiveness and safety of new forms of drug delivery for
approved drugs. Examples may be using an inhalation spray versus taking tablets
or a sustained-release form of medication versus capsules taken multiple times
per day.




Biologics License
Application. Once clinical trials are completed and the results tabulated
and analyzed, a Biologics License Application (“BLA”) is submitted to the
FDA. The application presents to FDA reviewers the entire history or the “whole
story” of the drug product including animal studies/human studies,
manufacturing, and labeling/medical claims. Before the FDA applies its
scientific technical expertise to the review of the application, it will decide
if the application gets a “priority review” or a “standard review”. This
classification determines the review timeframe. A priority review is for a drug
that appears to represent an advance over available therapy, whereas, a standard
review is for a drug that appears to have therapeutic qualities similar to those
of an already marketed product. Generally, an advisory committee (the Oncology
Drug Advisory Committee, ODAC) will review the BLA and make a recommendation to
the FDA. This outside advice is sought so that the FDA will have the benefit of
wider expert input. The FDA usually agrees with the advisory committee decisions
but they are not binding.




The FDA
takes action on the BLA after their review is complete. There are three possible
actions to be taken by the review team:




·
            Approved– This indicates
      to a company that it may now market in the
U.S.;


·
            Not
      Approved –This tells a company that the product may not be marketed in the
      U.S. and is accompanied by a detailed explanation as to why;
      and


19





·
            Approvable
      – This indicates that the FDA is prepared to approve the application upon
      the satisfaction of certain conditions. These drug products may not be
      legally marketed until the deficiencies have been satisfied, as well as
      any other requirements that may be imposed by the
  FDA.




The drug
approval process is time-consuming, involves substantial expenditures of
resources, and depends upon a number of factors, including the severity of the
illness in question, the availability of alternative treatments, and the risks
and benefits demonstrated in the clinical trials.




Orphan Drug Act. The Orphan
Drug Act provides incentives to develop and market drugs (“Orphan Drugs”) for rare
disease conditions in the United States. A drug that receives Orphan Drug
designation and is the first product to receive FDA marketing approval for its
product claim is entitled to a seven-year exclusive marketing period in the
United States for that product claim. A drug which is considered by the FDA to
be different than such FDA-approved Orphan Drug is not barred from sale in the
United States during such exclusive marketing period even if it receives
approval for the same claim. We can provide no assurance that the Orphan Drug
Act’s provisions will be the same at the time of the approval, if any, of our
products.




Other
Regulations




Various
Federal and state laws, regulations, and recommendations relating to safe
working conditions, laboratory practices, the experimental use of animals, and
the purchase, storage, movements, import, export, use, and disposal of hazardous
or potentially hazardous substances, including radioactive compounds and
infectious disease agents, used in connection with our research are applicable
to our activities. They include, among others, the United States Atomic Energy
Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health
Act, the National Environmental Policy Act, the Toxic Substances Control Act,
and Resources Conservation and Recovery Act, national restrictions on technology
transfer, import, export, and customs regulations, and other present and
possible future local, state, or federal regulation. The extent of governmental
regulation which might result from future legislation or administrative action
cannot be accurately predicted.





Competition




In
addition to the specified therapies relative to each cancer discussed earlier,
we generally face competition from pharmaceutical and biotechnology companies,
academic institutions, governmental agencies, and private research organizations
in recruiting and retaining highly qualified scientific personnel and
consultants and in the development and acquisition of technologies. The
pharmaceutical and biotechnology industries are very competitive and are
characterized by rapid and continuous technological innovation. We believe there
are a significant number of potential drugs in preclinical studies and clinical
trials to treat cancer that may result in effective, commercially successful
treatments. In addition to most of the large pharmaceutical companies having
small molecule programs, we are aware of large biotechnology companies, such as
Amgen, Inc., Genentech, Inc., Biogen Idec Inc., Eli Lilly & Co., and OSI
Pharmaceuticals, Inc., which are developing small molecule therapeutics as
treatments for cancer. Other, smaller companies in this field include: Avalon,
Kosan, Allos, EntreMed, Threshold Pharmaceuticals, Vion Pharmaceuticals, Cougar
Biotechnology and Sunesis. In the area of genomic-based diagnostic testing, we
are aware of several other companies that are offering or developing such tests
including Abbott Diagnostic Laboratories, Aureon Laboratories, Celera
Diagnostics, LLC, Correlogic Systems, Genomic Health, Monogram Biosciences,
Myriad Genetics, Roche Diagnostics and Veridex LLC.




We
recognize that most of our competitors have a broader range of capabilities and
greater access to financial, technical, scientific, business development,
recruiting and other resources. Additionally, third party-controlled technology,
which may be advantageous to our business, could be acquired or licensed by our
competitors, thereby preventing us from obtaining technology on commercially
reasonable terms, if at all. Because part of our strategy is to target markets
outside of the United States through collaborations with third parties, we will
compete for the services of third parties that may have already developed or
acquired internal biotechnology capabilities or made commercial arrangements
with other biopharmaceutical companies to target the diseases on which we have
focused.


20





Employees




We have
been successful in retaining the experienced personnel involved in our research
and development program. In addition, we believe we have successfully recruited
clinical/regulatory, quality assurance and other personnel needed to advance our
drug candidates through clinical studies or have engaged the services of experts
in the field for these requirements. As of February 28, 2009, we, together
with our consolidated subsidiaries, employed eighteen (18) individuals and
engaged the services of several consultants. Of our employees, five (5) are
executives,  ten (10) are engaged in research and development, and three
(3) are general and administrative.




Clinical
Advisory Board




We
maintain a clinical advisory board consisting of internationally recognized
physicians and scientists who advise us on scientific and technical aspects of
our business. The clinical advisory board meets periodically to review specific
projects and to assess the value of new technologies and developments to us. In
addition, individual members of the scientific advisory board meet with us
periodically to provide advice in particular areas of expertise. The clinical
advisory board consists of the following members:




Eric Rowinsky, M.D. –
Chairman.Dr.
Rowinsky is a talented scientific executive with 20-plus years of experience in
drug development in the oncology area. He has authored approximately 300
scientific articles and 50 textbook chapters. Dr. Rowinsky has led numerous
clinical trials for oncology drugs and is a recognized leader in the field. His
prior affiliations include the Johns Hopkins University School of Medicine, the
University of Texas Health Science Center at San Antonio and the Institute for
Drug Development in San Antonio. He played a key role in the development of
Taxol®, Hycamtin®, Tarceva®, Erbitux® and many other anticancer drugs. Dr.
Rowinsky is currently Executive Vice President and Chief Medical Officer at
ImClone Systems, Inc., a wholly owned subsidiary of Eli Lilly & Co and an
adjunct Professor of Medicine at New York University.




Esteban Cvitkovic, M.D.Dr.
Cvitkovic is a board-certified, medical oncologist who practices medicine in
Paris, France. Dr. Cvitkovic has more than thirty years of international
experience in oncology therapeutics including hands-on clinical research,
clinical pharmacology, early single agent and combination regimens development,
disease-oriented therapeutic impact assessment, evaluating new agents in
pre-clinical development, and optimizing efficacy and combination development.
Dr. Cvitkovic is author of more than 200 peer-reviewed articles
and 600 abstracts focusing on solid tumor oncology. He led the clinical
development of cisplatin and its combinations as well as oxaliplatin, vindesine,
bleomycin, navelbine, and ET-743. He played key consulting roles in registration
strategy and post-registration development of recent products such as
amifostine, docetaxel, CPT-11 and irofulven. Dr. Cvitkovic’s career includes
staff and academic appointments at Memorial Sloan-Kettering Cancer Center,
Columbia Presbyterian Medical Center, Institut Gustave Roussy (Villejuif,
France), Hôpital Paul Brousse (Villejuif, France), Hospital Beaujon
(Clichy) and Hôpital St. Louis (Paris).




Allan M. Green, M.D.,Ph.D.,
J.D. Dr. Green is a senior advisor to industry in matters of drug development
and FDA Regulation. He has authored over 50 articles and abstracts and holds 6
patents. Dr. Green is Adjunct Professor of Law at the Boston College Law School,
has 20-plus years of oncology experience, holds a PhD in Biochemistry and
Metabolism from MIT, was formerly Medical Director of New England Nuclear/Dupont
Medical Products and, subsequently, was founding CEO of Theseus Medical Imaging,
Inc.  He is Board Certified in Internal Medicine and Nuclear Medicine,
and is an attorney in practice in Cambridge, MA.




Randall K. Johnson, Ph.D.Dr.
Johnson’s experience includes work on novel antimetabolites, DNA damaging
agents,  mitotic spindle poisons  and targeted therapeutics. He has
authored over 200 scientific papers and holds 14 patents. His  30-plus
years of research experience has been focused on  discovery and
development of cancer therapeutics. His work has encompassed both antineoplastic
targets and research to discover small molecule mimetics of hematopoietic growth
factors. He has held senior positions in industry (GlaxoSmithKline) as well as
the U.S. National Cancer Institute.  He has been an independent consultant
for the past 7 years, during which time he has advised more than 100 clients in
the venture capital, biotech and pharmaceutical industries.




Ronald P. McCaffrey, M.D. Dr.
McCaffrey is a Lecturer in Medicine at the Harvard Medical School and a Clinical
Associate in Medicine, Hematology-Oncology Division at The Brigham & Women's
Hospital and Dana-Farber cancer Institute. Dr. McCaffrey has over 90
publications and has co-edited two books. In all, Dr. McCaffrey has 35-plus
years of experience in his specialty.


21




Pedro Santabárbara, M.D., Ph.D.Dr. Santabárbara is currently Vice President of Strategic Development and
Medical Affairs at PHARMA MAR S.A. He received his M.D. and Ph.D. degrees from
the University of Barcelona. He has authored over 80 articles and abstracts in
the field of oncology and has participated in a variety of hospital and academic
activities as well. He has worked for Bristol Myers Squibb (Taxol® team),
Rhône–Poulenc Rorer (Taxotere® team), ILEX Oncology (Campath® team), Gilead
Pharmaceuticals and, most recently, OSI Pharmaceuticals (Tarceva® team). He is
one of the most experienced developers of anticancer drugs.





Corporate
Information





OncoVista
Innovative Therapies, Inc. (formerly Aviation Upgrade Technologies, Inc.) was
incorporated in Nevada on January  8, 1999. Our principal executive offices
are located at 14785 Omicron Drive, Suite 104, San Antonio, Texas 78245 and our
telephone number is (210) 677-6000.





ITEM
1A – RISK FACTORS





An investment in our common stock
involves a high degree of risk.  You should consider carefully the
following information about these risks, together with the other information
contained in this Annual Report on Form 10-K before buying shares of our common
stock.  Our business, prospects, financial condition, and results of
operations may be materially and adversely affected as a result of any of the
following risks.  The trading of our common stock could decline as a
result of any of these risks.  You could lose all or part of your
investment in our common stock. Some of the statements in “Risk Factors” are
forward looking statements.  See “Special Note Regarding Forward
Looking Statements”.





Risks
Related to our Business





Our
accountants have raised substantial doubt with respect to our ability to
continue as a going concern.




We have a net loss of approximately
$7.5 million and net cash used in operations of approximately $3.9 million for
the year ended December 31, 2008, a working capital deficit of approximately
$4.7 million, an accumulated deficit of approximately $23.6 million and a total
stockholders’ deficit of approximately $8.3 million at December 31, 2008. The
audit report of GHP Horwath P.C. for the fiscal year ended December 31, 2008
contained a paragraph that emphasizes the substantial doubt as to our
continuance as a going concern. This is a significant risk to our shareholders
because there is an increased risk that we may not be able to generate and/or
raise enough resources to remain operational for an indefinite period of time.
See “Risk Factors -- We will
need additional capital in order to satisfy our business objectives” and
“Report of Independent
Registered Public Accounting Firm”.





We
will need additional capital in order to satisfy our business
objectives.





To date,
we have financed our operations principally through offerings of securities
exempt from the registration requirements of the Securities Act. We have also
loaned or advanced to AdnaGen approximately €600,000 ($850,000) during the
previous twelve months to support their operations. We believe the ability to
execute our strategy depends to a large extent on the continued viability of
AdnaGen. As such, we will likely continue to provide advances to AdnaGen until
they attain revenue levels adequate to support their continued operations and,
based on current projections, we expect that they will require at least €300,000
to €500,000 ($400,000 to $675,000) over the course of the next three to six
months.  We estimate that our cash reserves will be sufficient to
permit us to continue at our anticipated level of operations for at least two to
three months. Accordingly, we will need to raise additional capital to support
our current operations and fund in-licensing and research and development
programs and will further require substantial additional financing at various
intervals in the future. We can provide no assurance that additional funding
will be available on a timely basis, terms acceptable to us, or at all. In the
event that we are unable to obtain such financing, we will not be able to fully
develop and commercialize our technology or acquire or license promising product
candidates or technologies. As a result of the unavailability of sufficient
capital resources and AdnaGen’s cash needs, we were forced to scale back our
research and development operations during the previous twelve
months.


22





Our
future capital requirements will depend upon many factors,
including:


·
              capital
      needs of AdnaGen;


·
            continued
      scientific progress in our research and development
    programs;





·
            costs
      and timing of conducting clinical trials and seeking regulatory approvals
      and patent prosecutions;





·
            competing
      technological and market
developments;





·
            our
      ability to establish additional collaborative relationships;
      and





·
            effects
      of commercialization activities and facility expansions if and as
      required.





If we are
unsuccessful raising additional funding, our business may not continue as a
going concern and if sufficient capital is not available, we may be required to
further delay, scale back or eliminate one or more of our research and
development or acquisition and in-licensing programs or to enter into license or
other arrangements with third parties to commercialize products or technologies
that we would otherwise seek to develop and commercialize ourselves. In such
event, our business, prospects, financial condition, and results of
operations will be adversely affected. Even if we do find additional
funding sources, we may be required to issue securities with greater rights than
those currently possessed by holders of our common stock. We may also be
required to take other actions that may lessen the value of our common stock or
dilute our common stockholders, including borrowing money on terms that are not
favorable to us or issuing additional equity securities. If we experience
difficulties raising money in the future, our business, prospects, financial
condition and results of operation will be materially adversely
affected.




We
have substantial debt, a portion of which is payable upon demand.





At
December 31, 2008, we had total notes and loans payable of $5,648,080. Of our
notes and loans payable, the amount of $100,000, is convertible into shares of
our common stock and is payable on demand. We have an aggregate of $1,418,683 in
accrued interest outstanding at December 31, 2008, which includes $1,080,355
currently due and $338,328 due long-term. Additionally, in January 2009, we
completed an initial closing of a bridge round of debt financing, whereby we
issued secured promissory notes (the “Bridge Notes”) in the
aggregate principal amount of $750,000. In the event that we should not have
resources sufficient to satisfy these obligations in a timely manner, we would
be required to seek alternative means of repayment, which may be on terms that
are not advantageous or commercially reasonable, or we may be required to
curtail or delay some or all of our development efforts, any of which could have
a material adverse effect on our business, prospects, financial condition, and
results of operations.





We
are an early stage company with a history of losses and can provide no assurance
as to our future operating results.





We are an
early stage company with limited revenues from our principal business
activities. We currently have limited product revenues, and may not succeed in
developing or commercializing any products which will generate product or
licensing revenues. Other than AdnaGen’s diagnostic products, we do not expect
to have any products on the market for several years. In addition, development
of our product candidates requires a process of pre-clinical and clinical
testing, during which our products could fail. We may not be able to enter into
agreements with one or more companies experienced in the manufacturing and
marketing of pharmaceutical products and, to the extent that we are unable to do
so, we will not be able to market our product candidates. Eventual profitability
will depend on our success in developing, manufacturing, and marketing our
product candidates. We have experienced net losses and negative cash flows from
operating activities since inception and expect such losses and negative cash
flows to continue in the foreseeable future. As of December 31, 2008 and 2007,
we had a working capital deficiency of approximately $4.7 million and $0.2
million, respectively, and stockholders’ deficit of approximately $8.3 million
and $4.0 million, respectively. See our Consolidated Financial Statements and
the related notes. For the years ended December 31, 2008 and 2007, we incurred
net losses of approximately $7.5 million and $5.6 million, respectively. We may
never achieve profitability.


23





As
we have a limited operating history, investors may not have a sufficient history
on which to base an investment decision.





Although
OncoVista Innovative Therapies, Inc. (formerly Aviation Upgrade Technologies,
Inc.) was incorporated in 1999, our operating subsidiary, OncoVista, Inc. was
incorporated in September 2004 and is still in early stages of development.
Accordingly, we may be deemed to have a limited operating history upon which
investors may evaluate our prospects for success. Investors must consider the
risks and difficulties frequently encountered by early stage companies,
particularly in rapidly evolving markets such as the life science industry. Such
risks include, without limitation, the following:





·
            competition;





·
            need
      for acceptance of products;





·
            ability
      to anticipate and adapt to a competitive market and rapid technological
      developments;





·
            amount
      and timing of operating costs and capital expenditures relating to
      expansion of our business, operations, and infrastructure;
    and





·
            dependence
      upon key personnel.





We cannot
be certain that our strategy will be successful or that we will successfully
address these risks. In the event that we do not successfully address these
risks, our business, prospects, financial condition, and results of operations
could be materially and adversely affected.





Our
growth strategy is based in large part upon licensing and acquisition of
technologies and products and is not yet proven.





Our
strategy involves growth through commercialization of products and technologies
licensed or acquired by third parties, as well as developed internally, and is
largely untested. Accordingly, we are subject to various risks associated with
an acquisition growth strategy, including the risk that we will be unable to
identify suitable acquisition or licensing candidates in the future, that we
will fail to properly transfer acquired or licensed technologies and the related
intelligence and know-how, or that we will fail to integrate properly the
acquired or licensed technologies into our existing operations. Our growth is
also largely dependent on our ability to utilize our internal institutional
knowledge to further develop the acquired or licensed products or technologies.
Any failure by us to properly execute upon our strategy or to utilize such
knowledge could have a material adverse effect on our business, prospects,
financial condition, and results of operations. Specifically we acquired
non-operational intellectual property.




Our
success depends on the successful commercialization of our product candidates
and technologies.





The
successful commercialization of our product candidates and our technologies is
crucial for our success. Our proposed products and their potential applications
are in an early stage of clinical development and face a variety of risks and
uncertainties. Principally, these risks include the following:





·
            future
      clinical trial results may show that one or more of our product candidates
      are not well tolerated by recipients at their respective effective doses
      or is not efficacious as compared to a placebo or the accepted standard of
      care;


24





·
            future
      clinical trial results may be inconsistent with our preliminary testing
      results and data from our earlier studies may be inconsistent with
      clinical data;





·
            even
      if our product candidates are shown to be safe and effective for their
      intended purposes, we may face significant or unforeseen difficulties in
      obtaining or manufacturing sufficient quantities at reasonable
      prices;





·
            our
      ability to complete the development and commercialization of our products
      for their intended uses is significantly dependent upon our ability to
      obtain and maintain experienced and committed partners to assist us with
      obtaining clinical and regulatory approvals for, and the manufacturing,
      marketing and distribution of, our products on a worldwide
      basis;





·
            even
      if our products are successfully developed, commercially produced and
      receive all necessary regulatory approvals, there is no guarantee that
      there will be market acceptance of the products;
  and





·
            our
      competitors may develop therapeutics, treatments, and technologies which
      are superior or less costly than our own with the result that our
      products, even if they are successfully developed, manufactured and
      approved, may not generate significant
revenues.





If we are unsuccessful in dealing
with any of these risks, or if we are unable to successfully commercialize our
products for some other reason, this would likely seriously harm our
business.





We can
provide no assurance of the successful and timely development of our products.
Our product candidates are at various stages of research and development.
Further development and extensive testing will be required to determine their
technical feasibility and commercial viability. Our success will depend on our
ability to achieve scientific and technological advances and to translate such
advances into reliable, commercially competitive products on a timely basis.
Products and technologies that we have developed or acquired and may in the
future develop or acquire are not likely to be commercially available for some
time. The proposed development schedules for our products may be affected by a
variety of factors, including technological difficulties, proprietary technology
of others, and changes in governmental regulation, many of which will not be
within our control. Any delay in the development, introduction, or marketing of
our products could result either in such products being marketed at a time when
their cost and performance characteristics would not be competitive in the
marketplace or in the shortening of their commercial lives. In light of the
long-term nature of our projects, the nature of the technology involved, and the
other factors, described elsewhere in “Risk Factors”, there can be
no assurance that we will be able to successfully complete the development or
marketing of any new products.





In
the future, we may rely upon collaborative agreements with large pharmaceutical
companies.





In the
future, we may rely heavily on collaborative agreements with large
pharmaceutical companies, governments, or other parties for our revenues. Our
inability to obtain any one or more of these agreements, on commercially
reasonable terms, or at all, or to circumvent the need for any such agreement,
could cause significant delays and cost increases and materially affect our
ability to develop and commercialize our product candidates. Some of our
programs may require the use of multiple proprietary technologies, including
technologies created by third parties, especially patented drugs or other
substances. Obtaining licenses for these technologies or substances may require
us to make cumulative royalty payments or other payments to several third
parties, potentially reducing amounts paid to us or making the cost of our
products commercially prohibitive. Manufacturing of drug products may also
require licensing technologies and intellectual property from third
parties.




25




We
rely upon patents to protect our technology. We may be unable to protect our
intellectual property rights and we may be liable for infringing the
intellectual property rights of others.


Our
ability to compete effectively will depend on our ability to maintain the
proprietary nature of our intellectual property. We currently hold rights to
twelve issued patents and approximately two dozen pending patent applications in
the United States and corresponding patents and patent applications filed in
certain other countries covering proprietary compositions of matter and methods
and their proposed use in cancer therapeutics. Further, we intend to rely on a
combination of trade secrets and non-disclosure, and other contractual
agreements and technical measures to protect our rights in our technology. We
intend to depend upon confidentiality agreements with our officers, directors,
employees, consultants, and subcontractors, as well as collaborative partners,
to maintain the proprietary nature of our technology. These measures may not
afford us sufficient or complete protection, and others may independently
develop technology similar to ours, otherwise avoid our confidentiality
agreements, or produce patents that would materially and adversely affect our
business, prospects, financial condition, and results of operations. We believe
that our technology is not subject to any infringement actions based upon the
patents of any third parties; however, our technology may in the future be found
to infringe upon the rights of others. Others may assert infringement claims
against us, and if we should be found to infringe upon their patents, or
otherwise impermissibly utilize their intellectual property, our ability to
continue to use our technology or the licensed technology could be materially
restricted or prohibited. If this event occurs, we may be required to obtain
licenses from the holders of this intellectual property, enter into royalty
agreements, or redesign our products so as not to utilize this intellectual
property, each of which may prove to be uneconomical or otherwise impossible.
Licenses or royalty agreements required in order for us to use this technology
may not be available on terms acceptable to us, or at all. These claims could
result in litigation, which could materially adversely affect our business,
prospects, financial condition, and results of operations.





The
patent position of biopharmaceutical and biotechnology firms is generally
uncertain and involves complex legal and factual questions. We do not know
whether any of our current or future patent applications will result in the
issuance of any patents. Even issued patents may be challenged, invalidated or
circumvented. Patents may not provide a competitive advantage or afford
protection against competitors with similar technology. Competitors or potential
competitors may have filed applications for, or may have received patents and
may obtain additional and proprietary rights to compounds or processes used by
or competitive with ours. In addition, laws of certain foreign countries do not
protect intellectual property rights to the same extent as do the laws of the
United States or Canada.





Patent
litigation is becoming widespread in the biotechnology industry and we cannot
predict how this will affect our efforts to form strategic alliances, conduct
clinical testing or manufacture and market any products under development. If
challenged, our patents may not be held to be valid. We could also become
involved in interference proceedings in connection with one or more of our
patents or patent applications to determine priority of invention. If we were to
become involved in any litigation, interference or other administrative
proceedings, we will likely incur substantial expenses and the efforts of our
technical and management personnel will be significantly diverted. In addition,
an adverse determination could subject us to significant liabilities or require
us to seek licenses that may not be available on favorable terms, if at all. We
may be restricted or prevented from manufacturing and selling our products in
the event of an adverse determination in a judicial or administrative proceeding
or if we fail to obtain necessary licenses. If any such litigation should
involve products or technologies licensed or acquired by us from third parties,
we would rely upon the indemnification provisions set forth in such agreements.
Any failure by the relevant licensor or seller to honor such provisions could
require us to protect our rights through further litigation, which could be
expensive and time-consuming.




Our
commercial success will also depend significantly on our ability to operate
without infringing the patents and other proprietary rights of third parties.
Patent applications are, in many cases, maintained in secrecy until patents are
issued. The publication of discoveries in the scientific or patent literature
frequently occurs substantially later than the date on which the underlying
discoveries were made and patent applications are filed. In the event of
infringement or violation of another party’s patent, we may be prevented from
pursuing product development or commercialization. See “Business – Intellectual
Property”.




26




We
can provide no assurance that our products will obtain regulatory approval or
that the results of clinical studies will be favorable.


The
testing, marketing and manufacturing of our products will require the approval
of the FDA. We cannot predict with any certainty the amount of time necessary to
obtain such FDA approvals and whether any such approvals will ultimately be
granted. In any event, review and approval by the FDA is anticipated to take a
number of years. Preclinical and clinical trials may reveal that one or more of
our products are ineffective or unsafe, in which event further development of
such products could be seriously delayed or terminated. Moreover, obtaining
approval for certain products may require the testing on human subjects of
substances whose effects on humans are not fully understood or documented.
Delays in obtaining FDA or any other necessary regulatory approvals of any
proposed product and failure to receive such approvals would have an adverse
effect on the product’s potential commercial success and on our business,
prospects, financial condition, and results of operations. In addition, it is
possible that a product may be found to be ineffective or unsafe due to
conditions or facts which arise after development has been completed and
regulatory approvals have been obtained. In this event we may be required to
withdraw such product from the market. To the extent that our success will
depend on any regulatory approvals from governmental authorities outside of the
United States which perform roles similar to that of the FDA, uncertainties
similar to those stated above will also exist. See “Business – Governmental
Regulation”.





If
our products are commercialized, we may be subject to product liability
claims.





The
testing, marketing, and sale of pharmaceutical products entail inherent risks.
If we succeed in developing new pharmaceutical products, the sale of such
products may expose us to potential liability resulting from the use of such
products. Such liability might result from claims made directly by consumers or
by pharmaceutical companies or others selling such products. While we may seek
to obtain product liability insurance, there can be no assurance that we will be
able to obtain such insurance or, if obtained, that such insurance can be
acquired in amounts sufficient to protect us against such potential liability or
at a reasonable cost. Other than for one of our products in development, we do
not presently maintain product liability insurance.





As
we have no sales, marketing, and distribution capabilities other than our
AdnaGen operations, we will be required to either develop such capabilities or
to outsource these activities to third parties.





We
currently have no sales, marketing or distribution capabilities other than our
AdnaGen operations. In order to succeed, we ultimately will be required to
either develop such capabilities or to outsource these activities to third
parties. We can provide no assurance that third parties will be interested in
acting as our outsourced sales, marketing, and distribution arms on a timely
basis, on commercially reasonable terms, or at all. If we are unable to
establish sales, marketing, or distribution capabilities either by developing
our own organization or by entering into agreements with others, we may be
unable to successfully sell any products that we are able to begin to
commercialize, which would have a material adverse effect upon our business,
prospects, financial condition, and results of operations. Further, in the event
that we are required to outsource these functions on disadvantageous terms, we
may be required to pay a relatively large portion of our net revenue to these
organizations, which would have a material adverse effect upon our business,
prospects, financial condition, and results of operations.





We
have no experience manufacturing our products.





We
currently lack the resources to manufacture any of our product candidates on a
large scale. Our ability to conduct clinical trials and commercialize our
product candidates will depend, in part, on our ability to manufacture our
products, either directly or, as currently intended, through contract
manufacturers, at a competitive cost and in accordance with current Good
Manufacturing Practices (“cGMP”) and other regulatory
requirements. We anticipate that we will be required to depend on contract
manufacturers or collaborative partners for the manufacturing of our product
candidates for preclinical studies and clinical trials and intend to use
contract manufacturers to produce any products we may eventually commercialize.
If we are not able to obtain contract manufacturing on commercially reasonable
terms, we may not be able to conduct or complete clinical trials or
commercialize our product candidates. We have identified multiple suppliers for
most if not all of the components of our drug product candidates, although we
can provide no assurance that these components will be available when needed on
commercially reasonable terms.





In order
to succeed, we ultimately will be required to either develop such manufacturing
capabilities or to outsource manufacturing on a long-term basis to third
parties. We can provide no assurance that third parties will be interested in
manufacturing our products on a timely basis, on commercially reasonable terms,
or at all. If we are unable to establish manufacturing capabilities either by
developing our own organization or by entering into agreements with others, we
may be unable to commercialize our products, which would have a material adverse
effect upon our business, prospects, financial condition, and results of
operations. Further, in the event that we are required to outsource these
functions on disadvantageous terms, we may be required to pay a relatively large
portion of our net revenue to these organizations, which would have a material
adverse effect upon our business, prospects, financial condition, and results of
operations.


27





We
have limited experience in conducting clinical trials.





Clinical
trials must meet FDA and foreign regulatory requirements. We have limited
experience in designing, conducting and managing the preclinical studies and
clinical trials necessary to obtain regulatory approval for our product
candidates in any country. We may encounter problems in clinical trials that may
cause us or the FDA or foreign regulatory agencies to delay, suspend or
terminate our clinical trials at any phase. These problems could include the
possibility that we may not be able to conduct clinical trials at our preferred
sites, enroll a sufficient number of patients for our clinical trials at one or
more sites or begin or successfully complete clinical trials in a timely
fashion, if at all. Furthermore, we, the FDA or foreign regulatory agencies may
suspend clinical trials at any time if we or they believe the subjects
participating in the trials are being exposed to unacceptable health risks or if
we or they find deficiencies in the clinical trial process or conduct of the
investigation. If clinical trials of any of the product candidates fail, we will
not be able to market the product candidate which is the subject of the failed
clinical trials. The FDA and foreign regulatory agencies could also require
additional clinical trials, which would result in increased costs and
significant development delays. Our failure to adequately demonstrate the safety
and effectiveness of a pharmaceutical product candidate under development could
delay or prevent regulatory approval of the product candidate and could have a
material adverse effect on our business, prospects, financial condition, and
results of operations.




We
are dependent upon third party suppliers of our raw materials.





We are
dependent on outside vendors for our supplies of raw materials. While we believe
that there are numerous sources of supply available, if the third party
suppliers were to cease production or otherwise fail to supply us with quality
raw materials in sufficient quantities on a timely basis and we were unable to
contract on acceptable terms for these services with alternative suppliers, our
ability to produce our products and to conduct testing and clinical trials would
be materially adversely affected.





We
have limited senior management resources; we may be unable to effectively manage
growth with our limited resources.





We expect
the expansion of our business to place a significant strain on our limited
managerial, operational, and financial resources. We will be required to expand
our operational and financial systems significantly and to expand, train, and
manage our work force in order to manage the expansion of our operations. Our
failure to fully integrate our new employees into our operations could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. Our ability to attract and retain highly skilled
personnel is critical to our operations and expansion. We face competition for
these types of personnel from other technology companies and more established
organizations, many of which have significantly larger operations and greater
financial, technical, human, and other resources than we have. We may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. If we are not successful in attracting and
retaining these personnel, our business, prospects, financial condition, and
results of operations will be materially adversely affected. See “Business – Our Strategy”
and “Business –
Employees”.





We depend upon our senior management
and skilled personnel and their loss or unavailability could put us at a
competitive disadvantage.





We
currently depend upon the efforts and abilities of our senior executives, as
well as the services of several key consultants and other key personnel. The
loss or unavailability of the services of any of these individuals for any
significant period of time could have a material adverse effect on our business,
prospects, financial condition, and results of operations. In addition,
recruiting and retaining qualified scientific personnel to perform future
research and development work will be critical to our success. There is
currently a shortage of employees with expertise in our areas of research and
clinical and regulatory affairs, and this shortage is likely to continue.
Competition for skilled personnel is intense and turnover rates are high. Our
ability to attract and retain qualified personnel may be limited. Our inability
to attract and retain qualified skilled personnel would have a material adverse
effect on our business, prospects, financial condition, and results of
operations.


28





Because we will not pay cash
dividends, investors may have to sell shares in order to realize their
investment.





We have
not paid any cash dividends on our common stock and do not intend to pay cash
dividends in the foreseeable future. We intend to retain future earnings, if
any, for reinvestment in the development and expansion of our business. Any
credit agreements which we may enter into with institutional lenders or
otherwise may restrict our ability to pay dividends. Whether we pay cash
dividends in the future will be at the discretion of our Board of Directors and
will be dependent upon our financial condition, results of operations, capital
requirements, and any other factors that the Board of Directors decides is
relevant.





Risks
Related to Our Industry





The
biotechnology and biopharmaceutical industries are characterized by rapid
technological developments and a high degree of competition. We may be unable to
compete with more substantial enterprises.





The
biotechnology and biopharmaceutical industries are characterized by rapid
technological developments and a high degree of competition. As a result, our
actual or proposed products could become obsolete before we recover any portion
of our related research and development and commercialization expenses. Our
industries are highly competitive, and this competition comes from both
biotechnology firms and major pharmaceutical and chemical companies. Many of
these companies have substantially greater financial, marketing, and human
resources than we do (including, in some cases, substantially greater experience
in clinical testing, manufacturing, and marketing of pharmaceutical products).
We also experience competition in the development of our products from
universities and other research institutions and compete with others in
acquiring technology from such universities and institutions. In addition,
certain of our products may be subject to competition from products developed
using other technologies. See “Business –
Competition”.





The
government regulatory approval process is time consuming and
expensive.





To date,
we have not submitted a marketing application for any product candidate to the
FDA or any foreign regulatory agency, and none of our product candidates has
been approved for commercialization in any country other than AdnaGen’s
diagnostic products. Prior to commercialization, each product candidate will be
subject to an extensive and lengthy governmental regulatory approval process in
the United States and in other countries. We may not be able to obtain
regulatory approval for any product candidate we develop or, even if approval is
obtained, the labeling for such products may place restrictions on their use
that could materially impact the marketability and profitability of the product
subject to such restrictions. We have limited experience in designing,
conducting and managing the clinical testing necessary to obtain such regulatory
approval. Satisfaction of these regulatory requirements, which includes
satisfying the FDA and foreign regulatory authorities that the product is both
safe and effective for our intended therapeutic uses, typically takes several
years depending upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources.





Any manufacturer to produce our
products will be required to comply with extensive government regulation.





Before we
can begin to commercially manufacture any of our product candidates, we must
either secure manufacturing in an approved manufacturing facility or obtain
regulatory approval of our own manufacturing facility and processes. In
addition, the manufacturing of our product candidates must comply with cGMP
and/or other requirements of the FDA and requirements by regulatory agencies in
other countries. These requirements govern, among other things, quality control
and documentation procedures. We or any third-party manufacturer of our product
candidates, may not be able to comply with these requirements, which would
prevent us from selling such products. Material changes to the manufacturing
processes of our products after approvals have been granted are also subject to
review and approval by the FDA or other regulatory agencies.




29





The
commercial success of any newly-introduced pharmaceutical product depends in
part upon the ability of patients to obtain adequate reimbursement.





If we
succeed in bringing our product candidates to market, they may not be considered
cost-effective, and coverage and adequate payments may not be available or may
not be sufficient to allow us to sell our products on a competitive basis. In
both the United States and elsewhere, sales of medical products, diagnostics,
and therapeutics are dependent, in part, on the availability of reimbursement
from third party payors, such as health maintenance organizations and other
private insurance plans and governmental programs such as Medicare. Third party
payors are increasingly challenging the prices charged for pharmaceutical
products and services. We anticipate that our business will be affected by the
efforts of government and third party payors to contain or reduce the cost of
health care through various means. In the United States, there have been and
will continue to be a number of federal and state proposals to implement
government controls on pricing. Similar government pricing controls exist in
varying degrees in other countries. In addition, the emphasis on managed care in
the United States has increased and will continue to increase the pressure on
the pricing of pharmaceutical products. We cannot predict whether any
legislative or regulatory proposals will be adopted or the effect these
proposals or managed care efforts may have on our business.





We
will incur increased costs as a result of being a public company, compared to
the historical operations.





As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur in the past due to our more limited operations. In
addition, the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”), as well
as rules implemented by the SEC, require changes in corporate governance
practices of public companies. It may be time consuming, difficult and costly
for us to develop and implement the additional internal controls, processes and
reporting procedures required by the Sarbanes-Oxley Act and exchange compliance
requirements. We may need to hire additional financial reporting, internal
auditing and other finance staff in order to develop and implement appropriate
additional internal controls, processes and reporting procedures. In addition,
we will incur additional costs associated with our public company reporting
requirements which will significantly increase as a result of our becoming an
active operating public company with a larger group of stockholders. We also
expect these rules and regulations to make it more difficult and more expensive
for us to obtain director and officer liability insurance and we may be required
to accept reduced policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. As a result, it may be difficult for us
to attract and retain qualified persons to serve on our board or as executive
officers.





Risks
Related to Our Common Stock





There
is no assurance of an established and sustained public trading market of our
securities.





We are
listed on the OTCBB under the symbol “OVIT” and on the Frankfurt Stock Exchange
under the symbol "4IW." Trading of our shares began for the first time on
the OTCBB on October 26, 2007 and on the Frankfurt Stock Exchange on March 25,
2008, and there can be no assurances that an active market for our common stock
will be established and sustained.





The market price of our common stock
is likely to be highly volatile and subject to wide
fluctuations.





Assuming
we are able to establish and maintain an active trading market for our common
stock, the market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to a number of factors that
are beyond our control, including:





·
            announcements
      of acquisitions or licensing by us or business initiatives by our
      competitors;


·
            quarterly
      variations in our revenues and operating
  expenses;


·
            dilution
      caused by our issuance of additional shares of common stock and other
      forms of equity securities, which we expect to make in connection with
      future capital financings to fund our operations and growth, to attract
      and retain valuable personnel and in connection with future strategic
      partnerships with other companies;


·
            changes
      in expectations as to our business, prospects, financial condition, and
      results of operations;


30





·
            significant
      sales of our common stock;


·
            changes
      in the accounting methods used in or otherwise affecting our
      industry;


·
            changes
      in the valuation of similarly situated companies, both in our industry and
      in other industries;


·
            fluctuations
      in interest rates and the availability of capital in the capital
      markets;


·
            departures
      of key personnel; and


·
            regulatory
      considerations.





In
addition, the stock market in general has recently experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons often unrelated to
their operating performance. These broad market fluctuations may adversely
affect our stock price, regardless of our operating results.





These and
other factors are largely beyond our control, and the impact of these risks,
singly or in the aggregate, may result in material adverse changes to the market
price of our common stock and have a material adverse effect on our business,
prospects, results of operations and financial condition.




Our
common stock is deemed to be a "penny stock," which may make it more difficult
for investors to sell their shares due to suitability requirements.





The SEC
has adopted regulations that generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The market price of our common stock is currently less
than $5.00 per share and therefore is a “penny stock” according to Commission
rules. This designation requires any broker or dealer selling these securities
to disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors hereunder to sell their shares.





Because
OncoVista-Sub, our operating subsidiary, recently became public by means of a
reverse merger, we may not be able to attract the attention of major brokerage
firms.





There may
be risks associated with OncoVista-Sub becoming public through a “reverse
merger”.  Securities analysts of major brokerage firms may not provide
coverage of us because there is no incentive to brokerage firms to recommend the
purchase of our common stock.  No assurance can be given that brokerage
firms will, in the future, want to conduct any secondary offerings on our
behalf.





Future
sales of common stock or the issuance of securities senior to the common stock
or convertible into, or exchangeable or exercisable for, common stock could
materially adversely affect the trading price of the common stock, and our
ability to raise funds in new equity offerings.





Future
sales of substantial amounts of our common stock or other equity-related
securities in the public market or privately, or the perception that such sales
could occur, could adversely affect prevailing trading prices of our common
stock and could impair our ability to raise capital through future offerings of
equity or other equity-related securities. We can make no prediction as to the
effect, if any, that future sales of shares of common stock or equity-related
securities, or the availability of shares of common stock for future sale, will
have on the trading price of our common stock.


31




Future
sales of common stock by our existing stockholders could adversely affect our
stock price.





The
market price of our common stock could decline as a result of sales of a large
number of shares of our common stock in the market after this offering, or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. Assuming the exercise in full of all warrants,
options and convertible notes outstanding, we will have, as of February 28,
2009, an aggregate of 25,440,659 shares of common stock outstanding (after
giving effect to 20,000 shares of common stock which we are obligated to issue
and including 2,000,000 shares of unvested restricted stock). Of these
shares, 18,296,475 shares are freely tradable under Rule 144 of the
Securities Act, unless purchased by “affiliates” as that term is defined under
Rule 144, who may sell such shares subject to the restrictions in Rule 144.
The remaining 2,020,000 shares of common stock will be held by our existing
stockholders and will be deemed to be “restricted securities” under Rule 144.
Restricted securities may only be sold in the public market pursuant to an
effective registration statement under the Securities Act or pursuant to an
exemption from registration under Rule 144, Rule 701 or Rule 904 under the
Securities Act.




Our
issuance of warrants and options to investors, employees and consultants and the
registration rights for the underlying shares of common stock may have a
negative effect on the trading prices of our common stock as well as a dilutive
effect.





We have
issued and may continue to issue warrants and options at or below the current
market price. As of  February 28, 2009, we had 5,861,712 outstanding
warrants and options to investors, employees and consultants. In addition to the
dilutive effect of a large number of shares and a low exercise price for the
warrants and options, there is a potential that a large number of underlying
shares may be sold in the open market at any given time, which could place
downward pressure on the trading of our common stock.




32


ITEM
1B – UNRESOLVED STAFF COMMENTS





We are a smaller reporting company as
defined by Rule 12b-2 of the Exchange Act and are not required to provide the
information required under this item.





ITEM
2 – PROPERTIES





Our fully equipped research facilities
are located in the Texas Research Park in San Antonio, Texas.  We have
a total of 10,000 square feet of office and research space.  The labs
are fully equipped for organic chemistry as well as analytical and biological
activities. Pursuant to a Lease Agreement between Lipitek International and us,
we lease laboratory space for approximately $17,000 per month from Lipitek
International under a five-year Lease Agreement that expires in December
2009.  Lipitek is an affiliate of Alex L. Weis, Ph.D., our Chairman of
the Board of Directors and Chief Executive Officer.





Our
AdnaGen facility in Langenhagen, Germany occupies approximately 7,500 square
feet of laboratory and office space and houses eight (8) full-time
employees.  The German facility is leased on an annual basis expiring
in December 2009 for approximately $12,000 per month.





We believe that our existing facilities
are suitable and adequate to meet our current business requirements and we
believe that alternative or additional facilities would be readily available on
a competitive basis.





ITEM
3 – LEGAL PROCEEDINGS





Except as set forth below, we are not
involved in any legal proceedings nor are we aware of any threatened
litigation.




On
December 17, 2007, an action was filed against OncoVista-Sub, in the Supreme
Court of the State of New York, New York County, entitled Bridge Ventures, Inc.
v. OncoVista, Inc. and Centrecourt Asset Management. The action seeks damages
for the alleged breach of a consulting agreement and seeks an order directing
the issuance of warrants to purchase our common stock. We filed a motion to
dismiss the action, and on April 3, 2008 the motion was denied.  We
have answered the complaint and asserted a counterclaim seeking compensation for
the expenses that we incurred during the time that we worked with Bridge
Ventures, Inc. The case is now in the discovery phase.  Based on the
allegations in the complaint and our understanding of the relevant facts
and circumstances, we believe that the claims made in this lawsuit are without
merit and we intend to vigorously defend against them.





On July
8, 2008, AdnaGen commenced a lawsuit against Innogenetics N.V. (“Innogenetics”) in the
District Court of Hannover alleging that Innogenetics, a distributor of certain
AdnaGen diagnostic kits in Europe, breached the exclusive distribution agreement
that AdnaGen entered into with them. AdnaGen claimed that Innogenetics did not
order the contractual minimum quantities of diagnostic kits required to maintain
exclusivity.  AdnaGen terminated the exclusivity and sought damages of
approximately $550,000 (€369,000).  Following a bench trial, on March
3, 2009, the District Court ruled in favor of Innogenetics ordering AdnaGen to
pay the court costs which have prevously been paid and to pay Innogenetics’
attorneys’ fees amounting to approximately $8,500.





ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No matters were submitted to a vote of
our shareholders during the fourth quarter of the fiscal year
2008.


33


PART
II





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





Market
Information





Effective
as of October 22, 2007, we effected a 1.4739739-for-1 forward split of our
outstanding common stock.  From December 21, 2005 until January 13,
2008, our common stock was quoted on the OTC Bulletin Board under the symbol
“AVUG”.  From January 14, 2008, our common stock is quoted on the OTC
Bulletin Board under the symbol “OVIT”.




Until
October 26, 2007, there was no trading of our common stock. The quarterly high
and low reported sales prices for our common stock as quoted on the OTC Bulletin
Board for the periods indicated are as follows:




Year Ending December 31,
    2009
                      
                      High
                      
                      
                      LowFirst Quarter
                      
                      $
                      1.05
                      
                      
                      $
                      1.05(from
      January 1, 2009 to March 20, 2009)


Year Ended December 31,
2008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    3.50
                    
                    
                    $
                    1.00Second
      Quarter
                    
                    
                    3.48
                    
                    
                    
                    0.70Third
      Quarter
                    
                    
                    2.00
                    
                    
                    
                    0.75Fourth
      Quarter
                    
                    
                    1.70
                    
                    
                    
                    0.20
  Year Ended December 31,
2007
                      
                      High
                      
                      
                      LowFourth
      Quarter
                      
                      $
                      2.75
                      
                      
                      $
                      2.50(from
      October 26, 2007 to December 31, 2007)





The
foregoing quotations were provided by Yahoo!® Finance
and E*trade® and the
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.





The last reported sale price per share
of common stock as quoted on the OTCBB was $1.05 on March 20, 2009. As of such
date, we had 20,316,475 shares of common stock outstanding (after giving effect
to 20,000 shares of common stock which we are obligated to issue and including
2,000,000 shares of unvested restricted stock). Based on information available
from our registrar and transfer agent, we estimate that we had approximately 250
stockholders of record on March 20, 2009.





Dividends





We have
not declared nor paid any cash dividend on our common stock, and we currently
intend to retain future earnings, if any, to finance the expansion of our
business, and do not expect to pay any cash dividends in the foreseeable future.
The decision whether to pay cash dividends on our common stock will be made by
the Board of Directors, in their discretion, and will depend on our financial
condition, operating results, capital requirements and other factors that the
Board of Directors considers significant.





Recent
Sales of Unregistered Securities




Except as
set forth below we made no sales of unregistered securities during the year
ended December 31, 2008 that were not otherwise reported in a Quarterly Report
on Form 10-Q or in a Current Report on Form 8-K.





In
January 2009, we granted stock options to two employees, one of whom is an
executive officer, to purchase an aggregate of 1,000,000 shares of our common
stock at an exercise price of $0.001, vesting in equal monthly installments over
one year from the date of grant.





Repurchases
of Equity Securities by the Issuer and Affiliated Purchasers





None.


34


Use
of Proceeds from Sales of Registered Securities





None.





ITEM
6 – SELECTED FINANCIAL DATA





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.





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





The
following management’s discussion and analysis of financial condition contains
forward-looking statements which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under “Risk
Factors” and elsewhere in this Annual Report on Form 10-K. We assume no
obligation to update forward-looking statements or the risk factors. You should
read the following discussion in conjunction with our financial statements and
related notes filed as an exhibit to the registration statement of which this
Annual Report on Form 10-K forms a part.





Overview





We are a
biopharmaceutical company commercializing diagnostic tests for metastatic
tumors, as well as developing targeted anticancer therapies by utilizing
tumor-associated biomarkers. We have developed diagnostic kits for breast,
colon, ovarian, and prostate cancers, and currently market diagnostic kits in
Europe for the detection of circulating tumor cells (“CTCs”) in patients with
breast, colon and prostate cancer. Subject to availability of sufficient
working capital and Adna-Gen generating positive cash flow to support their
operations within the next twelve months, we believe we are positioned to
leverage our ownership in our diagnostics company, AdnaGen, to realize revenues
from sales of AdnaGen’s CE-marked diagnostic kits in Europe, while utilizing the
diagnostic technology to guide and expedite our anticancer drug development
efforts.





Our
primary therapeutic strategy is based on targeting the patient’s tumor(s) with
treatments that will deliver drugs selectively based upon specific biochemical
characteristics of the cancer cells comprising the tumor. Through a combination
of licensing agreements as well as mergers and acquisitions, we have acquired
the rights to several technologies with the potential to more effectively treat
cancers and significantly improve quality-of-life for patients. We believe that
the use of methods to detect and analyze biomarkers in CTCs to determine
suitability of specific treatments as well as provide an early indication of
treatment success or failure will be key to bringing personalized targeted
medicines to market. We expect our proprietary diagnostic technology to
facilitate selection and stratification of clinical trial patients, as well as
monitor and predict the response of patients to treatment. We believe that the
development of targeted approaches to the administration of anticancer agents
should lead to improved outcomes and/or reduced toxicity.





We expect
to be a major participant in the oncology arena through the successful
development and commercialization of innovative therapies which, as a result of
their lower toxicity and/or greater efficiency, will increase patient survival
rates and enhance patient quality of life. In targeting compounds for
acquisition, we focus on candidates that have been previously tested in human
clinical trials or animal models, as well as technologies that may improve the
delivery or targeting of previously tested, and in some cases marketed,
anticancer agents. Our senior management team and our panel of
internationally-recognized clinical advisors have made significant contributions
to the development of leading drugs currently used in cancer treatment.
Management, in conjunction with our advisors, will evaluate in-licensing
candidates based on several criteria, including development and registration
strategies to be employed, commercialization opportunities and competitive
technologies being developed elsewhere.




35


Our
product pipeline is comprised of advanced (Phase II) and early (Phase I)
clinical-stage compounds, late preclinical drug candidates and early preclinical
leads. We are not committed to any single treatment modality or class of
compound, but believe that successful treatment of cancer requires a tailored
approach based upon individual patient disease characteristics.





As a result of the unavailability of
sufficient capital resources and AdnaGen’s cash needs, we were forced to scale
back our research and development operations during the previous twelve months.
See “Risk Factors — We will
need additional capital in order to satisfy our business objectives” and
“Report of Independent
Registered Public Accounting Firm”.





Development
Program





Our most
advanced drug candidate is OVI-237, a liposomal formulation of a thymidylate
synthase (TS) inhibitor which has been administered in over 150 patients so far
in various Phase I and Phase II trials. The drug was in-licensed in
November 2007 and we finalized the protocol and selected clinical sites to
conduct a Phase II Study of OVI-237 monotherapy and combination therapy with
cisplatin for the treatment of metastatic breast cancer. Subject to the
availability of sufficient working capital, we plan on initiating the trial in
the third quarter of 2009, enrolling our first patients in the fourth quarter of
2009.





Our next
most advanced product candidate is Cordycepin (OVI-123) which is in Phase I/II
clinical trials for refractory leukemia patients who express the enzyme terminal
deoxynucleotidyl transferase (TdT). We have received orphan drug designation
from the FDA for Cordycepin which affords us seven years of market exclusivity
once the drug is approved for marketing. We initiated a Phase I/II trial based
on the "original" ADA-sensitive compound in the second quarter of 2008. The
trial is on-going at two US centers, The Dana Farber Cancer Institute in Boston,
Massachusetts and the Cancer Therapy Research Center at the University of Texas
Health Sciences Center at San Antonio, Texas, and is designed to enroll up to 24
patients in the first stage and up to 20 patients in the second
stage.  As of December 31, 2008, we had enrolled four patients in this
clinical trial.





We
completed the GLP animal drug safety studies for our lead drug candidate from
the L-nucleoside conjugate program (OVI-117). We have begun to compile the IND
for submission to the FDA, which is a key step to conducting human clinical
trials. Subject to availability of sufficient working capital, we plan to submit
the completed IND for review during the second quarter of 2009.





Research
and development expenditures for the above projects totaled approximately $2.5
million and $3.4 million for the years ended 2008 and 2007, respectively. We
expect we will incur additional expenses of between $6 to $8 million to complete
the current phases of development for the projects described above.





We are
also marketing kits in Europe for the detection of CTCs in breast, colon and
prostate cancer patients. The kits are manufactured by AdnaGen AG (which is 95%
owned by us) and marketed through non-exclusive distribution agreements in
Europe. We have also developed research products for the detection of steroid
receptors (ER/PR) and cancer stem cells.  We have developed the
protocol for a pivotal trial in metastatic breast cancer to obtain approval to
market the kit in the U.S.  Research and development expenditures
totaled approximately $927,000 and $855,000 for the years ended 2008 and 2007,
respectively.  We expect we will incur additional expenses of between
$2.0 to $3.0 million to complete the current phases of development for the
projects described above.





Other
Research and Development Plans





In
addition to conducting Phase I and Phase II clinical trials, we plan to conduct
pre-clinical research to accomplish the following:





·
            further
      deepen and broaden our understanding of the mechanism of action (MoA) of
      our products in cancer;


·
            develop
      alternative delivery systems and determine the optimal dosage for
      different patient groups;


36


·
            demonstrate
      proof of concept in animal models of human
  cancers;


·
            develop
      biomarker panels that complement our therapeutic products, based upon
      knowledge of the drugs MoA;


·
            develop
      successor products to our current
products.




We also
plan to pursue our interest in the application of nanotechnologies in cancer
therapy through strategic alliances, partnerships and licensing
agreements.





We have
an on-going program in the discovery-stage that is seeking compounds that bind
selectively to specific types of a protein known as tubulin. Microtubules are
structures within cells that are required for cell replication and division.
Many anti-cancer drugs target and bind to microtubules (including paclitaxel and
Taxotere). Microtubules are formed by polymerization of tubulin proteins. There
are many known variants, or isotypes, of tubulin. These isotypes occur in
different proportions in different cell types. There is a body of evidence which
strongly suggests that drugs that are bound by specific tubulin isotypes are
active against certain drug-resistant tumors. We have licensed technologies from
the University of Texas at San Antonio as well as the University of Alberta that
will enable us to search for such tubulin-isotype specific drugs. We plan to put
in place in our labs a high throughput screening assay to enable us to rapidly
screen libraries of known compounds as well as evaluate new compounds designed
and synthesized in-house. We hope that this program will eventually generate
several promising lead candidates for preclinical development.





Our plan
is to patent any successful inventions resulting from our future research
activities and to exploit any other means that may exist to protect our future
anti-cancer therapies in the commercial markets; although at this early stage
there can be no assurance that there will be any successful inventions resulting
from such research activities.





Other
Strategic Plans





We plan
to continue to grow the market for AdnaGen diagnostic kits in the U.S. and
Europe to provide revenue and cash flow to help support our drug development
efforts. In September 2008, AdnaGen entered into an exclusive distribution
agreement with TATAA Molecular Diagnostics s.r.o. (“TATAA”) for the Czech
Republic and Slovak Republic. The term of this agreement continues through
December 31, 2013, automatically renewable for additional twelve month periods,
and requires TATAA to purchase certain minimum quantities. Additionally, in
January 2009, AdnaGen entered into a non-exclusive distribution agreement with
Sysmex Europe GmbH (“Sysmex”) for certain European
countries.





In
September 2008, AdnaGen entered into an exclusive distribution and license
agreement with Biomarkers LLC (“Biomarkers”) granting
Biomarkers the exclusive right to distribute the AdnaGen diagnostic kits in
North America. The term of this agreement continues through December 31, 2010
and is automatically renewable for additional twelve month periods. Pending FDA
approval, Biomakers is selling the AdnaGen diagnostic kits for research use
only. Biomarkers plans to have the capability to run AdnaGen
assays in a CLIA laboratory based in New York in order to support on-going and
planned clinical trials.





In
January 2009, AdnaGen also entered into an exclusive distribution and license
agreement with Biomarkers granting Biomarkers the exclusive right to distribute
the AdnaGen diagnostic kits in South America and the Middle East. The term of
this agreement continues through December 31, 2010 and is automatically
renewable for additional twelve month periods. Biomarkers plans on seeking the
necessary approvals in these territories to permit it to sell the AdnaGen
diagnostic kits. Our CEO, Chairman of the Board, President and a
significant shareholder, is also a beneficial owner of Biomarkers.





We will
continue to use our proprietary diagnostic technology to progress our
anti-cancer drug portfolio providing better clinical outcomes by identifying and
treating only those patients who express certain
biomarkers.  Additionally, we anticipate establishing partnerships
with other drug companies to expedite their drug development efforts utilizing
our biomarker analysis technology.





In
addition to developing our existing anti-cancer drug portfolio, we plan to
obtain rights to additional drug candidates through licensing, partnerships and
mergers/acquisitions. Our efforts in this area will, of course, be guided by
business considerations (cost of the opportunity, fit with existing portfolio,
etc.) as well as input from our clinical advisory board regarding likelihood of
successful clinical development and marketing approval. Our goal is to create a
well-balanced product portfolio including lead molecules in different stages of
development and addressing different medical needs.




37


Critical
Accounting Policies





We have
identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations are disclosed throughout
this section where such policies affect our reported and expected financial
results. Our preparation of our financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenues and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.





Revenue Recognition. We
recognize revenue in accordance with the SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” that
requires we recognize revenue when each of the following four criteria is met:
1) a contract or sales arrangement exists; 2) products have been shipped or
services have been rendered; 3) the price of the products or services is fixed
or determinable; and 4) collectability is reasonably assured. Our customers have
no right of return for products sold. Revenues are considered earned upon
shipment.





Share-Based Compensation.We
follow Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised
2004), “Share-Based
Payment,” (“SFAS
123R”) which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors
including grants of employee stock options based on estimated fair values. We
have used the Black-Scholes option pricing model to estimate grant date fair
value for all option grants.  The assumptions we use in calculating
the fair value of share-based payment awards represent management’s best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As such, as we use different assumptions
based on a change in factors, our stock-based compensation expense could be
materially different in the future.





Preclinical Study and Clinical Trial
Accruals.Substantially
all of our preclinical studies and clinical trials are being performed by
third-party contract research organizations, or CROs, and other outside vendors.
For preclinical studies, we use the percentage of work completed to date and
contract milestones achieved to determine the accruals recorded.  For
clinical trial accruals, we use the number of patients enrolled, period of
patient enrollment and percentage of work completed to date to estimate the
accruals.  We monitor patient enrollment levels and related activities to
the extent possible through internal reviews, correspondence and status meetings
with CROs and review of contractual terms. Our estimates are dependent on the
timeliness and accuracy of data provided by our CROs and other vendors. If we
have incomplete or inaccurate data, we may under-or overestimate activity levels
associated with various studies or clinical trials at a given point in time. In
this event, we could record adjustments to research and development expenses in
future periods when the actual activity levels become known. No material
adjustments to preclinical study and clinical trial expenses have been
recognized to date.




Income Taxes.Significant
management judgment is required in developing the provision for income taxes,
including the determination of foreign tax liabilities, deferred tax assets and
liabilities and any valuation allowances that might be required against the
deferred tax assets. Our management evaluates our ability to realize our
deferred tax assets on a quarterly basis and adjusts our valuation allowance
when we believe that it is more likely than not that the asset will
not be realized. We follow SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No.
109”).





Under SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.  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.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation allowance is
recognized. In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48
addresses the accounting and disclosure of uncertain tax positions. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken. We adopted FIN 48 on January 1, 2007 as required, and determined that the
adoption of FIN 48 did not have a material impact on our consolidated
financial position and results of operations.




38


Foreign Currency Translation.The financial position and results of operations of our foreign
subsidiary are measured using the local currency (Euros) as the functional
currency. Assets and liabilities of the subsidiary have been translated at
current exchange rates as of December 31, 2008 and 2007, and related revenue and
expenses have been translated at an average exchange rate for the years ended
December 31, 2008 and 2007.  All equity transactions have been
translated at their historical rates when the transaction occurred. The
aggregate effect of translation adjustments is included as a component of
accumulated other comprehensive loss and as a component of stockholders’
deficit. Transaction gains and losses related to operating assets and
liabilities are included in other income (expense).





Results
of Operations





The following table sets forth, for the
period indicated, certain line items from our consolidated statements of
operations, expressed as a percentage of revenue:





Year ended December 31,2008
                  
                  
                  2007Total
      revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Operating
      expenses:Research
      and development
                  
                  
                  672.8
                  
                  
                  
                  228.7General
      and administrative
                  
                  
                  1,018.9
                  
                  
                  
                  151.7Total
      operating expenses
                  
                  
                  1,691.7
                  
                  
                  
                  380.4Loss
      from operations
                  
                  
                  (1,591.7
                  )
                  
                  
                  (280.4
                  )Other
      income (expense):Interest
      income
                  
                  
                  10.9
                  
                  
                  
                  6.0Interest
      expense
                  
                  
                  (48.0
                  )
                  
                  
                  (15.7
                  )Gain
      on debt settlement
                  
                  
                  150.8
                  
                  
                  
                  2.9Other
                  
                  
                  (8.5
                  )
                  
                  
                  2.6Net
      loss
                  
                  
                  (1,486.5
                  )
                  
                  
                  (284.7
                  )





Years
Ended December 31, 2008 and 2007





Revenue. Revenues were
approximately $503,000 for the year ended December 31, 2008, a decrease of $1.5
million or 74% as compared to approximately $2.0 million
in  2007.  Our revenues reflect royalties earned from the
sale of diagnostic kits, licensing and research and development
revenue.  Revenues are summarized in the following table:





2008
                  
                  
                  2007Licensing
                  
                  $
                  52,447
                  
                  
                  $
                  1,501,676Diagnostic
      kits
                  
                  
                  361,707
                  
                  
                  
                  239,364Research
      and development, grant and other revenues
                  
                  
                  89,171
                  
                  
                  
                  226,950Total
      revenues
                  
                  $
                  503,325
                  
                  
                  $
                  1,967,990





The
decline in revenue in the year ended December 31, 2008 is primarily attributable
to a decrease in milestone payments from development agreements and research and
development revenue, partially offset by an increase in sales from diagnostic
kits. Revenue in 2007 included milestone payments received as a result of
agreements with third parties. In 2008, AdnaGen terminated an exclusive
distribution agreement in Europe with Innogenetics to sell certain diagnostic
kits.  Subsequently, we have executed distribution agreements to sell
kits in various European countries and are seeking to enter into further
distribution agreements.




39


Research and
development.  Research and development expenses decreased by
approximately $1.1 million, or 25%, to approximately $3.4 million for the year
ended December 31, 2008, as compared to $4.5 million for the year ended December
31, 2007.  The decrease in 2008 is primarily a result of expense
recorded in 2007 related to the license agreement entered into with OSI
Pharmaceuticals, Inc. (“OSI”) for a Phase II clinical
drug candidate.  This decrease was partially offset by an increase in
2008 in expenses for preclinical and clinical studies including the commencement
of a Phase I/II study for OVI-123 (cordycepin), as well as to an increase in
salaries and related costs with the hiring of additional personnel to support
our expanding clinical development efforts.





Assuming
the availability of adequate working capital, we expect research and
development expenses to continue to increase in 2009 primarily due to increases
in expenditures related to the initiation of our Phase II clinical trial for
OVI-237, ongoing patient enrollment in our Phase I/II for OVI-123 and the
preparation and submission of an IND to the FDA for OVI-117.





General and
administrative.General and administrative expenses increased
by approximately $2.1 million to approximately $5.1 million in the year ended
December 31, 2008, or 72% compared to approximately $3.0 million in the year
ended December 31, 2007.  In 2008, the increase was due to
professional services related to becoming a publicly traded company subsequent
to the completion of the reverse acquisition and
recapitalization.  Additionally, the increase is attributable to stock
compensation expense for restricted stock, options and warrants recognized
during the period.





Assuming
the availability of adequate working capital, we expect general and
administrative expense in 2009 to increase primarily due to an increase in
salaries and benefits due to the addition of headcount in 2009, and stock compensation expense
for any restricted stock, options or warrants granted during the
year.





Other Income (Expense). Other
income (expense) increased 729% to approximately $529,000 in the year ended
December 31, 2008 from approximately $(84,000) in  the year ended
December 31, 2007.  In 2008, the increase was a result of a gain of
approximately $759,000 on a debt settlement recorded during the second quarter
of 2008, partially offset by foreign currency transaction losses.





Net Income (Loss).As a
result of the foregoing, our net loss increased by approximately $1.8 million to
approximately $7.5 million in the year ended December 31, 2008 from a net loss
of approximately $5.6 million in the year ended December 31, 2007.





Liquidity
and Capital Resources





To date,
we have financed our operations principally through proceeds of offerings of
securities exempt from the registration requirements of the Securities Act. In
January 2009, we completed a bridge round of debt financing, whereby we issued
secured promissory notes (the “Bridge Notes”) in the
aggregate principal amount of $750,000, in exchange for cash equal to the face
amount of such Bridge Notes, to accredited investors. We have also loaned or
advanced to AdnaGen approximately €600,000 ($850,000) during the previous twelve
months to support their operations.  We believe the ability to execute
our strategy relies largely on the continued viability of AdnaGen. As such, we
will likely continue to provide advances to AdnaGen until they attain revenue
levels adequate to support their continued operations and, based on current
projections, we expect that they will require at least at least €300,000 to
€500,000 ($400,000 to $675,000) over the course of the next three to six months.
We believe that our available resources and cash flow will be sufficient to meet
our anticipated operating cash needs for at least the next two to three
months.





The
ability of the Company to continue as a going concern is dependent on
management’s ability to further implement its strategic plan, resolve its
liquidity problems, principally by obtaining additional debt and/or equity
financing, and generate additional revenues from collaborative agreements or
sale of pharmaceutical products.  These factors raise significant
doubt about our ability to continue as a going concern.




40


We can
provide no assurance that additional funding will be available on terms
acceptable to us, or at all. Accordingly, we may not be able to secure the
funding which is required to expand research and development programs beyond
their current levels or at levels that may be required in the future. If we
cannot secure adequate financing, we may be required to further delay, scale
back or eliminate one or more of our research and development programs or to
enter into license or other arrangements with third parties to commercialize
products or technologies that we would otherwise seek to develop and
commercialize ourself. Our future capital requirements will depend upon many
factors, including:





·
            capital
      needs of AdnaGen;


·
            continued
      scientific progress in our research and development
    programs;


·
            costs
      and timing of conducting clinical trials and seeking regulatory approvals
      and patent prosecutions;


·
            competing
      technological and market
developments;


·
            our
      ability to establish additional collaborative relationships;
      and


·
            the
      effect of commercialization activities and facility expansions if and as
      required.




Accordingly,
we will be required to issue equity or debt securities or enter into other
financial arrangements, including relationships with corporate and other
partners, in order to raise additional capital. Depending upon market
conditions, we may not be successful in raising sufficient additional capital
for our short or long-term requirements. In such event, our business, prospects,
financial condition, and results of operations would be materially adversely
affected.




Operating
Activities.For the year ended December 31, 2008, net cash
used in operating activities was approximately $3.9 million compared to
approximately $2.9 million for the year ended December 31, 2007. Cash used in
operating activities increased $1.0 million, or 34%, primarily due to an
increase in our net loss of approximately $1.9 million for the year ended
December 31, 2008, to $7.5 million as compared to approximately $5.6 million for
the year ended December 31, 2007.  The increase in cash used in
operations was also attributable to a gain of approximately $759,000 recorded on
the settlement of debt.  These increases were partially offset by
increases for stock-based compensation for both employees and non-employees of
approximately $2.8 million related to option grants, restricted stock grants,
and warrants issued to a consultant.





Investing
Activities.For the year ended December 31, 2008, net cash used in
investing activities was approximately $104,000 as compared to $765,000 for the
year ended December 31, 2007. Cash used in investing activities decreased
$661,000, or 86%, primarily as a result of approximately $600,000 to acquire an
additional interest in AdnaGen in December 2007.  Additionally,
we paid $150,000 related to the acquisition of OncoVista
Innovative Therapies Inc., which was then a shell, in contemplation of
a reverse acquisition and recapitalization during the fourth quarter of
2007.  In 2008, we paid $70,000 to increase our ownership interest to
over 95% in AdnaGen.





Financing
Activities.Cash used in financing activities was
approximately $193,000 for the year ended December 31, 2008 as compared to cash
provided by financing activities of approximately $6.0 million for the year
ended December 31, 2007.  The decrease was primarily due to the net
proceeds of approximately $6.2 million from the 2007 Private Placement completed
in the prior year.  In 2008, we repaid certain notes payable resulting
in a gain on debt extinguishment.





Our
outstanding material contractual obligations under lease and debt agreements as
of December 31, 2008 are as follows:





Payments Due by PeriodWithin
                  One Year
                
                
                Two to
                  Three
                  Years
                
                
                Four to
                  Five Years
                
                
                After Five
                  Years
                
                
                TotalLoans
      and notes payable
                
                $
                2,123,830
                
                
                $
                3,524,250
                
                
                $
                −
                
                
                $
                −
                
                
                $
                5,648,080Operating
      leases and other
                
                
                387,549
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                387,549$
                2,511,379
                
                
                $
                3,524,250
                
                
                $
                −
                
                
                $
                −
                
                
                $
                6,035,629




41


The loans
and notes payable above have a contingent repayment plan.  Under the
plan, principal and accrued interest is payable at the maturity date only if
AdnaGen is profitable and obtains certain positive shareholder’s equity, except
with respect to debt in the principal amount of $704,850, for which only the
principal is subject to a contingent repayment plan. The debt holders have
signed subordination letters related to the principal and interest providing
that if AdnaGen is unable to repay, it would not lead to insolvency. If not
repaid at maturity, the debt will continue to be outstanding until such time
that AdnaGen has sufficient profits, liquidation surplus, or net assets to repay
the outstanding principal, the debt is renegotiated or AdnaGen becomes
insolvent. Further, debt holders in the principal amount of $4,229,100 have the
right to receive a share of AdnaGen profits under certain
circumstances.





In
October 2003, a third party loaned us a total of €515,000 accruing interest at
7.75% and due in June 2008. In February 2008, we placed approximately $200,000
(€128,750) in a separate escrow account in connection with a proposed settlement
for the outstanding loan balance and accrued interest which totaled
approximately $988,000 (€615,500).  In April 2008, the third party
accepted the debt settlement agreement.  We recorded the transaction
in April 2008, which resulted in a gain on settlement of debt in the amount of
$758,801 (€486,760).





During
2005, Biomed Solutions, LLC (“Biomed”) loaned us a total of
$525,563 accruing interest at 8% per annum. In 2006, we repaid $245,000 to
Biomed.  In October 2007, in full settlement of the remaining
principal and interest of $356,428 due under the loan, we paid $300,000 to
Biomed under the settlement terms. As a result, we recognized a gain on debt
settlement of $56,428.  Biomed is controlled by an affiliate company
of one of our current directors, as well as one of our former
directors.





Recent
Accounting Pronouncements





In December 2007, the FASB issued SFAS
No. 141 (R), “Business
Combinations”, which becomes effective for fiscal periods beginning after
December 15, 2008. The standard changes the accounting for business
combinations, including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs, and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS No. 141(R) becomes effective for
us on January 1, 2009. We do not expect the adoption of this statement to have a
material impact on our consolidated financial statements unless in the future,
we enter into a business acquisition.





In December 2007, the FASB issued SFAS
No. 160, “Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51.” The standard changes the accounting for non-controlling (minority)
interests in consolidated financial statements, including the requirements to
classify non-controlling interests as a component of consolidated stockholders’
equity, and the elimination of minority interest accounting in results of
operations with earnings attributable to non-controlling interests reported a
part of consolidated earnings. Purchases and sales of minority interests will be
reported in equity similar to treasury stock transactions. SFAS No. 160 is
effective for us on January 1, 2009. We do not believe the adoption of this
statement will have a material impact on our consolidated financial
statements.





In
December 2007, the FASB ratified Emerging Issues Task Force (“EITF”) No. 07-1, “Accounting for Collaborative
Arrangements”. EITF No. 07-1 defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third
parties. EITF No. 07-1 also establishes the appropriate income statement
presentation and classification for joint operating activities and payments
between participants, as well as the sufficiency of the disclosures related to
these arrangements. EITF No. 07-1 is effective for us on January 1, 2009, and is
to be applied retrospectively as a change in accounting principle for
collaborative arrangements existing at the effective date. We do not
expect EITF No. 07-1 to have a material impact on our consolidated financial
statements.


42


ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As part of our cash and cash
equivalents, we own financial instruments that are sensitive to market risks.
The balances are used to preserve our capital until it is required to fund
operations, including our research and development activities. None of these
market risk-sensitive instruments are held for trading purposes. We do not have
derivative financial instruments in our investment portfolio.





Interest
Rate Risk





We invest
our cash in a variety of financial instruments, primarily money market
instruments. These investments are denominated in United States dollars. All of
our interest-bearing securities are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the conservative nature of
these instruments, we do not believe that changes in interest rates would have a
material effect on our liquidity, financial condition or results of
operations.





Impact
of Inflation





Management
believes that results of operations are not dependent upon moderate changes in
inflation rates as we expect to be able to pass along component price increases
to our customers.





Seasonality





We have
not experienced any material seasonality in operations or business.





ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Our
consolidated financial statements and notes thereto and the related independent
public accounting firm report of OncoVista Innovative Therapies, Inc. and
Subsidiaries are attached to this Annual Report beginning at Page F-1 and are
incorporated herein by reference.





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





Dismissal
of Chang G. Park




Effective
February 28, 2007, we dismissed our independent auditor, Chang G. Park (“Park”), as Park had been
engaged to review our financial statements only for the period ended September
30, 2006. Park had been our independent auditor from November 16, 2006 to
February 28, 2007.





On
February 28, 2007, we engaged Stan J.H. Lee, CPA (“SJHL”) to act as our
independent auditor.




Park
provided no reports as to any fiscal year end, due to the short timeframe of its
engagement, nor did Park give any adverse opinion, or disclaimer of opinion and
had no reportable qualification or modification as to audit scope or accounting
principles except as described herein. As of the date of that dismissal, during
our two most recent fiscal years and the period from the end of the most
recently completed fiscal year through February 28, 2007, the date of Park’s
dismissal, there were no disagreements with Park on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Park
would have caused it to make reference to such disagreements in its
reports.




Our
financial statements for the year ended December 31, 2006, were audited by SJHL.
Park was not involved in any way with the audit of the financial statements for
the year ended December 31, 2006. We authorized SJHL to discuss any matter
relating to us and our operations with Park.




The
change in our auditors was recommended and approved by the board of directors
since we did not then have an audit committee.




During
the two most recent fiscal years and subsequent interim period, we did not
consult with SJHL regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or any matter
that was the subject of a disagreement or a reportable event as defined in the
regulations of the Commission.




43


Dismissal
of Stan J. H. Lee





As a
result of the Merger, on January 11, 2008, we engaged Berman & Company, P.A.
(“Berman”) as our
independent registered public accounting firm for our fiscal year
ended December 31, 2007 to replace SJHL. The change in our auditors was
recommended and approved by our Board of Directors since at the time we did not
have an audit committee.





The audit
report of SJHL on our financial statements for the fiscal year ended December
31, 2006 and other audit reports during our two most recent fiscal years were
qualified with respect to uncertainty as to our ability to continue as a going
concern. Such audit reports did not contain any other adverse opinion or
disclaimer of opinion or qualification. During our two most recent fiscal years
and the period from the end of the most recently completed fiscal year through
January 11, 2008, there were no disagreements with SJHL or any other independent
accountant on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
the satisfaction of SJHL, would have caused such entity to make reference to
such disagreements in its reports.





During
our two most recent fiscal years and the period from the end of the most
recently completed fiscal year through January 11, 2008, Berman did not provide
us with advice regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements, that was an important factor
considered by us in reaching a decision as to an accounting, auditing or
financial reporting issue.





Dismissal
of Berman & Company, P.A.





Effective
April 23, 2008, we dismissed Berman which audited our financial statements for
the fiscal year ended December 31, 2007, and engaged GHP Horwath P.C. (“GHP Horwath”) to act as our
independent registered public accounting firm. The report of Berman for the
fiscal year did not contain an adverse opinion, or disclaimer of opinion and
were not qualified or modified as to audit scope or accounting principles except
as described herein. The report of Berman for the fiscal year was qualified with
respect to uncertainty as to its ability to continue as a going concern. There
were no disagreements with Berman on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Berman would have caused
it to make reference to such disagreements in its reports.




Our
financial statements for the year ended December 31, 2008, were audited by GHP
Horwath. Berman was not involved in any way with the audit of the financial
statements for the year ended December 31, 2008. We authorized GHP Horwath to
discuss any matter relating to us and our operations with Berman. The change in
our auditors was recommended and approved by our audit committee.





During
the two most recent fiscal years and subsequent interim period, we did not
consult with GHP Horwath regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or any matter that
was the subject of a disagreement or a reportable event as defined in the
regulations of the Commission.





ITEM
9A(T) – CONTROLS AND PROCEDURES





Evaluation
of disclosure controls and procedures.





As of December 31, 2008, the end of the
period covered by this report, we conducted, under the supervision and with the
participation of our management, including our Chief Executive Officer
and Chief Financial Officer, an evaluation of the effectiveness of the design
and operation of the our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) in
ensuring that information required to be disclosed by us in our
reports is recorded, processed, summarized and reported within the required time
periods. Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that because of the material weakness in internal control over
financial reporting described below, our disclosure controls and procedures were
not effective as of December 31, 2008.




44


Management’s
Annual Report on Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Exchange Act Rule 13a-15(f). Our internal control system is a
process designed by, or under the supervision of, our principal executive and
principal financial officers, or persons performing similar functions, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles (U.S. GAAP).





Our internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that receipts and expenditures are being made
only in accordance with the authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our consolidated financial statements.





Because of our inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2008. As a
result of its assessment, management identified a material weakness in our
internal control over financial reporting. Based on the weakness described
below, management concluded that our internal control over financial reporting
was not effective as of December 31, 2008.





A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such
that, there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis. As a result of our assessment, management identified
the following material weaknesses in internal control over financial reporting
as of December 31, 2008:





·
            While
      there were internal controls and procedures in place that relate to
      financial reporting and the prevention and detection of material
      misstatements, these controls did not meet the required documentation and
      effectiveness requirements under the Sarbanes-Oxley Act (“SOX”) and therefore,
      management could not certify that these controls were correctly
      implemented. As a result, it was management’s opinion that the lack of
      documentation warranted a material weakness in the financial reporting
      process.





·
            Our disclosure
      controls and procedures were not effective to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Commission’s rules and forms and to
      ensure that information required to be disclosed by us in the reports that
      we file or submit under the Exchange Act is accumulated and communicated
      to our management, including our Chief Financial Officer, as appropriate
      to allow timely decisions. Inadequate controls include the lack of
      procedures used for identifying, determining, and calculating required
      disclosures and other supplementary information
    requirements.





·
            The
      lack of segregation of duties in financial reporting, as our financial
      reporting and all accounting functions are performed by our Chief
      Financial Officer, who was hired on January 2, 2008. This weakness is due
      to our lack of working capital to hire additional staff during the period
      covered by this report. We intend to hire additional accounting personnel
      to assist with financial reporting as soon as our finances will
      allow.




45


This Annual Report on Form 10-K does
not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not
subject to attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report.





Remediation
of Material Weaknesses





During 2009, we implemented the
following remediation activities to materially improve, or are reasonably likely
to improve, our internal control over financial reporting:





·
            We
      utilized external consultants to assist in the implementation and design
      of policies and procedures to  meet the required documentation
      and effectiveness requirements under the SOX and help mitigate the lack of
      segregation of duties within the financial reporting
    process.





Even with these changes, due to the
increasing number and complexity of pronouncements, emerging issues and
releases, and reporting requirements and regulations, we expect there will
continue to be some risk related to financial disclosures. However, the process
of identifying risk areas and implementing financial disclosure controls and
internal controls over financial reporting required under the Sarbanes-Oxley Act
continues to be complex and subject to significant judgment and may result in
the identification in the future of areas where we may need additional
resources. Additionally, due to the complexity and judgment involved in this
process, we cannot guarantee that we will not find or have pointed out to us
either by internal or external resources, or by our auditors following the
implementation of the external auditor requirement for their independent
assessment of our controls, additional areas needing improvement or resulting in
a future assessment that our controls are or have become ineffective as a result
of overlooked or newly created significant deficiencies or unmitigated
risks.





Changes
in internal controls.





During the fourth quarter of 2008, we
completed the documentation and testing of our internal controls. We continue to
add controls in our disclosure, stock options and finance functions to ensure
that stock-based compensation expenses are recorded correctly and continued to
improve the design, implementation, documentation, testing and monitoring of our
internal controls. Collectively, these actions represent changes in our internal
control over financial reporting that occurred during the fourth quarter of 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.





ITEM
9B – OTHER INFORMATION





The following disclosure would have
otherwise been filed on Form 8-K under the heading “Item 5.02 – Departure of
Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers”:





On March
24, 2009, our Board of Directors increased its size from five to six and
appointed Paul Mieyal, Ph.D., CFA to serve as director to fill the newly created
vacancy, such appointment to become effective on March 30, 2009.





Since
2006, Dr. Mieyal has served as a Vice President of Wexford Capital LLC, an SEC
registered investment advisor with over $5 billion of assets under management
located in Greenwich, CT. Prior to that, from 2000 to 2006, he was Vice
President in charge of healthcare investments for Wechsler & Co., Inc., a
private investment firm and registered broker-dealer. Dr. Mieyal also serves as
a director of Nephros, Inc. (OTCBB: NEPH.OB) and Nile
Therapeutics, Inc. (NASDAQCM:
NLTX). Dr. Mieyal received his Ph.D. in Pharmacology from New York
Medical College, a B.A. in chemistry and psychology from Case Western Reserve
University, and is a Chartered Financial Analyst.





Wexford
Capital LLC is the investment sub-advisor of Wexford Spectrum Trading Limited
which beneficially owns approximately 11% of our outstanding common stock and
recently invested $300,000 in our offering of secured bridge
notes.


46


PART
III





ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS  AND CORPORATE
GOVERNANCE





Executive
Officers, Directors, and Key Employees





Set forth
below is certain information with respect to the individuals who are our
directors, officers and key employees and who are anticipated to become our
directors.





Name
                      
                      Age
                      
                      PositionAlexander
      L. Weis, Ph.D.
                      
                      59
                      
                      Director,
      Chief Executive Officer, President and SecretaryAlexander
      Ruckdaeschel
                      
                      36
                      
                      Director,
      Audit Committee Member, Compensation Committee MemberJames
      Wemett
                      
                      60
                      
                      DirectorWilliam
      J. Brock
                      
                      59
                      
                      Director,
      Audit Committee Chairman, Compensation Committee
  ChairmanCorey
      Levenson, Ph.D.
                      
                      54
                      
                      Chief
      Technical Officer and DirectorJ.
      Michael Edwards
                      
                      42
                      
                      Chief
      Financial OfficerTamas
      Bakos, Ph.D.
                      
                      45
                      
                      Director
      of Preclinical ResearchMichael
      Moloney
                      
                      50
                      
                      Director
      of Program
Management





Set forth
below is biographical information with respect to each of the
aforementioned individuals.





Alexander L. Weis, Ph.D.Dr.
Weis has served, since August 16, 2007, as a member of our Board,
Chief Executive Officer, President and Secretary.  Dr. Weis is
the principal founder of OncoVista-Sub and has been its Chairman, Chief
Executive Officer, and President since its inception in September 2004. 
Since February 2009, Dr. Weis also serves as AdnaGen’s Chief Executive Officer.
Dr. Weis is a recognized leader and pioneer in the biotechnology and
pharmaceutical industries and has led pharmaceutical companies through all
stages from start up through public offerings and as a manager of a substantial
public company. Prior to founding OncoVista-Sub, from 1989 to September
2004, Dr. Weis served as President of Lipitek International, Inc., a specialty
pharmaceutical company that Dr. Weis founded. Dr. Weis was a co-founder of ILEX
Oncology, which became a publicly traded company in 1997 (NASDAQ: ILXO) and was later
acquired by Genzyme Corporation in a stock transaction valued at over $1
billion. Dr. Weis served as ILEX’S Chief Scientific Officer and Executive Vice
President from its founding in 1994 through 1998. Dr. Weis has worked for Vector
Therapeutics, MykoBiologics, the Cancer Therapy and Research Center, Sterling
Drugs, the Eastman Kodak Company and the Weizmann Institute of Science. Dr. Weis
received his Ph.D. in Organic Chemistry from the Novosibirsk Institute of
Organic Chemistry. Dr. Weis is a scientist and inventor, with over 60
publications and 30 patents. He is a Chartered Chemist and Fellow of the Royal
Society of Chemistry, and was selected as the South Texas Entrepreneur of the
Year in 1996.





Alexander Ruckdaeschel.Alexander Ruckdaeschel has served as a member of our Board since
December 2007, as a member of OncoVista-Sub's Board since January 2005 and
since March 28, 2008, a member of our Audit Committee and Compensation
Committee. Mr. Ruckdaeschel is a venture capitalist and since September, 2006
partner at Alphaplus-Advisors, a US based hedge fund. From January 2003 to
September 2006 he was a Fund Advisor at DAC-FONDS, a European Investment company
specializing in small-cap Biotech equities worldwide. From December 2003 to July
2006, he was an investment advisor to Nanostart AG, one of Europe’s leading
venture investment firms in the area of nanotechnology. Mr. Ruckdaeschel has
extensive experience in the European solar industry. He also serves on the board
of directors for several private companies. Prior to 2003, he was a research
analyst with Dunmore Management, a global hedge fund, and Thieme Associates, an
investment advisor. From 1992 to 2000 Mr. Ruckdaeschel served in the German
military, participating in United Nations missions in Somalia, Croatia and
Bosnia.





James Wemett.Mr. Wemett has
served on our Board since December 2007 and the Board of OncoVista-Sub
since May 2007. From May 2003 to June 2007, Mr. Wemett was an independent
consultant to Victorian Times, Inc., and from March 2004 to March 2007, was a
consultant to ROC Central, Inc., both of which are privately owned firms. In
1975 Mr. Wemett founded ROC Communications, a retail distributor of electronics
products which was sold in 2001. Mr. Wemett co-founded Technology Innovations
LLC in 1999, a private company and one of our stockholders, and serves on
Technology Innovations’ board. Mr. Wemett also serves on the board of directors
of Natural Nano, Inc (OTCBB:
NNAN) and since February, 2009 is serving as their Chief Executive
Officer. Mr. Wemett has been an active fundraiser for Camp Good Days, a
non-profit summer camp for children with cancer.




47


William J. Brock.Mr. Brock
has served on our board since December 2007, the board of OncoVista-Sub since
September 2007 and since March 28, 2008, Chairman of our Audit Committee and
Compensation Committee.  Since August 2007, Mr. Brock has served as the
President of iPro One, a financial services firm. Prior to that, between July
2004 and August 2007, Mr. Brock was a vice president for private client services
at Bear Stearns. From November 2002 to July 2004, Mr. Brock was a director of
Houlihan, Lokey, Howard and Zukin, an investment banking firm and from 2001 to
2002 Mr. Brock was Managing Director of Liberty Hampshire Corporation, New York,
a diversified financial institution. Mr. Brock holds a BA degree from Harvard
College an M.B.A. from the Harvard Graduate School of Business
Administration.




Corey Levenson, Ph.D.Dr.
Levenson has served on our board since December 2007 and served as our
Chief Technology officer since November 2007. Dr. Levenson has been
a director and Chief Technical Officer of OncoVista-Sub since January 2005.
Prior to joining OncoVista, Dr. Levenson was employed at Ilex Oncology, Inc.
(NASDAQ: ILXO) from
October 1996 to December 2004 first as Director of Scientific Affairs and
afterwards as Senior Director, Licensing in which capacity he developed and
implemented the strategy for in-licensing candidate compounds. From 1991 until
1996 Dr. Levenson was employed by Roche Molecular Systems as Senior Research
Investigator and from 1981 to 1991 was employed by Cetus Corporation as Senior
Scientist and Director of Nucleic Acid Chemistry. He has led technology
assessment programs, coordinated evaluation of drug pipeline candidates and
in-licensed drugs, including Clofarabine which was approved for marketing in the
U.S. by the FDA in 2004. Dr. Levenson is experienced in managing internal
research programs, as well as coordinating large inter-company research
programs. He has led extramural research collaborations which resulted in
licensing agreements. Dr. Levenson received his Ph.D. (Pharmaceutical Chemistry)
from the University of California at San Francisco in 1981. He has over two
dozen scientific publications and 16 issued U.S. patents.




J. Michael Edwards. Mr.
Edwards joined us as our Chief Financial Officer in January 2008. Before joining
us, he served as the Regional Director of Finance and Accounting for Fieldstone
Homes, a residential home construction company, from September 2006 to December
2007. Prior to joining Fieldstone, he worked in key finance and accounting roles
at a number of biotechnology companies including Controller at BioNumerik
Pharmaceuticals from June 2001 to September 2006 and Assistant Controller at
ILEX Oncology from February 2000 to May 2001. From 1997 to 1999, Mr. Edwards was
the Chief Accounting Officer for U.S. Global Investors, a publicly traded
registered investment adviser. He held various financial management positions
with Grant-Lydick Beverage Company from 1995 to 1997. Mr. Edwards was an auditor
with PricewaterhouseCoopers from 1992 to 1995. Mr. Edwards has more than fifteen
years of experience in accounting and financial management, including
participation in several private placements, evaluation of strategic alliance
agreements and preparation of filings for a potential initial public offering.
Mr. Edwards is a member of the board of directors of Special Olympics Texas. Mr.
Edwards holds a Bachelor of Business Administration degree in accounting from
the University of Texas at San Antonio, and earned a Masters in Business
Administration from the University of Texas. Mr. Edwards is a certified public
accountant.




Tamas Bakos, Ph.D. Dr. Bakos
has served as our Director of Preclinical Research since January 2005. Prior to
joining us, Dr. Bakos was a Research Chemist at Lipitek International, Inc. from
March 1995 to January 2005. Dr. Bakos received his doctorate degree at the
University of Szeged (Hungary) and did his postdoctoral work at L’Institut de
Chimie de Substances Naturelles in Paris.




Michael F. Moloney. Mr.
Moloneyhas served
as our Director of Program Management since January 2008. Mr. Moloney was an
independent consultant to the biopharmaceutical industry for the period January
2007 through December 2007. Mr. Moloney served as Vice President, Information
Systems and Technologies and a member of the Executive Management team for
BioNumerik Pharmaceuticals, Inc from November 2001 to December 2006.
Mr. Moloney served as Director of Systems and Operations Technologies for
BioNumerik Pharmaceuticals, Inc. from June 2000 to November 2001. From 1992
through June 2000, Mr. Moloney served as Director of Information Systems
for the CALGB, a National Cancer Institute funded multi-center cooperative group
engaged in cancer research. While at the CALGB, Mr. Moloney served as a
member of the CALGB Statistical Center management team and the CALGB Operations
Committee. Mr. Moloney held appointments on numerous CALGB scientific
committees and served as Vice Chairman for the National Cancer Institute’s
Intergroup Specimen Banking Committee. Prior to joining the CALGB,
Mr. Moloney held various technical positions at Clinical Research
International, Family Health International and the North Carolina Hospital
Association. Mr. Moloney received a B.S. in information systems from
Alderson Broaddus College and an MBA from The University of Texas at San
Antonio.




48


Board
of Directors and Officers





Each
director is elected until our next annual meeting and until his or her successor
is duly elected and qualified. Officers are elected by, and serve at the
discretion of, the Board of Directors. The Board of Directors may also appoint
additional directors up to the maximum number permitted under our by-laws. A
director so chosen or appointed will hold office until the next annual meeting
of stockholders.





Each
executive officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected or until his or her earlier
resignation or removal in accordance with our articles of incorporation and
by-laws.





Messrs.
Ruckdaeschel and Brock are considered independent directors under Rule
4200(a)(15) of the Nasdaq Marketplace Rules, even though such definition does
not currently apply to us because we are not listed on Nasdaq.





Meetings
and Committees of the Board of Directors




During
the year ended December 31, 2008, our Board of Directors held six (6)
meetings and took actions by written consent on six (6) occasions
throughout the respective time periods.




Committees
of the Board of Directors




On March
28, 2008, we established an Audit Committee and a Compensation Committee. Messrs
Brock and Ruckdaeschel serve on both committees with Mr. Brock serving as
Chairman of both committees. Both Messrs Brock and Ruckdaeschel have no other
affiliation with us and are independent as defined under Rule 4200(a)(15) of the
Nasdaq Marketplace Rules, even though such definition does not currently apply
to us because we are not listed on Nasdaq. Mr. Brock is deemed the “audit
committee financial expert”.




The
committees are responsible, respectively, for the matters described
below.




Audit
Committee




The audit
committee is responsible for the following:




·
            reviewing
      the results of the audit engagement with the independent
      auditors;


·
            identifying
      irregularities in the management of our business in consultation with our
      independent accountants, and suggesting an appropriate course of
      action;


·
            reviewing
      the adequacy, scope, and results of the internal accounting controls and
      procedures;


·
            reviewing
      the degree of independence of the auditors, as well as the nature and
      scope of our relationship with our independent
  auditors;


·
            reviewing
      the auditors’ fees; and


·
            recommending
      the engagement of auditors to the full Board of
  Directors.




A charter
has been adopted to govern the Audit Committee. A copy of the charter can be
found on our website at www.oncovista.com.


49


Compensation
Committee




The
compensation committee determines the salaries and incentive compensation of our
officers and provide recommendations for the salaries and incentive compensation
of our other employees and consultants.





Our
compensation programs to date are intended to enable the attraction, motivation,
reward, and retention of the management talent required to achieve corporate
objectives and thereby increase shareholder value. It has been our policy to
provide incentives to our senior management to achieve both short-term and
long-term objectives and to reward exceptional performance and contributions to
the development of our business. To attain these objectives, the executive
compensation program may include a competitive base salary, cash incentive
bonuses, and stock-based compensation.




The
compensation committee will establish on an annual basis, subject to the
approval of our Board of Directors and any applicable employment agreements, the
salaries that will be paid to our executive officers during the coming year. In
setting salaries, the compensation committee intends to take into account
several factors, including the following:




·
            competitive
      compensation data;


·
            the
      extent to which an individual may participate in the stock plans which may
      be maintained by us; and


·
            qualitative
      factors bearing on an individual’s experience, responsibilities,
      management and leadership abilities, and job
  performance.





A charter
has been adopted to govern the Compensation Committee. A copy of the charter can
be found on our website at www.oncovista.com.





Nominating
Committee




Our Board
of Directors does not expect to establish a nominating committee because we
believe that it is unnecessary in light of our size. The Board does not
anticipate utilizing a nominating committee charter. In the event that vacancies
on our Board of Directors arise, the Board will consider potential candidates
for director, which may come to the attention of the Board through current
directors, professional executive search firms, stockholders or other persons.
Stockholders may submit the names and five year backgrounds for the Board of
Directors’ consideration in our selection of nominees for directors in writing
to the Secretary at our address set forth in this Annual Report on Form
10-K.





Section
16(a) Beneficial Ownership Reporting Compliance




Based
solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to
us during fiscal year 2007, we believe that during fiscal year 2008, other than
as set forth below, our executive officers, directors and all persons who own
more than ten percent of a registered class of our equity securities complied
with all Section 16(a) filing requirements except that James Wemett, Technology
Innovations, Biomed Solutions and Wexford Spectrum Trading Ltd. have not filed
Form 4s.





Code
of Ethics





On March
28, 2008, we adopted a Code of Ethics for our officers, directors and employees.
A copy of the Code of Ethics can be found on our website at
www.oncovista.com.




50


ITEM
11 – EXECUTIVE COMPENSATION





Executive
Compensation




The
following table sets forth the compensation earned during the years ended
December 31, 2008 and 2007 by our former Chief Executive Officer and Chief
Financial Officer, our current Chief Executive Officer, and Chief Technical
Officer and our two most highly compensated non-executive officers. We refer to
such individuals as “named executive officers”:





Name and Principal
                                                                            Position
                                                                          
                                                                          Year
                                                                            (1)
                                                                          
                                                                          Salary
                                                                            ($)
                                                                          
                                                                          
                                                                          Bonus
                                                                            ($)
                                                                          
                                                                          
                                                                          Stock
                                                                            Awards
                                                                            ($)
                                                                          
                                                                          
                                                                          Option Awards
                                                                            ($)(2)
                                                                          
                                                                          
                                                                          Non-
                                                                            Equity
                                                                            Incentive
                                                                            Plan
                                                                            Compen-
                                                                            sation
                                                                            ($)
                                                                          
                                                                          
                                                                          Non-
                                                                            qualified
                                                                            Deferred
                                                                            Compen-
                                                                            sation
                                                                            ($)
                                                                          
                                                                          
                                                                          All Other
                                                                            Compen-
                                                                            sation
                                                                            ($)
                                                                          
                                                                          
                                                                          Total
                                                                            ($)Torbjorn
      B. LundqvistFormer
      Chairman and
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —Chief Executive
      Officer(3)
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          70,000
                                                                          (4)
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          1,840
                                                                          (5)
                                                                          
                                                                          
                                                                          71,840Alexander
      L. Weis, Ph.D.ChiefExecutive
      Officer,President
      and Secretary
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          310,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          875,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          17,496
                                                                          (5)
                                                                          
                                                                          
                                                                          1,202,4962007
                                                                          
                                                                          
                                                                          310,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          20,364
                                                                          (5)
                                                                          
                                                                          
                                                                          330,364Corey
      Levenson, Ph.D.Chief
      Technical Officer
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          198,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          291,667
                                                                          
                                                                          
                                                                          
                                                                          156,244
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          8,400
                                                                          (5)
                                                                          
                                                                          
                                                                          654,3112007
                                                                          
                                                                          
                                                                          198,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          156,244
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          8,578
                                                                          (5)
                                                                          
                                                                          
                                                                          362,822J.
      Michael EdwardsChief Financial
      Officer(6)
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          140,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          54,537
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          17,004
                                                                          (5)
                                                                          
                                                                          
                                                                          211,5412007
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —Tamas
      Bakos, Ph.D.,
                                                                            Director
      of PreclinicalResearch
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          88,200
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          62,488
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          10,368
                                                                          (5)
                                                                          
                                                                          
                                                                          161,0562007
                                                                          
                                                                          
                                                                          84,000
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          62,488
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          12,784
                                                                          (5)
                                                                          
                                                                          
                                                                          159,272Michael
      F. Moloney
                                                                            Director
      of Program Management
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          93,205
                                                                          (7)
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          48,824
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          17,004
                                                                          (5)
                                                                          
                                                                          
                                                                          159,0332007
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —







(1)
            The
      information is provided for each fiscal year which begins on January 1 and
      ends on December 31. With respect to the information provided for
      Alexander L. Weis, Corey Levenson, J. Michael Edwards, Tamas Bakos and
      Michael Moloney during 2007, the information relates to compensation
      received from OncoVista-Sub prior to the Merger and OncoVista Innovative
      Therapies, Inc. after the Merger whereas the information provided for
      Torbjorn Lundqvist during 2007 relates to compensation from OncoVista
      Innovative Therapies, Inc. (formerly Aviation Upgrade Technologies, Inc.)
      prior to his resignation on August 16, 2007.(2)
            The
      amounts reflect the compensation expense in accordance with FAS 123(R) of
      these option awards. The assumptions used to determine the fair value of
      the option awards for fiscal years ended December 31, 2008 and 2007 are
      set forth in Note 10 of our audited consolidated financial statements
      included in this Annual Report on Form 10-K. Our named executive officers
      will not realize the value of these awards in cash unless and until these
      awards are exercised and the underlying shares subsequently
      sold.(3)
            Mr.
      Lundqvist resigned as our Chairman and Chief Executive Officer on August
      16, 2007. The amounts referenced for fiscal year 2007 reflect the amount
      of compensation earned by Mr. Lundquist from January 1 until August 16,
      2007.(4)
            Amount
      represents salary accrued but unpaid. On August 16, 2007, all accrued
      amounts owing to Mr. Lundqvist by us were forgiven.(5)
            See
      “All Other Compensation” table below.(6)
            On
      January 2, 2008, Mr. Edwards was appointed our Chief Financial
      Officer.(7)
            Mr.
      Moloney is entitled to a salary of $100,000 per annum. The amount
      referenced reflects the amount earned by Mr. Moloney during fiscal year
      2008 since his commencement of employment on January 28,
    2008.




51


All
Other Compensation Table





All Other
Compensation amounts in the Summary Compensation Table above consist of the
following:




Name
                                              
                                              Year
                                              
                                              Automobile
                                                Allowance($)
                                              
                                              
                                              Medical
                                                Premiums($)
                                              
                                              
                                              Total ($)Torbjorn
      B. LundqvistFormer
      Chairman and Chief
                                              
                                              2008
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Executive
      Officer
                                              
                                              2007
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1,840
                                              
                                              
                                              
                                              1,840Alexander
      L. Weis, Ph.D.Chief
      Executive Officer, President
                                              
                                              2008
                                              
                                              
                                              12,000
                                              
                                              
                                              
                                              5,496
                                              
                                              
                                              
                                              17,496and
      Secretary
                                              
                                              2007
                                              
                                              
                                              12,000
                                              
                                              
                                              
                                              8,364
                                              
                                              
                                              
                                              20,364Corey
      Levenson, Ph.D.
                                              
                                              2008
                                              
                                              
                                              8,400
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              8,400Chief
      Technical Officer
                                              
                                              2007
                                              
                                              
                                              8,400
                                              
                                              
                                              
                                              178
                                              
                                              
                                              
                                              8,578J.
      Michael Edwards
                                              
                                              2008
                                              
                                              
                                              —
                                              
                                              
                                              
                                              17,004
                                              
                                              
                                              
                                              17,004Chief
      Financial Officer
                                              
                                              2007
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Tamas
      Bakos, Ph.D.
                                              
                                              2008
                                              
                                              
                                              —
                                              
                                              
                                              
                                              10,368
                                              
                                              
                                              
                                              10,368Director
      of Preclinical Research
                                              
                                              2007
                                              
                                              
                                              —
                                              
                                              
                                              
                                              12,784
                                              
                                              
                                              
                                              12,784Michael
      F. Moloney
                                              
                                              2008
                                              
                                              
                                              —
                                              
                                              
                                              
                                              17,004
                                              
                                              
                                              
                                              17,004Director
      of Program Management
                                              
                                              2007
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —







The
following table sets forth information concerning stock options and stock awards
held by the named executive officers as of December 31, 2008.





Option Awards
                                                                
                                                                
                                                                Stock AwardsName
                                                                
                                                                Number of
                                                                  Securities
                                                                  Underlying
                                                                  Unexercised
                                                                  Options
                                                                  (#)
                                                                  Exercisable
                                                                
                                                                
                                                                Number of
                                                                  Securities
                                                                  Underlying
                                                                  Unexercised
                                                                  Options
                                                                  (#)
                                                                  Unexercisable
                                                                
                                                                
                                                                Equity
                                                                  Incentive
                                                                  Plan Awards
                                                                  Number of
                                                                  Securities
                                                                  Underlying
                                                                  Unexercised
                                                                  Unearned
                                                                  Options
                                                                  (#)
                                                                
                                                                
                                                                Option
                                                                  Exercise
                                                                  Price
                                                                  ($)
                                                                
                                                                
                                                                Option
                                                                  Expiration
                                                                  Date
                                                                
                                                                
                                                                Number of
                                                                  Shares or
                                                                  Unitsof
                                                                  Stock
                                                                  HeldThat
                                                                  Have Not
                                                                  Vested
                                                                  (#)
                                                                
                                                                
                                                                Market
                                                                  Valueof
                                                                  Shares or
                                                                  Units of
                                                                  Stock
                                                                  Held
                                                                  That Have
                                                                  Not
                                                                  Vested
                                                                  ($)
                                                                
                                                                
                                                                Equity
                                                                  Incentive
                                                                  Plan
                                                                  Awards:
                                                                  Number
                                                                  of
                                                                  Unearned
                                                                  Shares,
                                                                  Unitsor
                                                                  Other
                                                                  Rights
                                                                  That Have
                                                                  Not
                                                                  Vested(#)
                                                                
                                                                
                                                                Equity
                                                                  Incentive
                                                                  Plan
                                                                  Awards:
                                                                  Market
                                                                  or
                                                                  Payout
                                                                  Value of
                                                                  Unearned
                                                                  Shares,
                                                                  Units or
                                                                  Other Rights
                                                                  That
                                                                  Have Not
                                                                  Vested ($)Torbjorn
      Lundqvist,
                                                                  Former
      Chairman and CEO
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Alexander
      L. Weis, Ph.D.
                                                                    Director,
      CEO, President andSecretary
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,500,000
                                                                (7)
                                                                
                                                                
                                                                3,750,000
                                                                (8)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Corey
      Levenson, Ph.D.
                                                                    Chief
      TechnicalOfficer
                                                                
                                                                
                                                                187,500
                                                                (1)
                                                                
                                                                
                                                                62,500
                                                                (2)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                0.001
                                                                
                                                                
                                                                01/15/2015
                                                                
                                                                
                                                                
                                                                500,000
                                                                (7)
                                                                
                                                                
                                                                1,250,000
                                                                (8)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —J.
      Michael  Edwards,
                                                                    Chief
      FinanicalOfficer
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                120,000
                                                                (3)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1.75
                                                                
                                                                
                                                                12/30/2017
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Tamas
      Bakos, Ph.D,
                                                                    Director
      of PreclinicalAffairs
                                                                
                                                                
                                                                25,000
                                                                (4)
                                                                
                                                                
                                                                25,000
                                                                (5)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                0.1
                                                                
                                                                
                                                                05/01/2015
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Michael
      F. Moloney,
                                                                    Director
      of ProgramManagement
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                100,000
                                                                (6)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1.75
                                                                
                                                                
                                                                01/25/2018
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —


(1)
                One-third
      of these options vested each on January 15, 2006, January 15, 2007 and
      January 15, 2008.(2)
                These
      options vest on January 15, 2009.(3)
                These
      options vest one fourth on each January 2, 2009, January 2, 2010, January
      2, 2011 and January 2, 2012.(4)
                These
      options vested on May 1, 2008.(5)
                These
      options vest on May 1, 2009.(6)
                These
      options vest one fourth on each January 28, 2009, January 28, 2010,
      January 28, 2011 and January 28, 2012.(7)
                The
      referenced shares are a restricted stock award that vest two-thirds on
      January 1, 2010 and one-third on January 1, 2011.(8)
                Market
      value is based on the closing sales price of our common stock of $1.05 per
      share on December 31, 2008.


52




Employment
Agreements




We are
party to the following employment agreements with our named executive
officers:




We are
party to an employment agreement, dated October 1, 2004, with Alexander L. Weis,
Ph.D., pursuant to which we have agreed to employ Dr. Weis as our Chief
Executive Officer and Chairman of the Board for a four-year initial term, with
one-year renewable terms, for base salary of $250,000 per year, subject to
adjustment, plus a $1,000 per month car allowance.  Dr. Weis’ current
base salary is $310,000 per annum. Dr. Weis is entitled to receive an annual
cash bonus equal to 40% of his base salary, provided that we meet certain
performance objectives established by the Board of Directors. Dr. Weis is also
entitled to a bonus upon our satisfaction of certain specified milestones. If
Dr. Weis’s employment is terminated as a result of his death or disability, he
(or in the case of his death, his estate) is entitled to severance of one year’s
base salary, one year’s health insurance coverage for his wife and dependent
children and, in the case of termination as a result of disability, one year’s
health insurance coverage for Dr. Weis’s. If Dr. Weis’s employment is terminated
without cause, he is entitled to one year’s base salary and one year’s health
and life insurance that was in effect prior to his termination. No severance is
payable if Dr. Weis’s employment is terminated for cause or if Dr. Weis’s
resigns, retires or otherwise terminates his employment
voluntarily.





Since
February 2009, Dr. Weis has been serving as AdnaGen’s Chief Executive Officer.
In such capacity he receives an additional salary of €10,000 ($13,500) per month
plus health insurance (approximately €500 per month) and a daily per diem (€94).
As a result of the extraordinary efforts being expended by Dr. Weis in taking on
this additional role and to further incentivize him, on January 6, 2009, the
Compensation Committee resolved to compensate Dr. Weis as follows: (i) if
AdnaGen’s indebtedness is restructured into equity or long-term indebtedness,
then we would pay Dr. Weis $50,000 for restructuring into equity of AdnaGen or
$100,000 for restructuring not involving equity of AdnaGen in addition to the
issuance of shares of capital stock of AdnaGen representing 5% of the
outstanding capital stock of AdnaGen as of the restructuring, giving effect to
such issuance (“Restructuring
Shares”), (ii) upon AdnaGen achieving revenues of $3,000,000 in calendar
year 2009 and AdnaGen achieving positive operational cash flow for the year
2009, we would pay Dr. Weis a cash payment of $225,000 and 250,000 shares of our
common stock (the “Sales
Milestone Shares”), (iii) upon AdnaGen consummating additional financing
through entities introduced by Dr. Weis, we would pay Dr. Weis cash equal to 2%
if in the form of indebtedness or 4% if in a form other than indebtedness of the
gross proceeds of such additional financing plus shares of capital stock of
AdnaGen having an equal value to such cash bonus based on the valuation in such
financing (the “Financing
Shares”), (iv) upon AdnaGen consummating strategic transactions,
including mergers and acquisitions, through entities introduced by Dr. Weis, we
would pay Dr. Weis cash in an amount equal to 8% of the gross consideration of
such transactions if equal to or less than $300,000 or 5% if greater than
$300,000 or 3% if greater than $1,000,000, and (v) the Restructuring Shares,
Sales Milestone Shares and Financing Shares (collectively, the “Shares”) vest in 12 equal
monthly installments provided that if the employment of Dr. Weis by us
terminates without cause prior to the vesting in full of the Shares, any
unvested Shares shall be forfeited and if there is a change of control event,
then the Shares shall immediately vest in full.




53


We are a
party to an employment agreement, dated January 15, 2005, with Corey Levenson,
Ph.D. pursuant to which we have agreed to employ Dr. Levenson as our Chief
Technical Officer for a four-year initial term, with one-year renewable terms,
for a compensation of $150,000 per year, subject to adjustment, plus a $700 per
month car allowance. Dr. Levenson’s current base salary is $198,000 per annum.
Dr. Levenson is entitled to receive an annual cash bonus equal to 30% of his
base salary, provided that we meet certain performance objectives established by
the Board of Directors. If Dr. Levenson’s employment is terminated as a result
of his death or disability, he (or in the case of his death, his estate) is
entitled to severance of one year’s base salary, one year’s health insurance
coverage for his wife and dependent children and, in the case of termination as
a result of disability, one year’s health insurance coverage for Dr. Levenson.
If Dr. Levenson’s employment is terminated without cause, he is entitled to one
year’s base salary and one year’s health and life insurance that was in effect
prior to his termination. No severance is payable if Dr. Levenson’s employment
is terminated for cause or if Dr. Levenson resigns, retires or otherwise
terminates his employment voluntarily.




We are
party to an employment agreement, dated January 1, 2008, with Michael Edwards,
pursuant to which we have agreed to employ Mr. Edwards as a Chief Financial
Officer, for a four-year initial term, renewable for successive one-year renewal
terms, with a base salary of $140,000 per year.  Mr. Edwards is entitled to
receive an annual cash bonus equal to 30% of his base salary, provided that we
meet certain performance objectives established by the Board of Directors. 
In addition, the agreement provides for the grant of options to acquire 120,000
shares of our common stock at $1.75 per share, vesting over four years. If Mr.
Edwards’ employment is terminated as a result of his death or disability, he (or
in the case of his death, his estate) is entitled to severance of one year’s
base salary, one year’s health insurance coverage for his wife and dependent
children and, in the case of termination as a result of disability, one year’s
health insurance coverage for Mr. Edwards. If Mr. Edwards’ employment is
terminated without cause, he is entitled to one year's base salary and one
year's health and life insurance that was in effect prior to termination. No
severance is payable if Mr. Edwards' employment is terminated for cause or if
Mr. Edwards resigns, retires or otherwise terminates his employment voluntarily.
In
January 2009, we granted 500,000 non-qualified stock options to Mr. Edwards at
an exercise price of $0.001 per share, vesting in equal monthly installments
over one year from the date of grant.




We are
party to an employment agreement, dated January 1, 2005, with Tamas Bakos,
Ph.D., pursuant to which we have agreed to employ Dr. Bakos as a Director of
Pre-Clinical Development, for a one-year initial term, renewable for successive
one-year renewal terms, with a base salary of $80,000 per year, subject to
adjustment. Dr. Bakos’ current base salary is $88,200. If Dr. Bakos’ employment
is terminated as a result of his death or disability, he (or in the case of his
death, is estate) is entitled to severance of one year’s base salary, one year’s
health insurance coverage for his wife and dependent children and, in the case
of termination as a result of disability, one year’s health insurance coverage
for Dr. Bakos. If Dr. Bakos’ employment is terminated without cause, he is
entitled to two weeks base salary.




We are
party to an employment agreement, dated January 28, 2008, with Michael Moloney,
pursuant to which we have agreed to employ Mr. Moloney as the Director of
Program Management, with a base salary of $100,000 per year.  Mr. Moloney
is entitled to receive an annual cash bonus equal to 30% of his base salary,
provided that we meet certain performance objectives established by the Board of
Directors.  In addition, the agreement provides for the grant of options to
acquire 100,000 shares of our common stock at $1.75 per share, vesting over four
years. In January
2009, we granted 500,000 non-qualified stock options to Mr. Moloney at an
exercise price of $0.001 per share, vesting in equal monthly installments over
one year from the date of grant.





To assist
us in conserving our cash, it was determined at the end of the last fiscal
year that, effective January 1, 2009, all employees of OncoVista-Sub would
forego the payment of one-half of their respective salaries until such time
that we raise additional capital.We have accrued these
amounts, which are included in accrued liabilities on our consolidated balance
sheet.




54


Stock
Option Plans




We have
adopted the following stock option plans:





2007
Stock Option Plan




In June
2007, OncoVista-Sub’s Board of Directors adopted the 2007 Stock Option Plan (the
“2007 Plan”) subject to
stockholder approval. The Plan authorizes the grant of ISOs, Non-Qualified Stock
Options and stock purchase rights (“Rights”) with respect to up
to an aggregate of 3,000,000 shares of our Common Stock to our employees and
directors or our subsidiaries and individuals, including consultants, performing
services for our benefit or for the benefit of a subsidiary. As a result of the
Merger, the 2007 Plan was adopted by our Board of Directors and all options
granted under the 2007 Plan were assumed by us. As of February 28,
2009, 2,630,000 non-qualified options under the 2007 Plan are available for
future issuance.




The 2007
Plan permits us to grant (i) both Incentive Stock Options and Non-Qualified
Options and (ii) Stock Purchase Rights (“Rights”). Unless earlier
terminated by the Board of Directors, the Plan (but not outstanding options or
Rights) terminates in May 2017, after which no further awards may be granted
under the 2007 Plan. The 2007 Plan will be administered by the full Board of
Directors or, at the board’s discretion, by a committee of the board consisting
of at least two persons who are “disinterested persons”
defined under Rule 16b-2(c)(ii) under the Securities Exchange Act of 1934, as
amended (the “Committee”).




Options and Rights.Recipients of options or Rights under the Plan (“Optionees”) are selected by
the board or the Committee. The Board or Committee determines the terms of each
option or Right granted including (1) the purchase price of shares subject to
options or Rights, (2) the dates on which options or Rights become exercisable
and (3) the expiration date of each option or Right (which may not exceed ten
years from the date of grant). The minimum per share purchase price of options
granted under the 2007 Plan for Incentive Stock Options is the fair market value
(as defined in the 2007 Plan) of one share of our common stock on the date the
option is granted.




The
Administrator may grant alone, in addition to or in tandem with options granted
under the 2007 Plan, to eligible persons Rights to purchase options for such
number of shares of our common stock at the price, within the period and subject
to the conditions set forth in the award. The purchase is to be effected by
execution of a Restricted Stock Purchase Agreement in the form determined by the
Administrator which may at the Administrator’s option grant us the right to
repurchase the shares acquired at the original price paid in the event of the
voluntary or involuntary termination of the purchaser’s service for any reason.
The agreement may provide that the repurchase option lapses in whole or
installments as to a service provider other than an officer, director, or
consultant, at a rate of at least 20% per annum over 5 years from the date of
purchase.




Option
and Rights holders will have no voting, dividend or other rights as stockholders
with respect to shares of our Common Stock covered by options or Rights prior to
becoming the holders of record of such shares. The purchase price upon the
exercise of options or Rights may be paid as determined by the Administrator at
the time of exercise in cash, by certified bank, cashier’s check or promissory
note, by tendering stock held by the Option or Rights holders, as well as by
cashless exercise either through the surrender of other shares subject to the
option or through a broker. The total number of shares of our common stock
available under the 2007 Plan and the number of shares and per share exercise
price under outstanding options and Rights will be appropriately adjusted in the
event of any stock dividend, reorganization, merger or recapitalization or a
similar corporate event.




The Board
of Directors may at any time terminate the 2007 Plan or from time to time make
such modifications or amendments to the 2007 Plan as it may deem advisable and
the board or Committee may adjust, reduce, cancel and re-grant an unexercised
option if the fair market value declines below the exercise price except as may
be required by any national stock exchange or national market association on
which our common stock is then listed. In no event may the Board, without the
approval of stockholders, amend the 2007 Plan to increase the maximum number of
shares of our common stock for which options or Rights may be granted under the
2007 Plan or change the class of persons eligible to receive options or Rights
under the 2007 Plan.





55


Subject
to limitations set forth in the 2007 Plan, the terms of option and Rights
agreements will be determined by the board or Committee but may not be longer
than ten years, and need not be uniform.




2007
Independent Directors’ Plan




In June
2007, OncoVista-Sub’s Board of Directors adopted the 2007 Stock Option Plan for
Independent and Non-Employee Directors (the “Directors Plan”) for the
purpose of promoting our interests and those of our stockholders by increasing
the proprietary and vested interest of such Directors in our growth and
performance.  As a result of the Merger, our Board of Directors
assumed the Directors Plan and all options granted under the Directors Plan were
assumed by us.




The
Directors Plan relates to a maximum of 500,000 shares of our Common Stock for
which options may be granted to Eligible Directors who are defined as
Independent or Non-Employee Directors. An Independent Director is defined under
the Directors Plan as a director meeting the requirements of Section 10A(m)
under the Securities Exchange Act of 1934 and as defined by any exchange or
market on which the Common Stock is traded or is listed. A Non-Employee Director
is defined by reference to our definition in Rule 16b-3 under the Securities
Exchange Act. As of February 28, 2009, 490,000 non-qualified options under
the Directors Plan are available for future issuance.





The
Directors Plan is to be administered by the Board of Directors or the
Compensation Committee of the Board of Directors, which is authorized to adopt,
interpret and amend regulations under the Directors Plan. At this time, we do
not have any standing committees and the Board of Directors will administer the
Directors Plan in lieu of a Compensation Committee.




The
Directors Plan specifies that each newly elected Independent or Non-Employee
Director (“Eligible
Director”) upon first election or appointment to the Board will receive
options to purchase 10,000 shares and immediately following each Annual Meeting
of Stockholders each director who has been an Eligible Director for more than 12
months immediately preceding and including such meeting and the Chairman of the
board, if an Eligible Director, for the same period shall be granted an
additional option to purchase 15,000 shares.




The
exercise price of an option is to be the Fair Market Value, as defined in the
Directors Plan. Payment shall be made in cash or unless otherwise determined by
the Board of Directors, in shares of our common stock. The option may be
exercised in whole or in part during the period commencing on the first
anniversary of the grant date and ending on the date of termination of the
option, which is the earlier of a date one year from the date the optionee is no
longer a Director or ten years from the date of grant.




The
Directors Plan provides for adjustment in the exercise price and shares subject
to the Directors Plan and outstanding options in the event of a stock split,
stock dividend, subdivision or combination of the common stock or change in
corporate structure.





2004
Stock Option Plan




In
October 2004, OncoVista-Sub’s Board of Directors adopted the 2004 Stock Option
Plan (the “2004 Plan”)
subject to stockholder approval. As a result of the Merger, our Board of
Directors assumed the 2004 Plan and all options granted under the 2004 Plan were
assumed by us. The 2004 Plan authorized the grant of options with respect to up
to an aggregate of 1,000,000 shares of our Common Stock to our employees,
directors and consultants or to our affiliates. As of February 28,
2009, 100,000 non-qualified options under the 2004 Plan are available for
future issuance.




The 2004
Plan permits us to grant both incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”or
“ISOs”)and options
which do not qualify as incentive stock options (“Non-Qualified Options”).
Unless earlier terminated by the shareholders, the 2004 Plan will terminate in
October 2014.




56


Financial Statement Treatment of
Options.We intend to expense the fair equity-based awards, such as stock
options and warrants, granted in accordance with accounting principles generally
accepted in the United States of America equal to the fair value of the vested
portion of the options as Rights using the Black-Scholes option pricing method
on each grant date. Modifications such as lowering the exercise prices or
extending the expiration dates could also result in material additions to our
non-cash expenses.




To the
extent outstanding options or Rights are repriced, such repricing will result in
charges to our earnings equal to the difference between (i) the fair value of
the vested portion of the options or Rights granted, utilizing the Black-Scholes
option pricing model on each grant date and (ii) the charges to earnings
previously made as a result of the initial grants of the options or Rights being
repriced, which will have a dilutive effect on the earnings per
share.




Federal Income Tax
Consequences. The following is a brief discussion of the Federal income
tax consequences of transactions under the 2004 Plan and 2007 Plan. This
discussion is not intended to be exhaustive and does not describe state or local
tax consequences.




Incentive Options. No taxable
income is realized by the optionee upon the grant or exercise of an ISO, except
as noted below with respect to the alternative minimum tax provided no reduction
in the exercise price has been made since the date of grant except as a result
of an anti-dilution event. If common stock is issued to an optionee
pursuant to the exercise of an ISO, and if no disqualifying disposition of such
shares is made by such optionee within two years after the date of grant or
within one year after the transfer of such shares to such optionee, then (i)
upon sale of such shares, any amount realized in excess of the option price will
be taxed to such optionee as a long-term capital gain and any loss sustained
will be a long-term capital loss, and (ii) no deduction will be allowed to the
optionee’s employer for Federal income tax purposes.




Except as
noted below for corporate “insiders”, if our common
stock acquired upon the exercise of an ISO is disposed of prior to the
expiration of either holding period described above, generally (i) the optionee
will realize ordinary income in the year of disposition in an amount equal to
the excess (if any) of the fair market value of such shares at exercise (or, if
less, the amount realized on the disposition of such shares) over the option
price paid for such shares and (ii) the optionee’s employer will be entitled to
deduct such amount for Federal income tax purposes if the amount represents an
ordinary and necessary business expense. Any further gain (or loss) by the
optionee will be taxed as short-term or long-term capital gain (or loss), as the
case may be, and will not result in any deduction by the employer.




Subject
to certain exceptions for disability or death, if an ISO is exercised more than
three months following termination of employment, the exercise of the option
will generally be taxed as the exercise of a Non-Qualified Option.





For
purposes of determining whether an optionee is subject to any alternative
minimum tax liability, an optionee who exercises an ISO generally would be
required to increase his or her alternative minimum taxable income, and compute
the tax basis in the stock so acquired, in the same manner as if the optionee
had exercised a Non-Qualified Option. Each optionee is potentially subject to
the alternative minimum tax. In substance, a taxpayer is required to pay the
higher of his/her alternative minimum tax liability or his/her “regular” income tax
liability. As a result, a taxpayer has to determine his potential liability
under the alternative minimum tax.




Non-Qualified Options. Except
as noted below for corporate “insiders”, with respect to
Non-Qualified Options: (i) no income is realized by the optionee at the time the
option is granted; (ii) generally, at exercise, ordinary income is realized by
the optionee in an amount equal to the difference between the option price paid
for the shares and the fair market value of the shares, if unrestricted, on the
date of exercise, and the optionee’s employer is generally entitled to a tax
deduction in the same amount subject to applicable tax withholding requirements;
and (iii) at sale, appreciation (or depreciation) after the date of exercise is
treated as either short-term or long-term capital gain (or loss) depending on
how long the shares have been held.




Special Rules Applicable To
Corporate Insiders. As a result of the rules under Section 16(b) of the
Exchange Act, “insiders” (as defined in the
Securities Exchange Act of 1934), depending upon the particular exemption from
the provisions of Section 16(b) utilized, may not receive the same tax treatment
as set forth above with respect to the grant and/or exercise of options.
Generally, insiders will not be subject to taxation until the expiration of any
period during which they are subject to the liability provisions of Section
16(b) with respect to any particular option. Insiders should check with their
own tax advisers to ascertain the appropriate tax treatment for any particular
option.




57


Benefits. Inasmuch as awards
to all participants under the 2004 Plan and 2007 Plan will be granted at the
sole discretion of the board or Committee, such benefits under the 2004 Plan and
2007 Plan, as applicable, are not determinable.




We
believe that the 2004 Plan and 2007 Plan are important in attracting and
retaining individuals with good ability to service us, motivating their efforts
and serving our business interests, while reducing the cash payments which we
would otherwise be required to make to accomplish such purposes.





Director
Compensation




Effective
September 11, 2007, independent members of our Board of Directors are entitled
to $10,000 as annual remuneration for service as a member of the board plus
reimbursement for travel expenses.




The
following table sets forth director compensation for the year ended December 31,
2008.




Name of Director
                      
                      Fees Earned or
                        Paid in Cash
                        ($)
                      
                      
                      Stock Awards
                        ($)
                      
                      
                      Option Awards
                        ($)
                      
                      
                      Non-Equity
                        Incentive Plan
                        Compensation
                        ($)
                      
                      
                      Nonqualified
                        Deferred
                        Compensation
                        ($)
                      
                      
                      All Other
                        Compensation
                        ($)
                      
                      
                      Total
                        ($)Alexander L.
      Weis(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Corey Levenson(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Alexander
      Ruckdaeschel
                      
                      
                      10,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      10,000James
      Wemett
                      
                      
                      10,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      10,000William
      Brock
                      
                      
                      10,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      10,000


_______________





(1)
            Please
      refer to the summary compensation table for executive compensation with
      respect to the named individual.





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





The
following table sets forth certain information regarding beneficial ownership of
our common stock as of February 28, 2009 by (i) by each person who is known
by us to own beneficially more than 5% of our common stock, (ii) by each of
the Named Executive Officers and (iv) by all our directors and executive
officers as a group. On such date, we had 20,316,475 shares of our common stock
outstanding (after giving effect to 20,000 shares of common stock which we are
obligated to issue and including 2,000,000 shares of unvested restricted
stock).





As used in the table below and
elsewhere in this Annual Report on Form 10-K, the term “beneficial ownership” with
respect to a security consists of sole or shared voting power, including the
power to vote or direct the vote and/or sole or shared investment power,
including the power to dispose or direct the disposition, with respect to the
security through any contract, arrangement, understanding, relationship, or
otherwise, including a right to acquire such power(s) during the next 60 days
following February 28, 2009.





Except as
otherwise noted, the address of the referenced individual is c/o OncoVista,
Inc., 14785 Omicron Drive, Suite 104, San Antonio, Texas 78245.


58





Name and Address of
                                                  
                                                  Shares of Common Stock
                                                  
                                                  
                                                  Percentage of ClassBeneficial Owner
                                                  
                                                  Beneficially Owned
                                                  
                                                  
                                                  Beneficially OwnedAlexander
      L. Weis, Ph.D.(1)(2)
                                                  
                                                  
                                                  5,275,000
                                                  (3)
                                                  
                                                  
                                                  26
                                                  %Alexander
      Ruckdaeschel(1)
                                                  
                                                  
                                                  60,000
                                                  (4)
                                                  
                                                  
                                                  *James
      Wemett(1)
                                                  
                                                  
                                                  2,270,475
                                                  (5)
                                                  
                                                  
                                                  11.2
                                                  %Technology
      Innovations15
      Schoen PlacePittsford,
      NY 14534Corey
      Levenson, Ph.D.(1)(2)
                                                  
                                                  
                                                  750,000
                                                  (6)
                                                  
                                                  
                                                  3.7
                                                  %William
      J. Brock(1)
                                                  
                                                  
                                                  15,000
                                                  (4)
                                                  
                                                  
                                                  −J.
      Michael Edwards(2)
                                                  
                                                  
                                                  155,000
                                                  (4)
                                                  
                                                  
                                                  *Tamas
      Bakos, Ph.D.
                                                  
                                                  
                                                  75,000
                                                  (4)
                                                  
                                                  
                                                  *Michael
      F. Moloney
                                                  
                                                  
                                                  150,000
                                                  (4)
                                                  
                                                  
                                                  *Technology
      Innovations(7)
                                                  
                                                  
                                                  1,235,475
                                                  
                                                  
                                                  
                                                  6.1
                                                  %15
      Schoen PlacePittsford,
      NY 14534Biomed
      Solutions, LLC(7)
                                                  
                                                  
                                                  1,025,000
                                                  
                                                  
                                                  
                                                  5.1
                                                  %15
      Schoen PlacePittsford,
      NY 14534Jack
      A. Tuszynski
                                                  
                                                  
                                                  1,400,000
                                                  
                                                  
                                                  
                                                  6.9
                                                  %10220
      133rd
      StreetEdmonton,
      AlbertaCanada
      T5N 1Z7CAMOFI
      Master LDC
                                                  
                                                  
                                                  2,387,759
                                                  (8)(10)
                                                  
                                                  
                                                  11.5
                                                  %CAMHZN
      Master LDCc/o
      Centrecourt Asset Management LLC350
      Madison Avenue, 8th FloorNew
      York, New York 10017Wexford
      Spectrum Trading Ltd.
                                                  
                                                  
                                                  2,442,855
                                                  (9)
                                                  
                                                  
                                                  11.6
                                                  %411
      West Putnam AvenueGreenwich,
      CT 06830All
      Current Executive Officers and Directors as a group (six
      persons)
                                                  
                                                  
                                                  8,525,475
                                                  (11)
                                                  
                                                  
                                                  41
                                                  %





(1)
            Indicates
      director.(2)
            Indicates
      officer.(3)
            Includes
      the (i) beneficial ownership of 500,000 shares of common stock of Lipitek
      International, Inc., (ii) 1,500,000 shares of restricted stock vesting
      two-thirds on January 1, 2010 and one-third on January 2011, and (iii)
      125,000 shares of common stock of the referenced person’s minor child.
      Excludes shares of common stock issuable upon exercise
      of warrants, beneficially owned by referenced person, issued in
      connection with a bridge note financing that closed on January 15, 2009
      due to the currently indeterminable nature of the type and number of
      shares issuable upon exercise of the warrants.(4)
            Represents
      shares of common stock issuable upon the exercise of stock options within
      the 60 days following February 28, 2009.(5)
            Includes
      (i)  beneficial ownership of Technology Innovations and Biomed
      Solutions, LLC disclosed in the table above and (ii) 10,000 shares of
      common stock issuable upon the exercise of stock options within the 60
      days following February 28, 2009.(6)
            Includes
      (i) 250,000 shares of common stock issuable upon exercise of stock options
      within 60 days following February 28, 2009, and (ii) 500,000 shares of
      restricted stock, vesting two-thirds on January 1, 2010 and one-third on
      January 2011.(7)
            Technology
      Innovations, LLC is the beneficial owner of a majority of the outstanding
      membership interests of Biomed Solutions, LLC; it disclaims ownership of
      these shares except to the extent of its pecuniary interest in Biomed
      Solutions, LLC. James Wemett and Michael Weiner, a former director of
      OncoVista-Sub, are deemed to have voting and investment control over these
      shares; they disclaim ownership of these shares except to the extent of
      their pecuniary interest in Biomed Solutions LLC and Technology
      Innovations LLC.




59





(8)
            Represents
      (i) 1,559,616 shares of common stock and 456,000 shares of common stock
      issuable upon the exercise of warrants within 60 days following February
      28, 2009 held by CAMOFI Master LDC, (ii) and 285,286 shares of common
      stock and 86,857 shares of common stock issuable upon the exercise of
      warrants within 60 days following February 28, 2009 held by CAMHZN Master
      LDC. Centrecourt Asset Management LLC (“Centrecourt’) is the
      investment manager of CAMOFI Master LDC and CAMHZN Master LDC. Richard
      Smithline is director of CAMOFI Master LDC and CAMHZN Master LDC.
      Centrecourt and Mr. Smithline disclaim beneficial interest in such
      securities.  The foregoing is based on information supplied in a
      Schedule 13G filed with the Commission on February 12,
    2009.(9)
            Represents
      1,714,284 shares of common stock and 428,571 shares of common stock
      issuable upon the exercise of warrants within 60 days following February
      29, 2008 by Wexford Spectrum Trading Limited ("WST"). Wexford Capital
      LLC ("Wexford")
      may, by reason of its status as Investment Sub-Advisor of WST, be deemed
      to own beneficially the interest in the shares of common stock of which
      WST possesses beneficial ownership. Each of Charles E. Davidson ("Davidson") and Joseph
      M. Jacobs ("Jacobs") may, by reason
      of hisstatus
      as a controlling person of Wexford Capital, be deemed to own beneficially
      the interests in the shares of common stock of which WST possesses
      beneficial ownership. Each of Davidson, Jacobs and Wexford Capital shares
      the power to vote and to dispose of the interests in the shares of common
      stock beneficially owned by WST. Each of Wexford, Davidson and Jacobs
      disclaims beneficial ownership of the shares of common stock owned by WST
      except, in the case of Davidson and Jacobs, to the extent of their
      interests in each member of WST.  The foregoing is based on
      information supplied in a Schedule 13G filed with the Commission on
      November 21, 2007. The referenced amount excludes shares of common stock
      issuable upon exercise of warrants, beneficially owned
      by referenced person, issued in connection with a bridge note
      financing that closed on January 15, 2009 due to the currently indeterminablenature of the type and number of shares issuable upon exercise of
      the warrants.(10)
            Notwithstanding
      the inclusion of the warrants beneficially owned by the referenced
      investors in the beneficial ownership calculation, the warrants provide
      that the holder of the warrants shall not have the right to exercise any
      portion of the warrants and that we shall not affect any exercise of such
      warrants to the extent that after giving effect to such issuance after
      exercise such holder of the warrants together with his, her or its
      affiliates, would beneficially own in excess of 4.99% of the number of
      shares of common stock outstanding immediately after giving effect to such
      issuance. Such 4.99% limitation may be waived by each holder upon not less
      than 61 days prior notice to change such limitation to 9.99% of the number
      of shares of common stock outstanding immediately after giving effect to
      such issuance.(11)
            Includes
      490,000 shares of common stock issuable upon exercise of stock options
      within 60 days following February 28, 2009.*
            Less
      than 1.0%.





Equity
Compensation Plan Information





The
following table sets forth information with respect to our 2004 Stock Option
Plan (“2004
Plan”),  our 2007 Stock Option Plan (the “2007 Plan”) and 2007 Stock
Option Plan for Independent and Non-Employee Directors (the “Directors Plan”) as of
December 31, 2008:





Plan Category
                        
                        Number of
                          securities
                          to be issued upon
                          exercise of
                          outstanding
                          options,
                          warrants and
                          rights
                        
                        
                        Weighted-average
                          exercise price of
                          outstanding
                          options, warrants
                          and rights
                        
                        
                        Number of securities
                          remaining available for
                          future issuance
                          under equity
                          compensation plans
                          (excluding
                          securities reflected in
                          column (a))(a)
                        
                        
                        (b)
                        
                        
                        (c)Equity
      compensation plans approved by security holders
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Equity
      compensation plans not approved by security holders
                        
                        
                        1,770,000
                        (1)
                        
                        $
                        1.93
                        
                        
                        
                        3,220,000
                        (2)


_______________




(1)
            Represents
      800,000 shares granted from the 2004 Plan, 370,000 shares granted from the
      2007 Plan,  10,000 shares granted from the Director Plan and
      590,000 warrants issued to non-employees.(2)
            Represents
      100,000 shares available for issuance under the 2004 Plan, 2,630,000
      shares available for issuance under the 2007 Plan and 490,000 shares
      available for issuance under the Director
Plan.




60


ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE





Except as otherwise indicated below, we
have not been a party to any transaction, proposed transaction, or series of
transactions required to be disclosed pursuant to Item 404 of Regulation S-K in
the last fiscal year.





Transactions
with Related Persons




Our
policy is to enter into transactions with related parties on terms that, on the
whole, are no more favorable, or no less favorable, than those available from
unaffiliated third parties. Based on our experience in the business sectors in
which we operate and the terms of our transactions with unaffiliated third
parties, we believe that all of the transactions described below met this policy
standard at the time they occurred.





2009
Bridge Notes





On
January 15, 2009, we and OncoVista-Sub completed an initial closing of a bridge
round of debt financing, whereby we and OncoVista-Sub issued secured
promissory notes (the “Bridge
Notes”) in the aggregate principal amount of $750,000, in exchange for
cash equal to the face amount of such Bridge Notes, to accredited investors as
defined by Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”). Of the
Bridge Notes issued, Bridge Notes in the principal amount of $350,000 were sold
to affiliates of Dr. Weis
and Bridge Notes in the principal amount of $300,000 were sold to Wexford
Spectrum Trading Limited. Dr. Weis is a member of our Board, Chief Executive
Officer, President, and Secretary as well as one of our significant beneficial
owners. Wexford Capital LLC is the investment sub-advisor of Wexford Spectrum
Trading Limited which beneficially owns approximately 11% of our outstanding
common stock and a representative of Wexford, Dr. Paul Mieyal, has been
appointed to the Board of Directors, such appointment commencing March 30,
2009.





The
Bridge Notes bear interest at 10% per annum increasing to 18% in the case of an
event of default and mature on the earlier of (i) January 15, 2010, (ii) the
date upon we consummate a financing, the aggregate gross proceeds of which equal
or exceed $5,000,000 (a “Qualified Financing"), and
(iii) the acceleration of the maturity of the Bridge Notes as described
therein.





In
connection with the bridge financing, we issued to holders of the Bridge Notes
detachable warrants (the “Warrants”), exercisable for a
period of five years from the date of grant, of up to an amount or number of the
securities offered in the first Qualified Financing, at an exercise price per
security equal to the product of (x) and (y), where (x) equals the offering
price per security in the first Qualified Financing and where (y) equals 0.90,
subject to adjustment in certain instances.  In the event that no
Qualified Financing shall be consummated by us prior to the expiration of the
Warrants, the Warrants shall be exercisable for up to an aggregate of 750,000
shares of common stock, par value $0.001 per share, at an exercise price of
$0.50 per share, subject to adjustment in certain instances.





We
entered into a Registration Rights Agreement with the holders of the Warrants
covering the shares of our common stock issuable upon exercise of the Warrants.
The Registration Rights Agreement requires us  to file a registration
statement with the SEC within 45 days of the final closing of the first
Qualified Financing (the “Filing Date”). We are
required to use our best efforts to cause the registration statement to become
effective as promptly as practicable after the filing thereof.  If we
do not file the registration statement with the SEC on or prior to the 45th day
following the Filing Date, or if the registration statement has not been
declared effective within 120 days following the Filing Date, we agreed to pay
to the holders liquidated damages in the amount of 0.5% of the offering price of
the Bridge Notes and the Warrants purchased thereby for each 30 days thereafter
until such registration statement shall be filed or effective, as applicable,
with the foregoing capped at 10%.





61


Biomarkers
Distribution Agreement





In
September 2008, AdnaGen entered into an exclusive distribution and license
agreement with Biomarkers LLC (“Biomarkers”) granting
Biomarkers the exclusive right to distribute the AdnaGen diagnostic kits in
North America. The term of this agreement continues through December 31, 2010
and is automatically renewable for additional twelve month
periods. Biomarkers plans on seeking the necessary approvals in these
territories to permit it to sell the AdnaGen diagnostic
rights. Pending FDA approval, Biomarkers is selling the AdnaGen
diagnostic kits for research use only. Biomarkers plans
to have the capability to run AdnaGen assays in a CLIA laboratory based in
New York in order to support on-going and planned clinical trials.





In
January 2009, AdnaGen also entered into an exclusive distribution and license
agreement with Biomarkers granting Biomarkers the exclusive right to distribute
the AdnaGen diagnostic kits in South America and the Middle East. The term of
this agreement continues through December 31, 2010 and is automatically
renewable for additional twelve month periods. Biomarker plans on seeking the
necessary approvals in these territories to permit it to sell the AdnaGen
diagnostic kits. Our CEO, Chairman of the Board, President and a significant
shareholder, is also a beneficial owner of Biomarkers.





Lipitek
Agreements





We and
Lipitek International Inc. (“Lipitek International”)
entered into a License Agreement, dated October 13, 2004, pursuant to which
Lipitek International has granted to us an exclusive, world-wide, royalty and
milestone-bearing right and license to utilize the patents and technologies of
Lipitek International relating to L-Nucleosides and their
conjugates.





On
November 17, 2005, we, Lipitek International, and Dr. Weis entered into a
Purchase Agreement, dated as of November 17, 2005, pursuant to which Lipitek has
granted us an option to purchase all membership interests in Lipitek Research
LLC to us for a purchase price of $5,000,000, payable in installments. As of
February 28, 2009, we have paid Lipitek International a total of $500,000. On or
before July 28, 2012, we are required to pay the balance of the purchase price.
Prior to the full payment of the purchase price, we have the option upon 30
day’s written notice to abandon the purchase of Lipitek Research LLC upon
forfeiture of the amounts already paid. In addition, Lipitek International and
Dr. Weis agreed to use reasonable efforts to ensure that we have the right of
first negotiation with respect to any Lipitek International intellectual
property related to anti-cancer, anti-fungal, anti-parasitic and anti-malarial
activities (except that derived from South American plants and vegetation) and
to intellectual property arising out of any current research or research
contract of Lipitek Research LLC.





Pursuant
to a Lease Agreement between Lipitek International and us, we lease laboratory
space for approximately $17,000 per month from Lipitek International under a
five-year lease agreement expiring in December 2009.




Dr. Weis
is a member of our board, Chief Executive Officer, President, and Secretary as
well as one of our significant beneficial owners. Dr. Weis has agreed not to
vote as a director in connection with any matter relating to
Lipitek.





Employment
Agreements





For a
description of employment agreements, please see “Executive Compensation -
Employment Agreements”.


62


ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 We incurred the following fees to our
independent registered public accounting firms for services rendered during the
fiscal year ended December 31, 2008 and 2007:
 
 Summary:
                    
                    2008
                    
                    
                    2007Audit
      fees(1)
                    
                    $
                    81,000
                    
                    
                    $
                    45,000Audit
      related fees(2)
                    
                    
                    1,000
                    
                    
                    
                    60,000Tax
      fees(3)
                    
                    
                    8,000
                    
                    
                    
                    −Other
      fees
                    
                    
                    −
                    
                    
                    
                    −Total
                    
                    $
                    90,000
                    
                    
                    $
                    105,000
  
 (1)
              Amount
      represents fees paid for professional services for the audit of our
      consolidated annual financial statements and review of our interim
      consolidated financial statements included in quarterly reports and
      services that are normally provided by our registered public accounting
      firm in connection with statutory and regulatory filings or
      engagements.
 
 (2)
              Amount
      represents fees paid for professional services for assurance and related
      services by our registered public accounting firm that are reasonably
      related to the performance of the audit or review of our financial
      statements and are not reported under item
1.
 
 (3)
              Amount
      represents fees paid for professional services for tax compliance and tax
      advice.
 
 In
accordance with the Charter of the Audit Committee, the Committee must
pre-approve all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for us by our independent auditor in
order to safeguard the independence of the auditors.  With the
exception of de-minimis amounts for non-audit services, the Committee approved
all auditing services provided to the Company.
 
 ITEM
15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 Exhibits:
  Exhibit No.
                            
                            Description2.1
                            
                            Agreement
      and Plan of Merger, dated as of October 26, 2007, by and between Aviation
      Upgrade Technologies, Inc., OncoVista, Inc. and OncoVista Acquisition
      Corp.(1)2.2
                            
                            Copy
      of Certificate of Merger dated November 13, 2007. (2)3.1
                            
                            Certified
      Copy of the Articles of Incorporation of the Registrant.(2)3.2
                            
                            Bylaws.(3)3.3
                            
                            Certificate
      of Change of the Registrant.(4)3.4
                            
                            Certificate
      of Amendment to Articles of Incorporation of the Registrant.(11)10.1
                            
                            Executive
      Employment Agreement dated as of October 1, 2004, by and between
      OncoVista, Inc. and Alexander L. Weis, Ph.D.(2)10.2
                            
                            Executive
      Employment Agreement dated as of January 15, 2005, by and between
      OncoVista, Inc. and Corey Levenson, Ph.D.(2)10.3
                            
                            Employment
      Agreement dated as of August 22, 2005, by and between OncoVista, Inc. and
      Robert Patterson.(2)
 
  63
  
 10.4
                      
                      Employment Agreement
      dated as of January 1, 2005, by and between OncoVista, Inc. and Tamas
      Bakos, Ph.D.(2)10.5
                      
                      Employment Agreement
      dated as of July 3, 2006, by and between OncoVista, Inc. and Jeanne Kay
      Noel.(6)10.6
                      
                      Lease Agreement
      between OncoVista, Inc. and Lipitek International, Inc. dated January 1,
      2005.(2)10.7
                      
                      Investment and Stock
      Purchase Agreement dated September 7, 2005 between AdnaGen AG, BioMed
      Venture GmbH, individual stockholders of AdnaGen AG and OncoVista,
      Inc.(9)10.8
                      
                      Stock Purchase
      Option Agreement dated as of September 7, 2005 between AdnaGen AG, BioMed
      Venture GmbH, individual stockholders of AdnaGen AG and OncoVista,
      Inc.(9)10.9
                      
                      Agreement and Plan
      of Merger between Aengus Pharmaceuticals, Inc., OncoVista-Aengus, Inc. and
      OncoVista, Inc. dated as of November 7, 2005.(8)10.10
                      
                      License Agreement
      dated as of December 30, 2004 between AdnaGen AG and Gen-Probe Inc.(6)10.11
                      
                      Amendment to License
      Agreement between AdnaGen AG and Gen-Probe, Inc. effective June 30,
      2006.(6)10.12
                      
                      License Agreement
      between Boston Medical Center Corporation and Aengus Pharmaceuticals,
      Inc.(9)10.13
                      
                      Assumption of
      Obligations of License Agreement and Consent to Transfer License Agreement
      between Boston Medical Center Corporation and OncoVista-Aengus, Inc. (6)10.14
                      
                      License Agreement
      dated November 21, 2003 between Oxigene, Inc. and Aengus Pharmaceuticals,
      Inc.(6)10.15
                      
                      Consent and
      Agreement to Assign License Agreement between Oxigene Inc. and OncoVista
      Aengus Pharmacueticals, Inc. dated December ___, 2005.(6)10.16
                      
                      License Agreement
      effective as of October 13, 2004 between Lipitek International, Inc. and
      OncoVista, Inc.(6)10.17
                      
                      Patent License
      effective May 1, 2005 between Technology Innovations, LLC and OncoVista,
      Inc.(6)10.18
                      
                      License Agreement
      effective as of October 13, 2004 between Technology Innovations, LLC. and
      OncoVista, Inc.(6)10.19
                      
                      License Agreement
      between AdnaGen AG and Innogenetics N.V.(6)10.20
                      
                      Distribution
      Agreement dated January 29, 2007 between Innogenetics and AdnaGen AG.(6)10.21
                      
                      Purchase Agreement
      dated as of November 17, 2005 between Lipitek International, Inc. and
      OncoVista, Inc. (6)10.22
                      
                      Securities Purchase
      Agreement, dated as of August 16, 2007.(5)10.23
                      
                      Form of Subscription
      Agreement between OncoVista, Inc. and purchasers of units in the OncoVista
      private placement that closed on August 15, 2007.(6)
 
  64
  
 10.24
                      
                      Form
      of Registration Rights Letter between OncoVista, Inc. and purchasers of
      units in the OncoVista private placement that closed on August 15,
      2007.(6)10.25
                      
                      Form
      of Warrant issued to purchasers of units in the OncoVista private
      placement that closed on August 15, 2007.(6)10.26
                      
                      Form
      of Lock-Up Agreement.(6)10.27
                      
                      Letter
      Agreement dated July 11, 2007 between OncoVista, Inc. and Maxim Group,
      LLC.(6)10.28
                      
                      Warrant
      dated August 15, 2007 issued to Maxim Group, LLC.(6)10.29
                      
                      Form
      of Subscription Agreement.(6)10.30
                      
                      2004
      Stock Option Plan.(6)10.31
                      
                      2007
      Stock Option Plan.(6)10.32
                      
                      2007
      Stock Option Plan for Independent and Non-Employee Directors.(6)10.33
                      
                      License
      Agreement by and between OncoVista, Inc. and OSI Pharmaceuticals,
      Inc.(7)10.34
                      
                      Subscription
      Agreement, dated November 27, 2007, between OncoVista, Inc. and OSI
      Pharmaceuticals, Inc.(7)10.35
                      
                      Investors’
      Rights Agreement, dated November 27, 2007, between OncoVista, Inc. and OSI
      Pharmaceuticals, Inc.(7)10.36
                      
                      Stockholders
      Agreement, dated November 27, 2007, between OncoVista, Inc., OSI
      Pharmaceuticals, Inc., and Alexander L. Weis.(7)10.37
                      
                      Stock
      Purchase Warrant dated November 27, 2007.(7)10.38
                      
                      Stock
      Purchase Warrant dated November 27, 2007.(7)10.39
                      
                      Share
      Purchase Agreement between BioMed Venture GmbH and OncoVista, Inc.(12)10.40
                      
                      Executive
      Employment Agreement dated as of January 1, 2008 between Aviation Upgrade
      Technologies, Inc. and J. Michael Edwards. (10)10.41
                      
                      Secured
      Promissory Note of OncoVista Innovative Therapies, Inc. and OncoVista,
      Inc. dated January 15, 2009*10.42
                      
                      Registration
      Rights Agreement dated January 15, 2009*10.43
                      
                      Form
      of Warrant dated January 15, 2009*21.1
                      
                      List
      of Subsidiaries.*31.1
                      
                      Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended*31.2
                      
                      Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended*32.1
                      
                      Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
  Officer)*
  65
 
 32.2
                      
                      Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)*
  
 *
              Filed
      herewith.
 
 (1)
              Filed
      as an exhibit to the Current Report on Form 8-K filed on October 29, 2007
      with the Commission and incorporated by reference
  herein.
 
 (2)
              Filed
      as an exhibit to the Current Report on Form 8-K filed on November 13, 2007
      with the Commission and incorporated by reference
  herein.
 
 (3)
              Filed
      as an exhibit to Form 10-SB filed on December 7, 1999 with the Commission
      and incorporated by reference
herein.
 
 (4)
              Filed
      as an exhibit to the Current Report on Form 8-K filed on October 24, 2007
      with the Commission and incorporated by reference
  herein.
 
 (5)
              Filed
      as an exhibit to the Current Report on Form 8-K filed August 22, 2007 with
      the Commission and incorporated by reference
  herein.
 
 (6)
              Filed
      as an exhibit to Current Report on Form 8-K/A filed on November 19, 2007
      with the Commission and incorporated by reference
  herein.
 
 (7)
              Filed
      as an exhibit to Current Report on Form 8-K on December 3, 2007, with the
      Commission and incorporated by reference
herein.
 
 (8)
              We
      will file the referenced exhibit by amendment to the Current Report on
      Form 8-K on November 13, 2007 with the
  Commission.
 
 (9)
              We
      will file the referenced exhibit by amendment to the Current Report on
      Form 8-K filed on November 13, 2007 with the Commission and intend to seek
      confidential treatment with respect to portions of the referenced
      exhibit.
 
 (10)
              Filed
      as an exhibit to Current Report on Form 8-K filed on January 8, 2008 with
      the Commission and incorporated by reference
  herein.
 
 (11)
              Filed
      as an exhibit to Current Report on Form 8-K filed on January 9, 2008 with
      the Commission and incorporated by reference
  herein.
 
 (12)
              Filed
      as an exhibit to Current Report on Form 8-K filed on January 17, 2008 with
      the Commission and incorporated by reference
  herein.
  66
  SIGNATURES
 
 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.
 
 ONCOVISTA
      INNOVATIVE
      THERAPIES,
      INC./s/
      ALEXANDER L.
      WEISAlexander
      L. Weis, Ph.D.Chairman
      of the Board of DirectorsChief
      Executive Officer(principal
      executive officer)/s/ J. MICHAEL EDWARDSJ.
      Michael EdwardsChief
      Financial Officer(principal
      accounting officer)Date:  March
      27,
2009
 
 Pursuant to the requirements of the
Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities as on March 27,
2009.
 
 /s/ ALEXANDER L. WEISAlexander
      L. Weis, Ph.D.Chairman
      of the Board of Directors/s/ WILLIAM J. BROCKWilliam
      J. BrockDirector/s/ COREY LEVENSONCorey
      Levenson, Ph.D.Director/s/ ALEXANDER
  RUCKDAESCHELAlexander
      RuckdaeschelDirector/s/ JAMES WEMETTJames
      WemettDirector
  67
 
 ONCOVISTA
INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
 Consolidated
Financial Statements
 Years
Ended December 31, 2008 and 2007
 
 F-1
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReports
      of Independent Registered Public Accounting Firms
                            F-3Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                            F-5Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                            F-6Consolidated
      Statements of Stockholders’ Deficit and Comprehensive Loss for the Years
      Ended December 31, 2008 and 2007
                            F-7Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                            F-8Notes
      to Consolidated Financial Statements for the Years Ended December 31, 2008
      and 2007
                            F-9
  F-2
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 OncoVista Innovative Therapies,
Inc.
 
 We have
audited the accompanying consolidated balance sheet of OncoVista Innovative
Therapies, Inc. and Subsidiaries (the “Company”) as of December 31, 2008, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with 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.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OncoVista
Innovative Therapies, Inc. and Subsidiaries as of December 31, 2008, and the
results of their operations, and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 3
to the consolidated financial statements, the Company has a net loss of
$7,482,024 and net cash used in operations of $3,861,456 for the year ended
December 31, 2008, a working capital deficit of $4,684,427, an accumulated
deficit of $23,574,947 and a total stockholders’ deficit of $8,345,779 at
December 31, 2008.  These factors raise substantial doubt about the
Company’s ability to continue as a going concern.  Management’s plan
in regards to these matters is also described in Note 3.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 /s/ GHP
Horwath P.C.
 
 Denver,
Colorado
 March 26,
2009
  F-3
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 OncoVista Innovative Therapies,
Inc.
 
 We have
audited the accompanying consolidated balance sheets of OncoVista Innovative
Therapies, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2007 and 2006.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
 We
conducted our audits in accordance with 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 consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included the 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 consolidated financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OncoVista
Innovative Therapies, Inc. and Subsidiaries as of December 31, 2007 and 2006,
and the consolidated results of their operations, changes in stockholders’
deficit and cash flows for the years ended December 31, 2007 and 2006, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 3
to the consolidated financial statements, the Company has a net loss of
$5,602,393 and net cash used in operations of $2,879,573 for the year ended
December 31, 2007, a working capital deficit of $208,085, an accumulated deficit
of $16,092,923 and a total stockholders’ deficit of $3,992,333 at December 31,
2007.  These factors raise substantial doubt about the Company’s
ability to continue as a going concern.  Management’s plan in regards
to these matters is also described in Note 3.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
 /s/
Berman & Company, P.A.
 
 Boca
Raton, Florida
 April 7,
2008
  F-4
  ONCOVISTA
INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
 Consolidated
Balance Sheets
 
 December 31,2008
                                  
                                  
                                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  91,482
                                  
                                  
                                  $
                                  4,364,141Accounts
      receivable
                                  
                                  
                                  171,775
                                  
                                  
                                  
                                  195,224Inventory
                                  
                                  
                                  51,575
                                  
                                  
                                  
                                  36,493Prepaid
      and other current assets
                                  
                                  
                                  33,851
                                  
                                  
                                  
                                  98,368Total
      current assets
                                  
                                  
                                  348,683
                                  
                                  
                                  
                                  4,694,226Equipment,
      net
                                  
                                  
                                  151,667
                                  
                                  
                                  
                                  199,621Deposits
      and other assets
                                  
                                  
                                  53,783
                                  
                                  
                                  
                                  56,102Total
      assets
                                  
                                  $
                                  554,133
                                  
                                  
                                  $
                                  4,949,949LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable
                                  
                                  $
                                  593,721
                                  
                                  
                                  $
                                  245,704Accrued
      expenses
                                  
                                  
                                  1,235,204
                                  
                                  
                                  
                                  568,754Loans
      payable
                                  
                                  
                                  1,318,980
                                  
                                  
                                  
                                  2,136,657Notes
      payable
                                  
                                  
                                  804,850
                                  
                                  
                                  
                                  836,450Accrued
      interest payable
                                  
                                  
                                  1,080,355
                                  
                                  
                                  
                                  1,114,746Total
      current liabilities
                                  
                                  
                                  5,033,110
                                  
                                  
                                  
                                  4,902,311Long-term
      liabilitiesNotes
      payable
                                  
                                  
                                  3,524,250
                                  
                                  
                                  
                                  3,682,250Accrued
      interest payable
                                  
                                  
                                  338,328
                                  
                                  
                                  
                                  353,497Other
                                  
                                  
                                  4,224
                                  
                                  
                                  
                                  4,224Total
      long-term liabilities
                                  
                                  
                                  3,866,802
                                  
                                  
                                  
                                  4,039,971Total
      liabilities
                                  
                                  
                                  8,899,912
                                  
                                  
                                  
                                  8,942,282Commitments
      and contingenciesStockholders’
      deficit:Common
      stock, $.001 par value; 147,397,390 shares authorized, 20,316,475 and
      20,116,475 shares issued and outstanding at December 31, 2008 and 2007,
      respectively
                                  
                                  
                                  20,316
                                  
                                  
                                  
                                  20,116Additional
      paid-in capital
                                  
                                  
                                  16,389,878
                                  
                                  
                                  
                                  13,604,591Accumulated
      deficit
                                  
                                  
                                  (23,574,947
                                  )
                                  
                                  
                                  (16,092,923
                                  )Accumulated
      other comprehensive loss
                                  
                                  
                                  (1,181,026
                                  )
                                  
                                  
                                  (1,524,117
                                  )Total
      stockholders’ deficit
                                  
                                  
                                  (8,345,779
                                  )
                                  
                                  
                                  (3,992,333
                                  )Total
      liabilities and stockholders’ deficit
                                  
                                  $
                                  554,133
                                  
                                  
                                  $
                                  4,949,949
 
 See
accompanying notes to consolidated financial statements
  F-5
  ONCOVISTA
INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
 Consolidated
Statements of Operations
 
 Year ended December 31,2008
                          
                          
                          2007Revenues:Licensing
                          
                          $
                          52,447
                          
                          
                          $
                          1,501,676Diagnostic
      kits
                          
                          
                          361,707
                          
                          
                          
                          239,364Research
      and development revenue
                          
                          
                          89,171
                          
                          
                          
                          226,950Total
      revenues
                          
                          
                          503,325
                          
                          
                          
                          1,967,990Operating
      expenses:Research
      and development
                          
                          
                          3,386,163
                          
                          
                          
                          4,501,401General
      and administrative
                          
                          
                          5,128,583
                          
                          
                          
                          2,984,801Total
      operating expenses
                          
                          
                          8,514,746
                          
                          
                          
                          7,486,202Loss
      from operations
                          
                          
                          (8,011,421
                          )
                          
                          
                          (5,518,212
                          )Other
      income (expense):Interest
      income
                          
                          
                          55,109
                          
                          
                          
                          118,139Interest
      expense
                          
                          
                          (241,533
                          )
                          
                          
                          (309,565
                          )Gain
      on debt settlement
                          
                          
                          758,801
                          
                          
                          
                          56,428Other
                          
                          
                          (42,980
                          )
                          
                          
                          50,817Total
      other income (expense), net
                          
                          
                          529,397
                          
                          
                          
                          (84,181
                          )Net
      loss
                          
                          $
                          (7,482,024
                          )
                          
                          $
                          (5,602,393
                          )Net
      loss per share - basic and diluted
                          
                          $
                          (0.41
                          )
                          
                          $
                          (0.33
                          )Weighted
      average number of shares outstanding during the period - basic and
      diluted
                          
                          
                          18,235,055
                          
                          
                          
                          17,030,788
 
 See
accompanying notes to consolidated financial statements
  F-6
  ONCOVISTA
INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
 Consolidated
Statements of Stockholders’ Deficit and Comprehensive Loss
 For
the Years Ended December 31, 2008 and 2007
 
 Additional
                                
                                
                                
                                
                                
                                Accumulated
                                  otherCommon stock
                                
                                
                                paid-in
                                
                                
                                Accumulated
                                
                                
                                comprehensiveShares
                                
                                
                                Amount
                                
                                
                                capital
                                
                                
                                deficit
                                
                                
                                loss
                                
                                
                                TotalBalance
      at January 1, 2007
                                
                                
                                16,888,475
                                
                                
                                $
                                16,888
                                
                                
                                $
                                5,673,499
                                
                                
                                $
                                (10,490,530
                                )
                                
                                $
                                (768,145
                                )
                                
                                $
                                (5,568,288
                                )Net
      loss
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (5,602,393
                                )
                                
                                
                                −
                                
                                
                                
                                (5,602,393
                                )Other
      comprehensive loss:Foreign
      currency translation loss
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (755,972
                                )
                                
                                
                                (755,972
                                )Total
      comprehensive loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (6,358,365
                                )Purchase
      of additional equity interest in subsidiary
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (599,241
                                )
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (599,241
                                )Issuance
      of stock, net of direct offering costs of $570,500
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                6,224,484
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                6,224,484Cash
      paid for acquisition of shell
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (150,000
                                )
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (150,000
                                )Deemed
      issuance to shareholders of legal acquiror and
      recapitalization
                                
                                
                                728,000
                                
                                
                                
                                728
                                
                                
                                
                                (728
                                )
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −Issuance
      of unvested restricted common stock - related parties
                                
                                
                                2,000,000
                                
                                
                                
                                2,000
                                
                                
                                
                                (2,000
                                )
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −Issuances
      of common stock and warrants for licensing rights and intellectual
      property
                                
                                
                                500,000
                                
                                
                                
                                500
                                
                                
                                
                                1,865,150
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                1,865,650Employee
      stock-based compensation
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                368,701
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                368,701Non-employee
      stock-based consulting
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                224,726
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                224,726Balance
      at December 31, 2007
                                
                                
                                20,116,475
                                
                                
                                
                                20,116
                                
                                
                                
                                13,604,591
                                
                                
                                
                                (16,092,923
                                )
                                
                                
                                (1,524,117
                                )
                                
                                
                                (3,992,333
                                )Net
      loss
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (7,482,024
                                )
                                
                                
                                −
                                
                                
                                
                                (7,482,024
                                )Other
      comprehensive loss:Foreign
      currency translation gain
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                343,091
                                
                                
                                
                                343,091Total
      comprehensive loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (7,138,933
                                )Purchase
      of additional equity interest in subsidiary
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (70,374
                                )
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                (70,374
                                )Issuance
      of restricted common stock for consulting
                                
                                
                                100,000
                                
                                
                                
                                100
                                
                                
                                
                                109,900
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                110,000Issuance
      of warrants for consulting
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                1,012,292
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                1,012,292Exercise
      of common stock options
                                
                                
                                100,000
                                
                                
                                
                                100
                                
                                
                                
                                9,900
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                10,000Employee
      stock-based compensation
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                1,557,743
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                1,557,743Non-employee
      stock-based consulting
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                165,826
                                
                                
                                
                                −
                                
                                
                                
                                −
                                
                                
                                
                                165,826Balance
      at December 31, 2008
                                
                                
                                20,316,475
                                
                                
                                $
                                20,316
                                
                                
                                $
                                16,389,878
                                
                                
                                $
                                (23,574,947
                                )
                                
                                $
                                (1,181,026
                                )
                                
                                $
                                (8,345,779
                                )
 
 See
accompanying notes to consolidated financial statements
  F-7
  ONCOVISTA
INNOVATIVE THERAPIES, INC. AND SUBSIDIARIES
 Consolidated
Statements of Cash Flows
 
 Year
      ended December 31,2008
                            
                            
                            2007Cash
      flows from operating activitiesNet
      loss
                            
                            $
                            (7,482,024
                            )
                            
                            $
                            (5,602,393
                            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
                            
                            
                            75,829
                            
                            
                            
                            71,635Gain
      on debt settlement
                            
                            
                            (758,801
                            )
                            
                            
                            (56,428
                            )Employee
      stock-based compensation
                            
                            
                            1,557,743
                            
                            
                            
                            368,701Non-employee
      stock-based consulting
                            
                            
                            165,826
                            
                            
                            
                            224,726Common
      stock issued for consulting
                            
                            
                            110,000
                            
                            
                            
                            −Warrants
      issued for consulting
                            
                            
                            1,012,292
                            
                            
                            
                            −Common
      stock and warrants issued for licensing rights of intellectual
      property
                            
                            
                            −
                            
                            
                            
                            1,865,650Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            16,106
                            
                            
                            
                            (133,091
                            )Inventory
                            
                            
                            (17,377
                            )
                            
                            
                            1,416Prepaid
      and other assets
                            
                            
                            63,449
                            
                            
                            
                            (45,060
                            )Accounts
      payable
                            
                            
                            358,982
                            
                            
                            
                            166,012Accrued
      expenses
                            
                            
                            852,382
                            
                            
                            
                            60,224Accrued
      interest payable
                            
                            
                            184,137
                            
                            
                            
                            199,035Net
      cash used in operating activities
                            
                            
                            (3,861,456
                            )
                            
                            
                            (2,879,573
                            )Cash
      flows from investing activitiesPurchase
      of equipment
                            
                            
                            (33,180
                            )
                            
                            
                            (15,970
                            )Cash
      paid to acquire equity interest in subsidiary
                            
                            
                            (70,374
                            )
                            
                            
                            (599,241
                            )Cash
      paid for acquisition of shell
                            
                            
                            –
                            
                            
                            
                            (150,000
                            )Net
      cash used in investing activities
                            
                            
                            (103,554
                            )
                            
                            
                            (765,211
                            )Cash
      flows from financing activitiesProceeds
      from exercise of stock options
                            
                            
                            10,000
                            
                            
                            
                            –Repayments
      of loans and notes payable
                            
                            
                            (202,550
                            )
                            
                            
                            (224,135
                            )Proceeds
      from sale of common stock
                            
                            
                            –
                            
                            
                            
                            6,794,984Cash
      paid for direct offering costs
                            
                            
                            –
                            
                            
                            
                            (570,500
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            (192,550
                            )
                            
                            
                            6,000,349Net
      (decrease) increase in cash and cash equivalents
                            
                            
                            (4,157,560
                            )
                            
                            
                            2,355,565Effect
      of exchange rates on cash
                            
                            
                            (115,099
                            )
                            
                            
                            53,931Cash
      and cash equivalents at beginning of year
                            
                            
                            4,364,141
                            
                            
                            
                            1,954,645Cash
      and cash equivalents at end of year
                            
                            $
                            91,482
                            
                            
                            $
                            4,364,141Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                            
                            $
                            103,329
                            
                            
                            $
                            110,530
 
 See
accompanying notes to consolidated financial statements
  F-8
 
 Note
      1.
              BASIS
      OF PRESENTATION, ORGANIZATION AND NATURE OF
  OPERATIONS
 
 OncoVista
Innovative Therapies, Inc. (“OVIT” or the “Company”) is a biopharmaceutical
company involved in the commercialization of diagnostic tests for metastatic
tumors, as well as the development of targeted anticancer therapies by utilizing
tumor-associated biomarkers. The Company has developed diagnostic kits for
breast, colon, ovarian and prostate cancers, and currently market diagnostic
kits in Europe for the detection of circulating tumor cells (“CTCs”) in patients
with breast, colon and prostate cancer.  The Company has also
developed research products for the detection of steroid receptors (ER/PR) and
cancer stem cells.
 
 The
Company, formerly known as Aviation Upgrade Technologies, Inc. (“AVUG”), was
incorporated in Nevada in January 1999. In August 2007, OncoVista, Inc.
(“OncoVista”) acquired 16,160,430 shares of common stock of AVUG constituting
approximately 95.7% of AVUG’s issued and outstanding capital stock for cash
consideration of $667,000, of which $150,000 was paid by OncoVista, and the
remaining $517,000 was paid by third parties. The acquisition resulted in a
change of control of AVUG.
  In
October 2007, OncoVista entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with AVUG. In November 2007, AVUG, then a shell corporation,
merged its subsidiary, OncoVista Acquisition Corp., with OncoVista, and
OncoVista became the surviving corporation as a wholly-owned subsidiary of AVUG.
OncoVista was incorporated on September 22, 2004 in the State of Delaware and
its corporate offices are located in San Antonio, Texas.
 
 In
December 2005, OncoVista acquired a controlling (51%) interest in AdnaGen AG
(“AdnaGen”), a research and development company based in Langenhagen,
Germany.  AdnaGen focuses on the development of innovative tumor
diagnostics by utilizing its proprietary technology for the detection and
analysis of rare cells.  In December 2007, OncoVista purchased from a
now former shareholder of AdnaGen an additional 34% equity interest in AdnaGen,
for consideration of $599,241. In June 2008, OncoVista purchased an additional
10% equity interest in AdnaGen, for consideration of $70,374 from now former
AdnaGen shareholders.  As a result of these purchases, OncoVista now
owns approximately 95% of AdnaGen.
 
 Note
      2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of OVIT, OncoVista and
AdnaGen AG (collectively, the “Company”).  All intercompany balances
have been eliminated in consolidation.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.
 
 Significant
estimates during 2008 and 2007 include the valuation of warrants and stock
options granted for services or compensation, estimates of the probability and
potential magnitude of contingent liabilities, and the valuation allowance for
deferred tax assets due to continuing operating losses.
 
 Comprehensive
Income (Loss)
 
 The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive
Income”, which establishes standards for the reporting and display of
comprehensive income (loss) and its components in the consolidated financial
statements.  Comprehensive income or loss is comprised of net earnings
or loss and other comprehensive income or loss, which includes certain changes
in equity that are excluded from net earnings, primarily foreign currency
translation adjustments.
  F-9
  Cash
and Cash Equivalents
 
 For the
purpose of the Statements of Cash Flows, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.
 
 The
Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial
institution.  The balance at times may exceed federally insured
limits. The balance exceeded the federally insured limit by approximately $0 and
$3.6 million at December 31, 2008 and 2007, respectively. The Company has not
incurred any losses related this credit risk in its history.
 
 Accounts
Receivable
 
 There has
been no identifiable bad debt expense during the years ended December 31, 2008
and 2007, respectively.  Additionally, the Company has not recorded
any allowance for doubtful accounts.  The allowance is generally
determined based on an account-by-account review.  Accounts are
charged off when collection efforts have failed and the account is deemed
uncollectible.  The Company does not charge interest on accounts
receivable.
 
 Inventory
 
 Inventory
is stated at the lower of cost or market, determined by the first-in, first-out
(FIFO) method.  Inventories consist of finished goods in the form of
select and detect breast cancer and colon cancer kits.  During the
years ended December 31, 2008 and 2007, respectively, there were no write-downs
to net realizable value due to obsolescence.
 
 Equipment
 
 Equipment
is stated at cost, less accumulated depreciation.  Costs greater than
$1,000 are capitalized and depreciated on a straight-line basis over the
estimated useful lives, which range from three to fourteen years.
 
 Long-Lived
Assets
 
 Long-lived
assets are reviewed for impairment periodically and whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset.  If such assets are
considered impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets.  As a result of these reviews, no impairment charge has been
recorded during the years ended December 31, 2008 and 2007.
 
 Minority
Interest
 
 Under
generally accepted accounting principles, when losses applicable to the minority
interest in a subsidiary exceed the minority interest in the equity capital of
the subsidiary, the excess is not charged to the minority interest since there
is no obligation of the minority interest to make good on such
losses.  The Company, therefore, has included losses applicable to the
minority interest against its interest. If future earnings materialize, the
Company will be credited to the extent of such losses previously
absorbed.  For financial reporting purposes, minority interest will
not be presented until the minority’s share of profit exceeds its previously
recorded deficit.
 
 Income
Taxes
 
 The
Company applies SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”).  Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.  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.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation allowance is
recognized.
  F-10
  On
January 1, 2009, the Company adopted Financial Accounting Standards Board
(“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN
48 addresses the accounting and disclosure of uncertain tax positions. FIN 48
clarifies the accounting for income taxes, by prescribing a minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
measurement and classification of amounts relating to uncertain tax positions,
accounting for and disclosure of interest and penalties, accounting in interim
periods, disclosures and transition relating to the adoption of the new
accounting standard. The adoption of FIN 48 did not have a material impact on
the Company's consolidated financial position and results of
operations.
 
 Significant
management judgment is required in developing the provision for income taxes,
including the determination of deferred tax assets and liabilities and any
valuation allowances that might be required against the deferred tax
assets.  Management evaluates its ability to realize its deferred tax
assets on a quarterly basis and adjusts its valuation allowance when it believes
that it is more likely than not that the asset will not be
realized.
 
 Revenue
Recognition
 
 The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 101, “Revenue
Recognition in Financial Statements”(SAB No. 101), as amended by SAB No.
104, “Revenue
Recognition” (SAB No. 104). The Company recognizes revenue when each of
the following four criteria is met: 1) a contract or sales arrangement exists;
2) products have been shipped or services have been rendered; 3) the price of
the products or services is fixed or determinable; and 4) collectability is
reasonably assured.  The Company currently has two primary sources of
revenue: Licensing and Diagnostic Kits.
 
 Licensing –The Company has
entered into various license agreements with third parties that generate
nonrefundable upfront and milestone license payments.  Upfront license
payments are reported as deferred revenue until they are recognizable as
revenue, generally on a straight line basis over the term of the respective
license period, beginning only after both the license period has begun and the
technology has been delivered. At December 31, 2008 and 2007, there was no
deferred revenue recognized from upfront license payments.  Milestone
payments from license agreements are recognized as revenue upon achievement of
the milestone provided the payment is nonrefundable.
 
 Diagnostic Kits –The Company
recognizes revenues from the sale of diagnostic test kits to third parties upon
shipment. The Company’s customers have no right of return for products
sold.
 
 Research and Development –The Company recognizes the revenue from contracts to perform research and
development services over the term of the applicable contract and as we complete
our obligations under that contract.
 
 Research
and Development Expenses
 
 The
Company’s research and development expense consists of costs associated with
discovery research and product development.  Discovery research is
comprised of employee costs, laboratory materials and supplies, and
research-related overhead allocations.  Included in product
development are clinical trial costs, including expenses associated with
contract research organizations, contract manufacturing, employee costs,
pharmacology studies, and costs to obtain, maintain and defend patents. These
costs are expensed as incurred.
 
 In June
2007, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on
EITF No. 07-03, “Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities”(“EITF No. 07-03”). EITF No.
07-03 provides that nonrefundable advance payments for goods or services that
will be used or rendered for future research and development activities should
be capitalized and deferred. Such amounts should be recognized as an expense as
the related goods are delivered or the related services are performed or such
time when an entity does not expect the goods to be delivered or services to be
performed. EITF No. 07-03 is effective for fiscal periods beginning after
December 15, 2007. The adoption of EITF No. 07-03 did not have a material impact
on the Company’s consolidated results of operations or financial
position.
  F-11
  Customer
Concentration
 
 For the
year ended December 31, 2008, four customers represented approximately 75% of
the Company’s revenue, accounting for approximately 31%, 18%, 16% and 10%, for
the period.  For the year ended December 31, 2007, one customer
represented approximately 82% of the Company’s revenue for the
period.
 
 Two
customers accounted for approximately 74% of accounts receivable, accounting for
50% and 24% of the balance at December 31, 2008, and one customer accounted for
approximately 70% of accounts receivable at December 31, 2007.
 
 Regulatory
Matters
 
 Regulations
imposed by federal, state and local authorities in the United States, as well as
authorities in other countries, are a significant factor in the conduct of
research, development, manufacturing and eventual marketing of the Company’s
products.  In the United States, drugs, biological products, and
medical devices are regulated by the United States Food, Drug and Cosmetic Act,
which is administered by the U.S. Food and Drug Administration.  In
Europe, sales of diagnostic products are regulated by Directorate General III of
the European Commission, which allows the Company’s subsidiary to market its
products as clinical diagnostics under the CE label in the European
Community.
 
 Foreign
Country Risks
 
 The
Company may be exposed to certain risks as a portion of its operations are being
conducted in Germany.  These include risks associated with, among
others, the political, economic and legal environment, as well as foreign
currency exchange risk.  The Company’s results may be adversely
affected by change in the political and social conditions in Germany due to
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversions and remittances abroad, and rates and methods of
taxation, among other things.  The Company does not believe these
risks to be significant, and no such losses have occurred in the current or
prior years because of these factors.  However, there can be no
assurance those changes in political and other conditions will not result in any
adverse impact in future periods.
 
 Net
Loss per Share
 
 Basic
earnings (loss) per share are computed by dividing the net income (loss) by the
weighted average number of common shares outstanding.  Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding including the effect of share
equivalents.  Common stock equivalents consist of shares issuable upon
the exercise of certain common stock purchase warrants and stock
options.
 
 At
December 31, 2008 and 2007, the following numbers of shares have been excluded
since such inclusion in the computation would be anti-dilutive:
 
 2008
                    
                    
                    2007Stock
      options outstanding under our various stock option plans
                    
                    
                    1,180,000
                    
                    
                    
                    1,090,000Warrants
                    
                    
                    2,931,712
                    
                    
                    
                    2,391,712Total
                    
                    
                    4,111,712
                    
                    
                    
                    3,481,712
 
 For
purposes of the computation of net income per share, unvested restricted shares
(Note 10) are considered contingently returnable shares under SFAS No. 128.
These shares, although classified as issued and outstanding, are not included in
basic weighted average number of shares until all necessary conditions are met
that no longer cause the shares to be contingently returnable. These
contingently returnable shares are to be included in diluted weighted average
number of shares as of the beginning of the period in which the conditions are
satisfied.
  F-12
  Share-Based
Compensation
  All
share-based payments to employees since inception have been recorded and
expensed in the statements of operations as applicable under SFAS No. 123R,
“Share-Based Payment”
(SFAS No. 123R).  SFAS No. 123R requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors including grants of employee stock options based on
estimated fair values.  The Company has used the Black-Scholes
option-pricing model to estimate grant date fair value for all option
grants.
 
 Share-based
compensation expense is based on the value of the portion of share-based payment
awards that is ultimately expected to vest during the year, less expected
forfeitures.  SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary in subsequent periods if actual
forfeitures differ from those estimates.
 
 Additionally,
during 2007, common stock and warrants were issued in connection with the
acquisition of licensing rights to intellectual property and treated as direct
offering costs. There was no effect on stockholders’ equity for these
transactions.
 
 Foreign
Currency Translation
 
 The
financial position and results of operations of the Company’s foreign subsidiary
are measured using the local currency (Euros “€”) as the functional
currency.  Assets and liabilities of the subsidiary have been
translated at current exchange rates as of December 31, 2008 and 2007, and
related revenue and expenses have been translated at average exchange rates for
the years ended December 31, 2008 and 2007.  All equity transactions
have been translated at their historical rates when the transaction
occurred.  Those translation adjustments are included as a component
of accumulated other comprehensive loss and as a component of stockholders’
deficit.  Transaction gains and losses related to operating assets and
liabilities are included in other income (expense).
 
 Fair
Value of Financial Instruments
 
 The
carrying amounts of the Company’s financial instruments, including accounts
receivable, accounts payable, loans payable and notes payable, approximate fair
value due to the relatively short period to maturity for these
instruments.
 
 Effective
January 1, 2008, the Company partially adopted SFAS No. 157, “Fair Value
Measurements”.  This statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.  As
permitted by FASB’s Statement of Position (“FSP”) FAS No. 157-2, the Company
elected to defer the adoption of the nonrecurring fair value measurement
disclosure of nonfinancial assets and liabilities.
 
 To
increase consistency and comparability in fair value measurements, SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:
 
 Level
1—quoted prices (unadjusted) in active markets for identical assets or
liabilities;
 Level
2—observable inputs other than Level I, quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets and
liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable;
and
 Level
3—assets and liabilities whose significant value drivers are
unobservable.
 
 Observable
inputs are based on market data obtained from independent sources, while
unobservable inputs are based on the Company’s market
assumptions.  Unobservable inputs require significant management
judgment or estimation.  In some cases, the inputs used to measure an
asset or liability may fall into different levels of the fair value
hierarchy.  In those instances, the fair value measurement is required
to be classified using the lowest level of input that is significant to the fair
value measurement.  Such determination requires significant management
judgment. There were no financial assets or liabilities measured at fair value,
with the exception of cash and cash equivalents (Level 1), as of December 31,
2008.  There were no changes in the Company’s valuation techniques
used to measure fair value on a recurring basis as a result of partially
adopting SFAS No. 157. The partial adoption of SFAS No. 157 did not have a
material impact on the Company’s consolidated results of operations, cash flows
or financial position.
  F-13
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115.” SFAS No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The standard establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 was effective for fiscal years beginning
after November 15, 2007. The Company did not elect to report any of its
financial assets or liabilities at fair value, and as a result, the adoption of
SFAS No. 159 had no material impact on the Company’s consolidated financial
position and results of operations.
 
 Reclassifications
  Certain
prior year balances have been reclassified to conform to the current year
presentation.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”,
which becomes effective for fiscal periods beginning after December 15, 2008.
The standard changes the accounting for business combinations, including the
measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for
pre-acquisition gain and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition related transaction
costs, and the recognition of changes in the acquirer’s income tax valuation
allowance. SFAS No. 141(R) becomes effective for the Company on January 1, 2009.
The Company does not expect the adoption of this statement to have a material
impact on its consolidated financial statements unless in the future, the
Company enters into a business acquisition.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” The
standard changes the accounting for non-controlling (minority) interests in
consolidated financial statements, including the requirements to classify
non-controlling interests as a component of consolidated stockholders’ equity,
and the elimination of “minority interest” accounting in results of operations
with earnings attributable to non-controlling interests reported a part of
consolidated earnings. Purchases and sales of minority interests will be
reported in equity similar to treasury stock transactions. SFAS No. 160 is
effective for the Company on January 1, 2009. The Company does not believe that
the adoption of this statement will have a material impact on the Company’s
consolidated financial statements.
 
 In
December 2007, the FASB ratified EITF No. 07-1, “Accounting for Collaborative
Arrangements.” EITF No. 07-1 defines collaborative arrangements and
establishes reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third
parties. EITF No. 07-1 also establishes the appropriate income statement
presentation and classification for joint operating activities and payments
between participants, as well as the sufficiency of the disclosures related to
these arrangements. EITF No. 07-1 is effective for the Company on January 1,
2009, and is to be applied retrospectively as a change in accounting principle
for collaborative arrangements existing at the effective date. The Company does
not expect EITF No. 07-1 to have a material impact on the Company’s consolidated
financial statements.
 
 Note
      3.
              GOING
      CONCERN AND MANAGEMENT PLANS
 
 As
reflected in the accompanying consolidated financial statements, the Company has
a net loss of approximately $7.5 million and net cash used in operations of
approximately $3.9 million for the year ended December 31, 2008, a working
capital deficit of approximately $4.6 million, an accumulated deficit of
approximately $23.6 million and a total stockholders’ deficit of approximately
$8.3 million at December 31, 2008.
 
 The
ability of the Company to continue as a going concern is dependent on
management’s ability to further implement its strategic plan, resolve its
liquidity problems, principally by obtaining additional debt and/or equity
financing, and generate additional revenues from collaborative agreements or
sale of pharmaceutical products.  The Company is also in default on
certain loans, notes, and related accrued interest aggregating $127,638 at
December 31, 2008 (See Note 6). These factors raise significant doubt about the
Company’s ability to continue as a going concern.
  F-14
  The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  These financial
statements do not include any adjustments relating to the recovery of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.  In
January 2009, the Company secured $750,000 in bridge financing and has engaged
several investment banks to assist in raising additional capital to support
ongoing development activities (See Note 13). There can be no assurance that
additional financing will be available in amounts or terms acceptable to the
Company, if at all.
 
 Note
      4.
              EQUIPMENT
 
 Equipment
balances at December 31, 2008 and 2007 are summarized below:
 
 2008
                        
                        
                        2007Equipment
                        
                        $
                        520,584
                        
                        
                        $
                        522,254Computer
      and office equipment
                        
                        
                        103,890
                        
                        
                        
                        100,395Furniture
      and fixtures
                        
                        
                        5,554
                        
                        
                        
                        5,554630,028
                        
                        
                        
                        628,203Less:
      accumulated depreciation
                        
                        
                        (478,361
                        )
                        
                        
                        (428,582
                        )Equipment,
      net
                        
                        $
                        151,667
                        
                        
                        $
                        199,621
 
 Note
      5.
              ACCRUED
      EXPENSES
 
 Accrued
expenses at December 31, 2008 and 2007 are summarized below:
 
 2008
                    
                    
                    2007Legal
      and professional
                    
                    $
                    693,397
                    
                    
                    $
                    199,428Clinical
      and other studies
                    
                    
                    268,465
                    
                    
                    
                    90,685Compensation
                    
                    
                    129,549
                    
                    
                    
                    118,671Other
                    
                    
                    143,793
                    
                    
                    
                    159,970Total
      accrued expenses
                    
                    $
                    1,235,204
                    
                    
                    $
                    568,754
  F-15
 
 Note
      6.
              DEBT
 
 The
Company had the following outstanding loans and notes payable at December 31,
2008 and 2007:
 
 2008
                    
                    
                    2007Unsecured
      loans payable to third parties with interest at 10% and due on
      demand
                    
                    $
                    1,318,980
                    
                    
                    $
                    2,136,657Unsecured
      convertible notes payable to a third party with interest at 8% and due on
      demand, matured in December 2005
                    
                    
                    100,000
                    
                    
                    
                    100,000Unsecured
      note payable to a third party with interest at 5.5%, matured in June
      2008
                    
                    
                    704,850
                    
                    
                    
                    736,450Unsecured
      note payable to a third party with interest at 5%, maturing in December
      2010
                    
                    
                    2,114,550
                    
                    
                    
                    2,209,350Unsecured
      note payable to a third party with interest at 9%, maturing in December
      2010
                    
                    
                    1,409,700
                    
                    
                    
                    1,472,900Total
      loans and notes payable
                    
                    
                    5,648,080
                    
                    
                    
                    6,655,357Less:
      current portion
                    
                    
                    (2,123,830
                    )
                    
                    
                    (2,973,107
                    )Total
      long-term debt
                    
                    $
                    3,524,250
                    
                    
                    $
                    3,682,250
 
 Loans and
notes payable in the principal amount of $5,548,080 have a contingent repayment
plan. Under the plan, principal and accrued interest is payable at the maturity
date only if AdnaGen is profitable and achieves certain positive shareholder’s
equity, except with respect to debt in the principal amount of $704,850, for
which only the principal is subject to a contingent repayment plan. The debt
holders have signed subordination letters related to the principal and interest
providing that if AdnaGen is unable to repay, it would not lead to insolvency.
If not repaid at maturity, the debt will continue to be outstanding until such
time that AdnaGen has sufficient profits, liquidation surplus, or net assets to
repay the outstanding principal, the debt is renegotiated or AdnaGen becomes
insolvent. Further, debt holders in the principal amount of $4,229,100 have the
right to receive a share of AdnaGen profits under certain
circumstances.
 
 In
October 2003, a third party loaned the Company a total of €515,000 accruing
interest at 7.75% and due in June 2008. In February 2008, the Company placed
approximately $200,000 (€128,750) in a separate escrow account in connection
with a proposed settlement for the outstanding loan balance and accrued interest
which totaled approximately $988,000 (€615,500).  In April 2008, the
third party accepted the debt settlement agreement.  The Company
recorded the transaction in April 2008, which resulted in a gain on settlement
of debt in the amount of $758,801 (€486,760).
 
 The
aggregate maturities of loans and notes payable at December 31, 2008 are as
follows:
 
 2009
                    
                    $
                    2,123,8302010
                    
                    
                    3,524,250$
                    5,648,080
 
 Convertible
Notes Payable
 
 The
Company had $100,000 of convertible notes payable outstanding at December 31,
2008.   The debt holder, at its option, may convert the principal
and any accrued interest into shares of common stock at a price of $2.50 per
share.  The market price at the date of each advance was either equal
to or less than the conversion price; accordingly, there was no beneficial
conversion feature.
  F-16
  Note
      7.
              COLLABORATION,
      LICENSE AND OTHER AGREEMENTS
 
 OSI
Pharmaceuticals
 
 In
November 2007, OncoVista entered into a license agreement with OSI
Pharmaceuticals, Inc. (“OSI”) for a Phase II clinical drug candidate, OSI-7904L
(the “License Agreement”).  OSI granted the Company an exclusive,
royalty-bearing, worldwide license, with the right to grant sublicenses, with
respect to OSI’s rights to OSI-7904L.
 
 Pursuant
to the License Agreement, OncoVista paid OSI an upfront license fee of $500,000
and is required to make payments based upon the achievement of specified
milestones or product sales. In addition, if the drug candidate is commercially
sold, then OncoVista would be required to pay royalties based on net sales of
the drug. OncoVista would also be required to pay royalty and milestone payments
to OSI for certain third parties.  As additional consideration,
OncoVista issued 500,000 shares of common stock and two warrants to OSI having a
fair value of $1,743,580 (See Note 10).
 
 Note
      8.
              LEASES,
      COMMITMENTS AND CONTINGENCIES
 
 Lease
Obligations
 
 In
January 2005, the Company entered into a five-year non-cancelable lease with an
affiliate of Dr. Alexander Weis, the Company’s CEO, Chairman of the Board and
President for office and laboratory space (See Note 9).  AdnaGen
maintains an annual operating lease for its office and laboratory space which
expires on December 31, 2009, as well as operating leases for office equipment
and vehicles.  Future minimum lease payments at December 31, 2008 are
$387,549.
 
 Total
rent expense amounted to approximately $405,000 and $435,000 for the years ended
December 31, 2008 and 2007, respectively.
 
 Employment
Contracts
 
 The
Company has employment contracts with certain executive officers. The contracts
have commitment periods of four years, renewable for additional one year
periods.  Compensation under the contracts range from $140,000 to
$322,000, as well as bonuses equivalent to 30% to 40% of base
salary.  Bonuses are based on performance milestones, which have not
yet been met; therefore, bonuses have not been paid or accrued for the years
ended December 31, 2008 and 2007.  In the event of termination without
cause, the contract provides for a severance of salary and benefits continuation
for twelve months.
 
 Legal
Matters
 
 On
December 17, 2007, an action was filed against the Company in the Supreme Court
of the State of New York, New York County, entitled Bridge Ventures, Inc. v.
OncoVista, Inc. and Centrecourt Asset Management. The action seeks damages for
the alleged breach of a consulting agreement and seeks an order directing the
issuance of warrants to purchase the Company’s common stock. The Company filed a
motion to dismiss the action, and on April 3, 2008 the motion was
denied.  The Company has answered the complaint and asserted a
counterclaim seeking compensation for the expenses that it incurred during the
time that it worked with Bridge Ventures, Inc. The case is now in the discovery
phase.  Based on the allegations in the complaint and the Company’s
understanding of the relevant facts and circumstances, the Company believes that
the claims made in this lawsuit are without merit and it intends to vigorously
defend against them.
 
 On July
8, 2008, AdnaGen commenced a lawsuit against Innogenetics N.V. (“Innogenetics”)
in the District Court of Hannover alleging that Innogenetics, a distributor of
certain AdnaGen diagnostic kits in Europe, breached the exclusive distribution
agreement that AdnaGen entered into with them. AdnaGen claimed that Innogenetics
did not order the contractual minimum quantities of diagnostic kits required to
maintain exclusivity.  AdnaGen terminated the exclusivity and sought
damages of approximately $550,000 (€369,000).  Following a bench
trial, on March 3, 2009, the District Court ruled in favor of Innogenetics
ordering AdnaGen to pay the court costs which have been previously paid and
to pay Innogenetics’ attorney’s fees amounting to approximately
$8,500.
  F-17
  Note
      9.
                RELATED
      PARTY TRANSACTIONS
 
 OncoVista’s
CEO, Chairman of the Board, President and a significant shareholder, is a
beneficial owner of Lipitek International, Inc. and Lipitek Research,
LLC.  The Company leases its laboratory space from Lipitek, Inc. under
a five-year lease agreement (See Note 8).  Rent is based on reasonable
and customary rates as if the space were rented to a third party.
 
 On
November 17, 2005, the Company entered into a purchase agreement with Lipitek
and the Company’s CEO, Chairman of the Board, and President, under which Lipitek
granted the Company an option to purchase all membership interests in Lipitek
Research, LLC (“Lipitek Research”)
for a purchase price of $5.0 million, which shall be payable quarterly based
upon revenues of Lipitek Research up to $50,000 per quarter.  Prior to
the full payment of the purchase price, the Company has the option, upon 30 days
written notice, to abandon the purchase of Lipitek Research and would forfeit
the amounts already paid.  In addition, all intellectual property
developments by Lipitek Research through the term of the agreement or 2012,
whichever is later, shall remain the Company’s property, irrespective of whether
the option is exercised.  In addition, the Company will receive 80% of
the research and development revenue earned by Lipitek while the agreement is in
place.  During 2008 and 2007, the Company paid $100,000 and $200,000,
respectively, toward the agreement which is included as a component of research
and development expenses, the Company has $100,000 included in accounts payable
in the consolidated balance sheet for the year ended December 31, 2008. In 2008
and 2007, the Company recognized revenues of $0 and $40,000, respectively from
its share of Lipitek revenues.
 
 The
Company’s CEO, Chairman of the Board, President and a significant shareholder,
is also a beneficial owner of Biomarkers LLC (“Biomarkers”).  In
September 2008, AdnaGen entered into an exclusive distribution and license
agreement with Biomarkers LLC (“Biomarkers”) granting
Biomarkers the exclusive right to distribute the AdnaGen diagnostic kits in
North America. The term of this agreement continues through December 31, 2010
and is automatically renewable for additional twelve month periods. Pending FDA
approval, Biomarkers is selling the AdnaGen diagnostic kits for research only.
Biomarkers plans to have the capability to run AdnaGen assays in a
CLIA laboratory based in New York in order to support on-going and planned
clinical trials.  In January 2009, AdnaGen also entered into an
exclusive distribution and license agreement with Biomarkers granting Biomarkers
the exclusive right to distribute the AdnaGen diagnostic kits in South America
and the Middle East. The term of this agreement continues through December 31,
2010 and is automatically renewable for additional twelve month periods.
Biomarkers plans on seeking the necessary approvals in these territories to
permit it to sell the AdnaGen diagnostic kits. In 2008, the Company
recorded revenue of approximately €35,000 ($52,000) from the sale of diagnostic
kits to Biomarkers.
 
 For the
potential acquisition of Lipitek, the Company determined that, under SEC
Regulation S-X, Rule 11-01(d) (“11-01”), and EITF No. 98-3
(“98-3”), “Determining
Whether a Nonmonetary Transaction Involves the Receipt of Productive Assets or
of a Business”, Lipitek was classified as a development stage company and thus
was not considered a business. As a result, SFAS No. 141 purchase accounting
rules did not apply.  The Company also cannot determine with any
certainty at this time, if it will exercise the option to purchase Lipitek in
the future.
 
 Note
      10.
              STOCKHOLDERS’
      DEFICIT
 
 Common
Stock Transactions of Accounting Acquired Prior to Reverse
Acquisition
 
 In August
2007, OncoVista completed a private placement (the “2007 Private Placement”)
whereby it sold to accredited investors 970,712 units at $7.00 per unit, each
unit consisting of four shares of OncoVista common stock and a warrant to
acquire one share of OncoVista common stock. The net proceeds of the private
placement after payment of placement agent fees and other expenses were
approximately $6.2 million.  In connection with the private placement,
the Company issued warrants to the third parties to acquire 886,000 shares of
common stock. The warrants are exercisable through August 15, 2012 at exercise
prices of $0.001 and $2.50 per share, subject to adjustment for stock splits,
stock dividends, distributions, reorganizations, reclassifications,
consolidations and mergers. As these warrants were granted as compensation in
connection with the private placement, the Company has treated these warrants as
a direct offering cost. The result of the transaction has no net effect on
equity. These warrants are fully vested and non-forfeitable.
  F-18
  Common
Stock
 
 The
Company is authorized to issue up to 147,397,390 shares of common stock. At
December 31, 2008, shares of common stock reserved for future issuance are as
follows:
 
 Stock
      options outstanding
                        
                        
                        1,180,000Warrants
      outstanding
                        
                        
                        2,931,712Stock
      options available for grant
                        
                        
                        3,220,0007,331,712
 
 In June
2008, the Company granted 100,000 shares of its common stock to a consultant for
services valued at $110,000 based upon the quoted closing trading price on the
date of issuance.
 
 Restricted
Stock
 
 In
October 2007, OncoVista granted an aggregate of 2,000,000 shares of restricted
stock to certain officers for $3.5 million based upon the quoted closing trading
price on the date of issuance.  These shares vest, subject to future
service requirements, two thirds on January 1, 2010 and one third on January 1,
2011. As of December 31, 2008, there was approximately $2.3 million of total
unrecognized compensation cost related to unvested restricted
stock.  For the years ended December 31, 2008 and 2007, compensation
expense of approximately $1.2 million and $0, respectively, was recognized for
vested restricted stock grants.
 
 Stock
Option Plans
 
 In May
2007, the Company’s Board of Directors adopted the 2007 Stock Option Plan (“2007
Plan”).  The 2007 Plan provides for the grant of incentive stock
options, non-statutory stock options and restricted stock awards to employees,
directors and consultants who provide services to OncoVista.  The
Company has reserved 3,000,000 shares of common stock for issuance under the
2007 Plan.
 
 In May
2007, the Board of Directors authorized the 2007 Stock Option Plan for
Independent and Non-Employee Directors (the “Directors
Plan”).  Options granted under the Directors Plan shall be
nonstatutory options and may be granted to nonemployee directors at an exercise
price equal to the fair market value at the date of grant. The maximum term of
options granted under the Directors Plan is ten years. The term of the Directors
Plan is ten years. The Company has reserved 500,000 shares of common stock for
issuance under the Director Plan.
 
 The
Company granted options to its officers and employees under its 2004 Stock
Incentive Plan (the “2004 Plan”).  The 2004 Plan is authorized to
grant options for up to 1,000,000 shares of common stock to employees,
directors, and consultants who provide service to the
Company.  Options granted have a vesting schedule with a term ranging
from grant date to four years and become fully exercisable based on specific
terms imposed at the date of grant.  All awards pursuant to the 2004
Plan shall terminate upon the termination of the grantees employment for any
reason.
 
 All
option grants are expensed in the appropriate period based upon each award’s
vesting terms, in each case with an offsetting credit to additional paid in
capital. Under SFAS No. 123R, in the event of termination, the Company will
cease to recognize compensation expense. There is no deferred compensation
recorded upon initial grant date, instead, the fair value of the share-based
payment is recognized ratably over the stated vesting period.  Vesting
periods for the Company’s stock option awards during 2008 and 2007 included the
following: one-half vesting on the first anniversary and one-half on the second
anniversary and annually over four years.  The Company granted 240,000
and 140,000 options for future services having fair values of $463,220 and
$244,692 in 2008 and 2007, respectively.
 
 The
stock-based compensation expense recorded by the Company for the years ended
December 31, 2008 and 2007, with respect to awards under the all option plans is
as follows:
 
 2008
                    
                    
                    2007Research
      and development
                    
                    $
                    119,122
                    
                    
                    $
                    124,975General
      and administrative
                    
                    
                    271,953
                    
                    
                    
                    243,726Total
      employee stock-based compensation
                    
                    $
                    391,075
                    
                    
                    $
                    368,701
  F-19
 The
Company recognized $165,826 and $224,726 as consulting expense and such amounts
are included in general and administrative expense in the consolidated
statements of operations for the years ended December 31, 2008 and 2007,
respectively.
 
 The
Company has followed fair value accounting and the related provisions of SFAS
No. 123R for all share based payment awards. The fair value of each option or
warrant granted is estimated on the date of grant using the Black-Scholes
option-pricing model.
 
 The
Black-Scholes assumptions used in the years ended December 31, 2008 and 2007 are
as follows:
 
 2008
                      
                      
                      2007Risk-free
      interest rate
                      
                      
                      2.54-3.09
                      %
                      
                      
                      3.23-4.21
                      %Expected
      dividend yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %Expected
      volatility
                      
                      
                      80.5
                      %
                      
                      
                      200
                      %Expected
      life of option
                      
                      10 years
                      
                      
                      10 yearsExpected
      forfeitures
                      
                      
                      0
                      %
                      
                      
                      0
                      %
 
 The
following is a summary of the Company’s stock option activity:
 
 2008
                    
                    
                    2007Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at January 1
                    
                    
                    1,090,000
                    
                    
                    $
                    0.91
                    
                    
                    
                    950,000
                    
                    
                    $
                    0.78Granted
                    
                    
                    240,000
                    
                    
                    
                    1.81
                    
                    
                    
                    140,000
                    
                    
                    
                    1.75Exercised
                    
                    
                    (100,000
                    )
                    
                    
                    0.10
                    
                    
                    
                    –
                    
                    
                    
                    –Forfeited
                    
                    
                    (50,000
                    )
                    
                    
                    0.10
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31
                    
                    
                    1,180,000
                    
                    
                    $
                    1.19
                    
                    
                    
                    1,090,000
                    
                    
                    $
                    0.91Exercisable
      at December 31
                    
                    
                    647,500
                    
                    
                    $
                    0.83
                    
                    
                    
                    540,000
                    
                    
                    $
                    0.61
 
 As of
December 31, 2008, the total intrinsic value of options outstanding was
$545,680 and exercisable was $453,693.  At December 31, 2008, the
weighted average remaining contractual term for options vested and exercisable
was 6.6 years.  The following table summarizes outstanding and
exercisable options at December 31, 2008:
 
 Options Outstanding
                            
                            
                            Options ExercisableRange of
                              Exercise
                              Prices
                            
                            Number
                              Outstanding
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life
                              (in years)
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Number
                              Currently
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price$
                            0.001
                            
                            
                            250,000
                            
                            
                            
                            6.04
                            
                            
                            $
                            0.001
                            
                            
                            
                            187,500
                            
                            
                            $
                            0.0010.10
                            
                            
                            270,000
                            
                            
                            
                            6.30
                            
                            
                            
                            0.10
                            
                            
                            
                            245,000
                            
                            
                            
                            0.101.75
                            
                            
                            300,000
                            
                            
                            
                            7.39
                            
                            
                            
                            1.75
                            
                            
                            
                            35,000
                            
                            
                            
                            1.752.50
                            
                            
                            360,000
                            
                            
                            
                            8.90
                            
                            
                            
                            2.50
                            
                            
                            
                            180,000
                            
                            
                            
                            2.501,180,000
                            
                            
                            
                            7.31
                            
                            
                            $
                            1.19
                            
                            
                            
                            647,500
                            
                            
                            $
                            0.83
  F-20
 The
following summarizes the activity of the Company’s stock options that have not
vested for the year ended December 31, 2008:
 
 2008
                    
                    
                    2007Shares
                    
                    
                    Weighted
                      Average
                      GrantDate
                      FairValue
                    
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Grant Date
                      Fair ValueOutstanding
      at January 1
                    
                    
                    550,000
                    
                    
                    $
                    2.31
                    
                    
                    
                    647,500
                    
                    
                    $
                    2.50Granted
                    
                    
                    240,000
                    
                    
                    
                    1.93
                    
                    
                    
                    140,000
                    
                    
                    
                    1.75Vested
                    
                    
                    (207,500
                    )
                    
                    
                    2.37
                    
                    
                    
                    (237,500
                    )
                    
                    
                    2.50Cancelled
      or forfeited
                    
                    
                    (50,000
                    )
                    
                    
                    2.50
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31
                    
                    
                    532,500
                    
                    
                    $
                    2.09
                    
                    
                    
                    550,000
                    
                    
                    $
                    2.31
 
 The total
intrinsic value of stock option exercises during the years ended December 31,
2008 and 2007 was $178,000 and $0, respectively.
 
 Stock
and Warrants Issued for Licensing Rights of Intellectual Property
 
 During
2007, the Company issued 500,000 shares of common stock and 200,000 stock
warrants having a fair value of approximately $1.7 million to acquire the
licensing rights for intellectual property held by OSI (See Note
7).  The fair value of the common stock was approximately $1.2 million
based upon the quoted closing trading price on the issuance date.  The
Company recorded fair value for the warrants of approximately $0.5 million based
upon the use of a Black-Scholes option-pricing model.
 
 Warrants
 
 In
February 2008, the Company issued warrants to a consultant for services to
acquire 540,000 shares of common stock as follows: up to 180,000 shares at $2.50
per share; 180,000 shares at $3.50 per share; and 180,000 shares at $4.50 per
share, vesting in equal monthly installments over one year.
 
 In 2007,
the Company issued two warrants in connection with a license agreement with OSI
(See Note 7).  The first warrant is exercisable into the number of
shares of the Company’s common stock equal to $5.0 million divided by the
average closing price of the Company’s common stock on a national securities
exchange registered with the SEC for the 20 consecutive trading days immediately
following the listing of OncoVista’s common stock on such exchange; provided
that the warrant shall be exercisable for 19.99% of the Company’s outstanding
shares of common stock if the exercise of the warrant results in a number of
shares exceeding 20% of outstanding shares of common stock.  As the
Company’s stock is currently traded on the Over-the-Counter Bulletin Board, this
warrant has not been granted. The second warrant is exercisable, through
September 2013, for 200,000 shares of common stock at an exercise price of $2.50
per share. The warrants provide for an exercise on a “cashless” or “net
issuance” basis and are subject to adjustment for events such as stock splits,
stock dividends, distributions, reorganizations, consolidations and mergers
affecting the Company’s common stock.
 
 In 2007,
the Company also issued 50,000 warrants to a third party at an exercise price of
$2.50 per share in return for professional and consulting services, exercisable
through November 2012. The Company valued these warrants based on the
Black-Scholes option pricing model and recorded $122,070 as a non-cash
charge.
 
 The
following is a summary of the Company’s warrant activity:
 
 2008
                    
                    
                    2007Shares
                    
                    
                    Weighted
                      Average
                      Grant Date
                      Fair Value
                    
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Grant Date
                      Fair ValueOutstanding
      at January 1
                    
                    
                    2,391,712
                    
                    
                    $
                    2.23
                    
                    
                    
                    285,000
                    
                    
                    $
                    2.50Granted
                    
                    
                    540,000
                    
                    
                    
                    3.50
                    
                    
                    
                    2,106,712
                    
                    
                    
                    2.19Exercised
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Forfeited
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31
                    
                    
                    2,931,712
                    
                    
                    $
                    2.47
                    
                    
                    
                    2,391,712
                    
                    
                    $
                    2.23Exercisable
      at December 31
                    
                    
                    2,886,712
                    
                    
                    $
                    2.45
                    
                    
                    
                    2,391,712
                    
                    
                    $
                    2.23
  F-21
  The
following table summarizes outstanding and exercisable warrants at December 31,
2008:
 
 Warrants Outstanding
                          
                          
                          Warrants ExercisableRange of
                            Exercise
                            Prices
                          
                          Number
                            Outstanding
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Life
                            (in years)
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price
                          
                          
                          Number
                            Currently
                            Exercisable
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price$
                          0.001
                          
                          
                          257,143
                          
                          
                          
                          3.50
                          
                          
                          $
                          0.001
                          
                          
                          
                          257,143
                          
                          
                          $
                          0.0012.50
                          
                          
                          2,314,569
                          
                          
                          
                          3.57
                          
                          
                          
                          2.50
                          
                          
                          
                          2,299,569
                          
                          
                          
                          2.503.50
                          
                          
                          180,000
                          
                          
                          
                          4.08
                          
                          
                          
                          3.50
                          
                          
                          
                          165,000
                          
                          
                          
                          3.504.50
                          
                          
                          180,000
                          
                          
                          
                          4.08
                          
                          
                          
                          4.50
                          
                          
                          
                          165,000
                          
                          
                          
                          4.502,931,712
                          
                          
                          
                          3.63
                          
                          
                          $
                          2.47
                          
                          
                          
                          2,886,712
                          
                          
                          $
                          2.45
 
 The
Black-Scholes assumptions used for warrants for the years ended December 31,
2008 and 2007 are as follows:
 2008
                        
                        
                        2007Risk-free
      interest rate
                        
                        
                        2.13
                        %
                        
                        
                        3.5
                        %Expected
      dividend yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %Expected
      volatility
                        
                        
                        80.5
                        %
                        
                        
                        200
                        %Expected
      life of option
                        
                        5 years
                        
                        
                        5 yearsExpected
      forfeitures
                        
                        
                        0
                        %
                        
                        
                        0
                        %
 
 Note 11.
              INCOME
      TAXES
 
 The
Company files separate tax returns for its parent and AdnaGen AG, its 95% owned
German subsidiary.  The parent company does not benefit from any
losses or incur any tax liabilities with respect to its ownership of AdnaGen
AG.  Accordingly, the Company has not incurred any U.S. Federal or
State tax expense since its inception.
 
 Significant
deferred tax assets at December 31, 2008 and 2007 are as follows:
 
 2008
                      
                      
                      2007Deferred
      tax assets:Net
      operating loss carryforwards, United States
                      
                      $
                      4,912,000
                      
                      
                      $
                      3,238,000Impairment
      loss
                      
                      
                      607,000
                      
                      
                      
                      607,000Share-based
      compensation and consulting
                      
                      
                      985,000
                      
                      
                      
                      459,000Other
                      
                      
                      27,000
                      
                      
                      
                      25,000Total
      deferred tax assets
                      
                      
                      6,531,000
                      
                      
                      
                      4,329,000Less:
      valuation allowance
                      
                      
                      (6,531,000
                      )
                      
                      
                      (4,329,000
                      )Net
      deferred tax assets
                      
                      $
                      −
                      
                      
                      $
                      −
 
 In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred income tax
assets will not be realized.  The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
deductible.  Management considers the scheduled reversal of deferred
income tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.  Based on consideration of these
items, management has determined that enough uncertainty exists relative to the
realization of the deferred income tax asset balances to warrant the application
of a full valuation allowance as of December 31, 2008 and 2007.
 
 At
December 31, 2008, OncoVista, Inc. had U.S. tax net operating loss carryforwards
of approximately $14.4 million available to offset future taxable income which
will expire at various dates through 2028.  The utilization of tax net
operating losses may be limited due to the change in ownership under Internal
Revenue Code Section 382.  AdnaGen tax attributes from its separately
filed tax return in Germany is subject to the rules and regulations of that
country.
  F-22
  The
actual tax benefit differs from the expected tax benefit for the years ended
December 31, 2008 and 2007 (computed by applying the U.S. Federal Corporate tax
rate of 34% to income before taxes) are as follows:
 
 2008
                          
                          
                          2007Expected
      tax expense (benefit)
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%Permanent
      differences:Impairment
      charge in excess of tax basis
                          
                          
                          –
                          
                          
                          
                          –Translation
      loss and other items
                          
                          
                          0.4
                          
                          
                          
                          0.1Rate
      differential and impact of foreign subsidiary
                          
                          
                          4.2
                          
                          
                          
                          (0.8
                          )Change
      in valuation allowance
                          
                          
                          29.4
                          
                          
                          
                          34.7Consolidated
      effective tax rate
                          
                          
                          –
                          %
                          
                          
                          –
                          %
 
 The
Company files income tax returns in the U.S. federal and Texas jurisdictions,
and is no longer subject to tax examinations for years prior to
2004.
 
 Note
      12.
              SEGMENT
      INFORMATION
 
 The
Company follows SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related Information”, with respect to its operating
segments.  The Company’s revenue is substantially derived from the
operation in a single business segment, the development of innovative tumor
diagnostics for detection, analysis, and treatment of rare (cancer)
cells.  Sales to customers outside the United States (in Europe) are
made by AdnaGen AG, the Company’s German subsidiary.
 
 A summary
of the Company’s operations for the years end December 31, 2008 and 2007 is
provided below:
 
 2008OncoVista
                      
                      
                      AdnaGen
                      
                      
                      TotalRevenues
                      
                      $
                      –
                      
                      
                      $
                      503,325
                      
                      
                      $
                      503,325Operating
      expenses
                      
                      
                      6,593,916
                      
                      
                      
                      1,920,830
                      
                      
                      
                      8,514,746Income
      (loss) from operations
                      
                      
                      (6,593,916
                      )
                      
                      
                      (1,417,505
                      )
                      
                      
                      (8,011,421
                      )Other
      income (expense), net
                      
                      
                      9,760
                      
                      
                      
                      519,637
                      
                      
                      
                      529,397Net
      income (loss)
                      
                      $
                      (6,584,156
                      )
                      
                      $
                      (897,868
                      )
                      
                      $
                      (7,482,024
                      )Total
      assets
                      
                      $
                      85,824
                      
                      
                      $
                      468,309
                      
                      
                      $
                      554,133
 
 2007OncoVista
                      
                      
                      AdnaGen
                      
                      
                      TotalRevenues
                      
                      $
                      80,000
                      
                      
                      $
                      1,887,990
                      
                      
                      $
                      1,967,990Operating
      expenses
                      
                      
                      5,945,696
                      
                      
                      
                      1,540,506
                      
                      
                      
                      7,486,202Income
      (loss) from operations
                      
                      
                      (5,865,696
                      )
                      
                      
                      347,484
                      
                      
                      
                      (5,518,212
                      )Other
      income (expense), net
                      
                      
                      134,196
                      
                      
                      
                      (218,377
                      )
                      
                      
                      (84,181
                      )Net
      income (loss)
                      
                      $
                      (5,731,500
                      )
                      
                      $
                      129,107
                      
                      
                      $
                      (5,602,393
                      )Total
      assets
                      
                      $
                      3,807,730
                      
                      
                      $
                      1,142,219
                      
                      
                      $
                      4,949,949
 
 Note
      13.
              SUBSEQUENT
      EVENTS
 
 Option
Grants to Employees
 
 In
January 2009, the Company granted stock options to certain employees, one of
whom is an executive officer of the Company, to purchase an aggregate of
1,000,000 shares of the Corporation’s common stock at an exercise price of
$0.001 per share, vesting in equal monthly installments over one year from the
date of grant.
  F-23
 2009
Bridge Notes
 
 On
January 15, 2009, the Company and OncoVista completed an initial closing of a
bridge round of debt financing, whereby the Company and OncoVista-Sub issued
secured promissory notes (the “Bridge Notes”) in the aggregate principal amount
of $750,000, in exchange for cash equal to the face amount of such Bridge Notes,
to accredited investors as defined by Rule 501 under the Securities Act of 1933,
as amended (the “Securities Act”). Of the Bridge Notes issued, Bridge Notes in
the principal amount of $350,000 were sold to affiliates of Dr. Weis
and Bridge Notes in the principal amount of $300,000 were sold to Wexford
Spectrum Trading Limited. Dr. Weis is a member of the Company’s Board, Chief
Executive Officer, President, and Secretary, as well as one of the Company’s
significant beneficial owners. Wexford Capital LLC is the investment sub-advisor
of Wexford Spectrum Trading Limited which beneficially owns approximately 11% of
the Company’s outstanding common stock and a representative of Wexford, Dr. Paul
Mieyal, has been appointed to the Board of Directors, such appointment
commencing March 30, 2009.
 
 The
Bridge Notes bear interest at 10% per annum increasing to 18% in the case of an
event of default and mature on the earlier of (i) January 15, 2010, (ii) the
date upon we consummate a financing, the aggregate gross proceeds of which equal
or exceed $5,000,000 (a “Qualified Financing"), and (iii) the acceleration of
the maturity of the Bridge Notes as described therein.
 
 In
connection with the bridge financing, the Company issued to holders of the
Bridge Notes detachable warrants (the “Warrants”), exercisable for a period of
five years from the date of grant, of up to an amount or number of the
securities offered in the first Qualified Financing, at an exercise price per
security equal to the product of (x) and (y), where (x) equals the offering
price per security in the first Qualified Financing and where (y) equals 0.90,
subject to adjustment in certain instances.  In the event that no
Qualified Financing shall be consummated by us prior to the expiration of the
Warrants, the Warrants shall be exercisable for up to an aggregate of 750,000
shares of common stock, par value $0.001 per share, at an exercise price of
$0.50 per share, subject to adjustment in certain instances.
 
 The
Company entered into a Registration Rights Agreement with the holders of the
Warrants covering the shares of the Company’s common stock issuable upon
exercise of the Warrants. The Registration Rights Agreement requires
us  to file a registration statement with the SEC within 45 days of
the final closing of the first Qualified Financing (the “Filing Date”). The
Company is required to use our best efforts to cause the registration statement
to become effective as promptly as practicable after the filing
thereof.  If the Company does not file the registration statement with
the SEC on or prior to the 45th day following the Filing Date, or if the
registration statement has not been declared effective within 120 days following
the Filing Date, the Company agreed to pay to the holders liquidated damages in
the amount of 0.5% of the offering price of the Bridge Notes and the Warrants
purchased thereby for each 30 days thereafter until such registration statement
shall be filed or effective, as applicable, with the foregoing capped at
10%.
 
 The
Company accounts for registration rights agreements in accordance with the FSP
EITF 00-19-2 “Accounting for
Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument,
should be separately recognized and accounted for as a contingency in accordance
with SFAS No. 5 “Accounting
for Contingencies.” As a result, management believes that a liability is
not probable and therefore, has not accrued any estimated
penalties.
  Dr.
Weis Appointment as CEO of AdnaGen
 
 Since
February 2009, Dr. Weis has been serving as AdnaGen’s Chief Executive Officer.
In such capacity he receives an additional salary of €10,000 ($13,500) per month
plus health insurance (approximately €500 per month) and a daily per diem (€94).
As a result of the extraordinary efforts being expended by Dr. Weis in taking on
this additional role and to further incentivize him, on January 6, 2009, the
Compensation Committee resolved to compensate Dr. Weis as follows: (i) if
AdnaGen’s indebtedness is restructured into equity or long-term indebtedness,
then the Company would pay Dr. Weis $50,000 for restructuring into equity of
AdnaGen or $100,000 for restructuring not involving equity of AdnaGen in
addition to the issuance of shares of capital stock of AdnaGen representing 5%
of the outstanding capital stock of AdnaGen as of the restructuring, giving
effect to such issuance (“Restructuring Shares”), (ii) upon AdnaGen achieving
revenues of $3,000,000 in calendar year 2009 and AdnaGen achieving positive
operational cash flow for the year 2009, the Company would pay Dr. Weis a cash
payment of $225,000 and 250,000 shares of the Company’s common stock (the “Sales
Milestone Shares”), (iii) upon AdnaGen consummating additional financing through
entities introduced by Dr. Weis, we would pay Dr. Weis cash equal to 2% if in
the form of indebtedness or 4% if in a form other than indebtedness of the gross
proceeds of such additional financing plus shares of capital stock of AdnaGen
having an equal value to such cash bonus based on the valuation in such
financing (the “Financing Shares”), (iv) upon AdnaGen consummating strategic
transactions, including mergers and acquisitions, through entities introduced by
Dr. Weis, the Company would pay Dr. Weis cash in an amount equal to 8% of the
gross consideration of such transactions if equal to or less than $300,000 or 5%
if greater than $300,000 or 3% if greater than $1,000,000, and (v) the
Restructuring Shares, Sales Milestone Shares and Financing Shares (collectively,
the “Shares”) vest in 12 equal monthly installments provided that if the
employment of Dr. Weis by the Company terminates without cause prior to the
vesting in full of the Shares, any unvested Shares shall be forfeited and if
there is a change of control event, then the Shares shall immediately vest in
full.
 
 F-24