UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q





(Mark
      One)ý
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2008ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
      1934For
      the transition period from  ____________
      to ____________




Commission
File Number: 333-139354




ADEONA
PHARMACEUTICALS, INC.


(Name
of small business issuer in its charter)





Delaware
            13-3808303(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification Number)3930
      Varsity Drive
              Ann
      Arbor, MI
            48108(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code:


(734)
332-7800




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  ý
   No  o




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




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




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




State
registrant’s revenues for its most recent fiscal year: $0




As of
November 1, 2008, the registrant had 20,838,528 shares of common stock
outstanding.




Transitional
Small Business Disclosure Format (Check one):   Yes  o
      No    ý









1





ADEONA
PHARMACEUTICALS, INC.




FORM
10-Q


TABLE
OF CONTENTS





PagePART
      I.—FINANCIAL INFORMATIONItem
      1.
            
            Financial
      StatementsConsolidated
      Balance Sheets (Unaudited)
            
            
            3Consolidated
      Statements of Operations (Unaudited)
            
            
            4Consolidated
      Statements of Cash Flows (Unaudited)
            
            
            5Notes
      to Consolidated Financial Statements (Unaudited)
            
            
            6Item
      2.
            
            Management’s
      Discussion and Analysis of Financial Information and Results of
      Operations
            
            
            22Item
      3.
            
            Controls
      and Procedures
            
            
            28PART
      II—OTHER INFORMATIONItem
      1.
            
            Legal
      Proceedings
            
            
            29Item
      1A.
            
            Risk
      Factors
            
            
            29Item
      2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            
            47Item
      3.
            
            Defaults
      Upon Senior Securities
            
            
            47Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            
            47Item
      5.
            
            Other
      Information
            
            
            47Item
      6.
            
            Exhibits
            
            
            48SIGNATURE
            
            
            49






2







PART
I.—FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Consolidated Balance
Sheets






September
      30,
            
            
            December
      31,Assets
            
            2008
            
            
            2007(Unaudited)
            
            
            (Audited)Current
      AssetsCash
            
            $
            6,435,607
            
            
            $
            11,492,802Prepaid
      expenses
            
            
            10,583
            
            
            
            63,636Other
      receivable
            
            
            48,617
            
            
            
            -Total
      Current Assets
            
            
            6,494,807
            
            
            
            11,556,438Property
      and Equipment, net of accumulated depreciation of $521,518 and
      $232,564
            
            
            1,699,301
            
            
            
            2,063,233Deposits
      and other assets
            
            
            11,989
            
            
            
            13,381Total
      Assets
            
            $
            8,206,097
            
            
            $
            13,633,052Liabilities and Stockholders'
      EquityCurrent
      Liabilities:Accounts
      payable
            
            $
            500,648
            
            
            $
            728,119Accrued
      liabilities
            
            
            176,388
            
            
            
            59,409Notes
      payable
            
            
            -
            
            
            
            900,000Total
      Current Liabilities
            
            
            677,036
            
            
            
            1,687,528Stockholders' EquityPreferred
      stock, $0.001 par value; 10,000,000 shares
authorized,none
      issued and outstanding
            
            -
            
            
            
            -Common
      stock, $0.001 par value; 100,000,000 shares
    authorized,20,838,528
      and 20,433,467 shares issued and outstanding
            
            
            20,839
            
            
            
            20,433Additional
      paid-in capital
            
            
            44,874,712
            
            
            
            43,001,609Deficit
      accumulated during the development stage
            
            
            (37,366,490
            )
            
            
            (31,076,518
            )Total
      Stockholders' Equity
            
            7,529,061
            
            
            
            11,945,524Total
      Liabilities and Stockholders' Equity
            
            $
            8,206,097
            
            
            $
            13,633,052









See
accompanying notes to unaudited consolidated financial statements








3




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Consolidated Statements of
Operations


(Unaudited)






For
      the Period
              from
      January 8, 2001For
      the three months ended September 30,
            
            For
      the nine months ended September  30,
            
            (Inception)
      to2008
            
            2007
            
            2008
            
            2007
            
            September
      30, 2008Operating
      Expenses:Research
      and development
            
            $
            863,272
            
            $
            1,573,610
            
            $
            4,156,255
            
            $
            4,069,782
            
            $
            15,317,050General
      and administrative
            
            
            606,685
            
            
            599,388
            
            
            2,242,855
            
            
            2,852,126
            
            
            9,088,066Total
      Operating Expenses
            
            
            1,469,957
            
            
            2,172,998
            
            
            6,399,110
            
            
            6,921,908
            
            
            24,405,116Loss
      from Operations
            
            
            (1,469,957
            )
            
            (2,172,998
            )
            
            (6,399,110
            )
            
            (6,921,908
            )
            
            (24,405,116
            )Other
      Income (Expense):Interest
      income
            
            
            26,688
            
            
            66,041
            
            
            108,503
            
            
            218,298
            
            
            451,892Gain
      on sale of equipment
            
            
            14,430
            
            
            -
            
            
            14,430
            
            
            -
            
            
            14,430Interest
      expense
            
            
            -
            
            
            (13,985
            )
            
            (13,831
            )
            
            (29,270
            )
            
            (66,760
            )Total
      Other Income, net
            
            
            41,118
            
            
            52,056
            
            
            109,102
            
            
            189,028
            
            
            399,562Net
      Loss
            
            $
            (1,428,839
            )
            $
            (2,120,942
            )
            $
            (6,290,008
            )
            $
            (6,732,880
            )
            $
            (24,005,554
            )Less:
      Preferred stock dividend - subsidiary
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (951,250
            )Less:
      Merger dividend
            
            
            -
            
            
            -
            
            
            -
            
            
            (12,409,722
            )
            
            (12,409,722
            )Net
      Loss Applicable to Common Shareholders
            
            $
            (1,428,839
            )
            $
            (2,120,942
            )
            $
            (6,290,008
            )
            $
            (19,142,602
            )
            $
            (37,366,526
            )Net
      Loss Per Share  - Basic and Diluted
            
            $
            (0.07
            )
            $
            (0.12
            )
            $
            (0.31
            )
            $
            (1.12
            )
            $
            (6.49
            )Weighted
      average number of shares outstanding during the period - basic and
      diluted
            
            
            20,715,966
            
            
            17,110,581
            
            
            20,587,746
            
            
            17,042,690
            
            
            5,759,615




See
accompanying notes to unaudited consolidated financial statements






4







Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)





Consolidated Statements of
Cash Flows


(Unaudited)




For
      the Periodfrom
      January 8,For
      the nine months endedSeptember 30,
            
            
            2001
              (Inception)
      to2008
            
            
            2007
            
            
            September
      30, 2008Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (6,290,008
            )
            
            $
            (6,732,880
            )
            
            $
            (24,005,554
            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Stock-based
      compensation
            
            
            1,110,771
            
            
            
            703,386
            
            
            
            3,047,417Stock-based
      consulting
            
            
            344,169
            
            
            
            641,926
            
            
            
            1,505,156Stock
      issued as compensation
            
            
            55,385
            
            
            
            -
            
            
            
            55,385Stock
      issued as compensation in acquisition of subsidiary
            
            
            -
            
            
            
            601,712
            
            
            
            601,712Contributed
      services - related party
            
            
            73,750
            
            
            
            275,124
            
            
            
            349,395Stock
      issued for license fee
            
            
            145,000
            
            
            
            -
            
            
            
            533,691Stock
      issued for milestone payment
            
            
            50,000
            
            
            
            -
            
            
            
            75,000Stock
      issued for consulting fee
            
            
            90,042
            
            
            
            -
            
            
            
            90,042Depreciation
            
            
            307,466
            
            
            
            108,642
            
            
            
            540,030Gain
      on sale of equipment
            
            
            (14,430)
            
            
            
            -
            
            
            
            (14,430)Changes
      in operating assets and liabilities:Prepaid
      expenses and other
            
            
            4,436
            
            
            
            9,372
            
            
            
            (59,200
            )Deposits
      and other assets
            
            
            1,392
            
            
            
            (17,534
            )
            
            
            (11,989
            )Accounts
      payable
            
            
            (135,177
            )
            
            
            189,525
            
            
            
            592,942Accrued
      liabilities
            
            
            116,979
            
            
            
            (158,899)
            
            
            
            179,406Net
      Cash Used In Operating Activities
            
            
            (4,140,225
            )
            
            
            (4,379,626
            )
            
            
            (16,500,997
            )Cash
      Flows From Investing Activities:Purchases
      of property and equipment
            
            
            (21,398
            )
            
            
            (1,743,313
            )
            
            
            (2,032,805
            )Cash
      paid to acquire shell in reverse acquisition
            
            
            -
            
            
            
            -
            
            
            
            (665,000
            )Net
      Cash Used In Investing Activities
            
            
            (21,398)
            
            
            
            (1,743,313
            )
            
            
            (2,697,805
            )Cash
      Flows From Financing Activities:Proceeds
      from loans payable - related party
            
            
            -
            
            
            
            
            
            
            
            3,210,338Repayments
      of loans payable - related party
            
            
            -
            
            
            
            
            
            
            
            (220,000
            )Proceeds
      from notes payable
            
            
            -
            
            
            
            1,100,000
            
            
            
            1,100,000Repayments
      of notes payable
            
            
            (900,000
            )
            
            
            (100,000
            )
            
            
            (1,100,000
            )Net
      proceeds from issuance of common stock for stock options
      exercised
            
            
            4,428
            
            
            
            -
            
            
            
            4,428Proceeds
      from issuance of preferred and common stock
            
            
            -
            
            
            
            -
            
            
            
            1,150,590Proceeds
      from sale of common stock and warrants in private
    placements
            
            
            -
            
            
            
            -
            
            
            
            13,926,362Proceeds
      from sale of common stock in connection with warrants
    exercise
            
            
            -
            
            
            
            282,841
            
            
            
            7,552,378Cash
      paid as direct offering costs in private placements and warrant
      call
            
            
            -
            
            
            
            -
            
            
            
            (1,739,987
            )Proceeds
      from issuance of Series B, convertible preferred stock -
      subsidiary
            
            
            -
            
            
            
            -
            
            
            
            1,902,500Direct
      offering costs in connection with issuance ofseries
      B, convertible preferred stock - subsidiary
            
            
            -
            
            
            
            -
            
            
            
            (152,200
            )Net
      Cash Provided By (Used In) Financing Activities
            
            
            (895,572
            )
            
            
            1,282,841
            
            
            
            25,634,409Net
      increase (decrease) in cash and cash equivalents
            
            
            (5,057,195
            )
            
            
            (4,840,098
            )
            
            
            6,435,607Cash
      and cash equivalents at beginning of period
            
            
            11,492,802
            
            
            
            12,192,426
            
            
            
            -Cash
      and cash equivalents at end of period
            
            $
            6,435,607
            
            
            $
            7,352,328
            
            
            $
            6,435,607Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            13,831
            
            
            $
            29,270
            
            
            $
            66,760Cash
      paid for taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -Supplemental
      disclosure of non-cash investing and financing
      activities:Sale
      of equipment in exchange for accounts payable
            
            $
            92,294
            
            
            $
            -
            
            
            $
            92,294Exchange
      of EPI preferred stock into Adeona common stock in
    acquisition
            
            $
            -
            
            
            $
            12,409,722
            
            
            $
            12,409,722Adeona
      acquired equipment in exchange for a loan with a related
    party
            
            $
            -
            
            
            $
            -
            
            
            $
            284,390EPI
      declared a 10% and 30% in-kind dividend on its Series B,convertible
      preferred stock.
            
            $
            -
            
            
            $
            -
            
            
            $
            951,250The
      Company issued shares and warrants in connection with theconversion
      of certain related party debt.
            
            $
            -
            
            
            $
            -
            
            
            $
            3,274,728Conversion
      of accrued liabilities to contributed capital - former  related
      party
            
            $
            -
            
            
            $
            -
            
            
            $
            3,017







See
accompanying notes to unaudited consolidated financial statements


5


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




Note 1 Organization and
Nature of Operations and Basis of Presentation




(A)
Description of the Business





Adeona
Pharmaceuticals, Inc. (“Adeona”) is a development-stage pharmaceutical company
that is developing proprietary, late-stage drug candidates for the treatment of
neurologic and fibrotic diseases.





(B)
Corporate Name Change





On
October 16, 2008, the Company completed a corporate name change to Adeona
Pharmaceuticals, Inc. from Pipex Pharmaceuticals, Inc.





(C)
Basis of Presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly they do not include all of the information and footnotes
necessary for a fair presentation of financial condition, results of operations
and cash flows in conformity with generally accepted accounting principles. In
the opinion of management of Adeona, the interim consolidated financial
statements included herewith contain all adjustments (consisting of normal
recurring accruals and adjustments) necessary for their fair
presentation.




The
unaudited interim consolidated financial statements should be read in
conjunction with the Company’s Annual Report on Form 10-KSB, which contains the
audited financial statements and notes thereto, together with the Management’s
Discussion and Analysis, for the year ended December 31, 2007. The interim
results for the period ended September 30, 2008 are not necessarily
indicative of results for the full fiscal year.





(D)
Corporate Structure, Basis of Presentation and Non-Controlling
Interest




The
Company has seven subsidiaries, Pipex Therapeutics, Inc. (“Pipex Therapeutics”),
Effective Pharmaceuticals, Inc. (“EPI”), Solovax, Inc. (“Solovax”), CD4
Biosciences, Inc. (“CD4”), Epitope Pharmaceuticals, Inc. (“Epitope”),
Healthmine, Inc. (“Healthmine”) and Putney Drug Corp. (“Putney”) which were
previously under common control.  As of
September 30, 2008, EPI, Healthmine and Putney are wholly owned and Pipex
Therapeutics, Solovax, CD4 and Epitope are majority owned.  The
combinations of these entities prior to 2006 were accounted for in a manner
similar to a pooling of interests.




For
financial reporting purposes, the outstanding preferred stock and common stock
of the Company is that of Adeona, the legal registrant. All statements of
operations, stockholders’ equity (deficit) and cash flows for each of the
entities are presented as consolidated since January 8, 2001 (inception) due to
the existence of common control since that date. All subsidiaries were
incorporated on January 8, 2001, except for EPI, which was incorporated on
December 12, 2000, Epitope which was incorporated in January of 2002, Putney
which was incorporated in November of 2006 and Healthmine which was incorporated
in December 2007.  All of the subsidiaries were incorporated under the
laws of the State of Delaware.




For
financial accounting purposes, the Company’s inception is deemed January 8,
2001. The activity of EPI for the period from December 12, 2000 to January 7,
2001 was nominal. Therefore, there is no financial information presented for
this period.








6


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





The
Company’s ownership in its subsidiaries requires the Company to account for the
related non-controlling 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.  Since the Company’s subsidiaries have never been profitable
and present negative equity, there has been no establishment of a positive
non-controlling interest. This value is not presented as a deficit balance in
the accompanying consolidated balance sheet.




(E)
Reverse Stock Split




In
January 2007, and effective on April 25, 2007, the Company’s Board of Directors
approved a 3 for 1 reverse stock split of all outstanding common stock, stock
options and stock warrants of Adeona. All share and per share amounts have been
retroactively restated to reflect this reverse stock split.





(F)
Reverse Acquisition and Recapitalization




On
October 31, 2006, Sheffield Pharmaceuticals, Inc. (“Sheffield”), a then shell
corporation, entered into a Merger Agreement (“Merger”) with Pipex Therapeutics,
a privately owned company, whereby Pipex Therapeutics was the surviving
corporation. This transaction was accounted for as a reverse acquisition.
Sheffield did not have any operations at the time of the merger, and this was
treated as a recapitalization of Pipex Therapeutics. Since Pipex Therapeutics
acquired a controlling voting interest in a public shell corporation, it was
deemed the accounting acquirer, while Sheffield was deemed the legal acquirer.
The historical financial statements of the Company are those of Pipex
Therapeutics, EPI, Solovax and CD4 since inception, and of the consolidated
entities from the date of Merger and subsequent. On December 11, 2006, Sheffield
changed its name to Pipex Pharmaceuticals, Inc.




Since the
transaction is considered a reverse acquisition and recapitalization, the
guidance in SFAS No. 141 does not apply for purposes of presenting
pro-forma financial information.




Pursuant
to the agreement, Sheffield issued 34,000,000 shares of common stock for all of
the outstanding Series A, convertible preferred and common stock of Pipex
Therapeutics, and Sheffield assumed all of Pipex Therapeutics’ outstanding
options and warrants, but did not assume the options and warrants outstanding
within any of Pipex Therapeutics’ subsidiaries (EPI, CD4 and Solovax). On
October 31, 2006, concurrent with the Merger, Pipex Therapeutics executed a
private stock purchase agreement to purchase an additional 2,426,300 shares of
common stock held by Sheffield’s sole officer and director; these shares were
immediately cancelled and retired. Aggregate consideration paid for Sheffield
was $665,000. Upon the closing of the reverse acquisition, shareholders of
Sheffield retained an aggregate 245,824 shares of common stock. As a result of
these two stock purchase transactions, Pipex Therapeutics acquired approximately
99% ownership of the issued and outstanding common shares of
Sheffield.





See Note
2(H) as it pertains to the retroactive effect of the share and per share amounts
pursuant to the reverse acquisition and recapitalization discussed in this Note
1(F).








7




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





(G) Contribution Agreements —
Consolidation of Entities under Common Control





1. 
EPI’s Acquisition of CD4




On
December 31, 2004, EPI acquired 91.61% of the issued and outstanding common
stock of CD4 in exchange for 825,000 shares of common stock having a fair value
of $825. EPI assumed certain outstanding accounts payable and loans of CD4 of
approximately $664,000. The fair value of the exchange was equivalent to the par
value of the common stock issued. CD4 shareholders retained 119,000 shares
(8.39%) of the issued and outstanding common stock of CD4; these shareholders
comprise the non-controlling shareholder base of CD4.





2. 
Pipex Therapeutics’ Acquisition of Solovax




On July
31, 2005, Pipex Therapeutics acquired 96.9% of the aggregate voting preferred
and common stock of Solovax. Pipex Therapeutics assumed all outstanding
liabilities of approximately $310,000, the transfer of 1,000,000 shares of
Series A Convertible Preferred Stock owned by Solovax’s president and 250,000
shares of common stock owned by Solovax’s COO. The fair value of the exchange
was equivalent to the par value of the common stock received pursuant to the
terms of the contribution.





3. 
Pipex Therapeutics’ Acquisition of EPI/CD4




On
December 31, 2005, Pipex Therapeutics acquired 65.47% of the aggregate voting
preferred and common stock of EPI and EPI’s majority owned subsidiary CD4. In
addition, Pipex Therapeutics assumed $583,500 of outstanding liabilities of EPI.
The fair value of the exchange was equivalent to the par value of the common
stock received pursuant to the terms of the contribution.




In the
consolidated financial statements, each of these transactions described in Note
1F, was analogous to a recapitalization with no net change to equity since the
entities were under common control at the date of the transaction.





4.
Adeona’s Acquisition of EPI, Share Issuances and Paid-in Kind Merger
Dividend




On
January 5, 2007, EPI merged with and into a wholly owned subsidiary of Adeona,
Effective Acquisition Corp. In the transaction, Adeona issued an aggregate
795,248 shares of common stock having a fair value of $15,865,198 based upon the
quoted closing trading price of $19.95 per share. As consideration for the share
issuance, EPI exchanged 1,902,501 shares of Series B Convertible Preferred stock
and 75,000 shares of common stock into 765,087 and 30,161, shares of Adeona
common stock, respectively.





See
additional discussion below for the issuance of the 765,087 shares, the Company
recorded a paid-in kind/merger dividend.





In
connection with the issuance of the 30,161 shares, the Company recorded
additional compensation expense of $601,712 as the stock was issued to an
officer and director of the Company.





During
2006, EPI declared a 10% and 30% preferred stock dividend, respectively, on its
outstanding Series B, convertible preferred stock.  During 2005, EPI
declared a 10% preferred stock dividend on its outstanding Series B, convertible
preferred stock.  In total, 951,250 shares of additional Series B,
convertible preferred stock were issued to the holders of record at the
declaration date.  These 951,250 shares of outstanding Series B
preferred stock dividend were cancelled and retired and were not contemplated in
the exchange with Adeona. EPI also cancelled and retired all of the issued and
outstanding 3,000,000 shares of Series A Convertible Preferred stock as well as
750,000 shares of common stock








8


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




In
connection with this exchange and pursuant to Securities and Exchange Commission
Regulation S-X, Rule 11-01(d) and EITF 98-3, “Determining whether a Non-Monetary
Transaction involves the receipt of Productive Assets or of a Business”
EPI 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.
Additionally, the Company applied the provisions of EITF 86-32, “Early Extinguishment of a
Subsidiary’s Mandatorily Redeemable Preferred Stock” and has determined
that even though the preferred stock of EPI was not mandatorily redeemable, this
transaction is analogous to a capital transaction, and there would be no
resulting gain or loss.





Finally,
in connection with EITF Topic D-42, “The Effect on the Calculation of
Earnings Per Share for the Redemption or Induced Conversion of Preferred
Stock” , The Company has determined that the fair value of the
consideration transferred to the holders of EPI Series B, convertible preferred
stock over the carrying amount of the preferred stock represents a return to the
preferred stockholders. The difference is $12,409,722, which is included as a
component of paid in-kind dividends. This amount is included as an additional
reduction in net loss applicable to common shareholders for purposes of
computing loss per share in the accompanying financial statements for the period
from January 8, 2001 (inception) to June 30, 2008.




As part
of the acquisition of EPI, the Company granted an aggregate 68,858 warrants and
34,685 options for the outstanding warrants and options held by the EPI warrant
and option holders. These new warrants and options will continue to vest
according to their original terms. Pursuant to SFAS No. 123R and fair value
accounting, the Company treated the exchange as a modification of an award of
equity instruments. As such, incremental compensation cost was measured as the
excess of the fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. In substance, Adeona repurchased the
EPI instruments by issuing a new instrument of greater value.




The
Company used the following weighted average assumptions for the fair value of
the replacement award: expected dividend yield of 0%; expected volatility of
196.10%; risk-free interest rate of 4.65%, an expected life ranging from seven
to eight years and exercise prices ranging from $0.09 - $3.30.




The
Company has the following weighted average assumptions for the fair value of the
cancelled award at the cancellation date: expected dividend yield of 0%;
expected volatility of 200%; risk-free interest rate of 4.65%, an expected life
ranging from seven to eight years and exercise prices ranging from $0.09
-$3.30.




The fair
value of the replacement award required an increase in compensation expense of
approximately $352,734.








9




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




Note 2 Summary of
Significant Accounting Policies




(A)
Principles of Consolidation




All
significant inter-company accounts and transactions have been eliminated in
consolidation.





(B)
Development Stage




The
Company’s consolidated financial statements are presented as statements of a
development stage enterprise. For the period from inception (January 8, 2001) to
date, the Company has been a development stage enterprise, and accordingly, the
Company’s operations have been directed primarily toward the acquisition and
creation of intellectual properties and certain research and development
activities to improve current technological concepts. As the Company is devoting
its efforts to research and development, there have been no sales, license fees
or royalties earned. Additionally, the Company continually seeks sources of debt
or equity based funding to further its intended research and development
activities. The Company has experienced net losses since its inception, and had
an accumulated deficit of $37,366,490 at September 30, 2008.




(C)
Use of Estimates




In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and revenues and
expenses during the periods presented. Actual results may differ from these
estimates.




Significant
estimates during 2008 and 2007 include depreciable lives of property, valuation
of warrants and stock options granted for services or compensation pursuant to
EITF No. 96-18 and SFAS No. 123R, respectively, estimates of the probability and
potential magnitude of contingent liabilities and the valuation allowance for
deferred tax assets due to continuing operating losses.




(D)
Cash and 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. At September 30, 2008, the balance
exceeded the federally insured limit by $6,271,207.




(E)
Property and Equipment




Property
and equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Items of property
and equipment with costs greater than $1,000 are capitalized and depreciated on
a straight-line basis over the estimated useful lives, as follows:





Description
            
            Estimated
      Useful LifeOffice
      equipment and furniture
            
            5
      yearsLaboratory
      equipment
            
            10
      yearsManufacturing
      equipment
            
            10
      yearsLeasehold
      improvements and fixtures
            
            Lesser
      of estimated useful life or life of
lease






On September 19, 2008, the Company transferred
certain manufacturing equipment with a net book value of $77,710 and $30,000 in
cash to settle an account payable totaling $122,140.  This transaction
resulted in a gain on the sale in the amount of $14,430 that is included in the
accompanying Consolidated Statements of Operations.








10




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(F)
Long Lived Assets




Long-lived
assets are reviewed for impairment 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. There were no impairment charges taken
during the three and nine month periods ended September 30, 2008 and September
30, 2007 and for the period from January 8, 2001 (inception) to September 30,
2008.




(G)
Derivative Liabilities




In
connection with the reverse acquisition, all outstanding convertible preferred
stock of Adeona was cancelled and retired, as such, the provisions of EITF No.
00-19, “Accounting for
Derivative Financial Instruments Index to, and Potentially Settled in, a
Company’s Own Stock” do not apply. The Company’s majority owned
subsidiaries also contain issued convertible preferred stock; however, none of
these instruments currently contains any provisions that require the recording
of a derivative liability. In connection with the acquisition of EPI on January
5, 2007 (See Note 1(G)(4), all issued and outstanding shares of Series A and B,
convertible preferred stock were cancelled and retired. As such, no potential
derivative liabilities will exist pertaining to these instruments.




(H)
Net Loss per Share




Basic
earnings (loss) per share is computed by dividing the net income (loss) less
preferred dividends for the period by the weighted average number of common
shares outstanding. Diluted earnings (loss) per share is computed by dividing
net income (loss) less preferred dividends by the weighted average number of
common shares outstanding including the effect of share equivalents. Since the
Company reported a net loss for the three and nine month periods ended September
30, 2008 and September 30, 2007 and for the period from January 8, 2001
(inception) to September 30, 2008, respectively, all common stock equivalents
would be anti-dilutive; as such there is no separate computation for diluted
earnings per share.




The
Company’s net loss per share for the three and nine month periods ended
September 30, 2008 and 2007 and for the period from January 8, 2001 (inception)
to September 30, 2008 was computed assuming the recapitalization associated with
the reverse acquisition, as such, all share and per share amounts have been
retroactively restated. Additionally, the numerator for computing net loss per
share was adjusted for preferred stock dividends recorded during the three and
nine month periods ended September 30, 2008 and 2007 and the period from January
8, 2001 (inception) to September 30, 2008, in connection with the acquisition of
EPI (See Note 1(G)(4)) as well as and certain provisions relating to the sale of
EPI’s Series B, convertible preferred stock.




(I)
Research and Development Costs




The
Company expenses all research and development costs as incurred for which there
is no alternative future use. Research and development expenses consist
primarily of license fees, manufacturing costs, salaries, stock based
compensation and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and other expenses relating to the design,
development, testing and enhancement of the Company’s product candidates, as
well as an allocation of overhead expenses incurred by the Company.





(J)
Fair Value of Financial Instruments




The
carrying amounts of the Company’s short-term financial instruments, including
other receivable, prepaid expenses, accounts payable and accrued liabilities,
approximate fair value due to the relatively short period to maturity for these
instruments.








11


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





(K)
Stock 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”.




(L)
Reclassifications




Certain
amounts in the year 2007 financial statements have been reclassified to conform
to the year 2008 presentation. The results of these reclassifications did not
materially affect the Company’s consolidated financial position, results of
operations or cash flows.




(M)
Recent Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” ,
which clarifies the principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability.  It also defines fair value and established a hierarchy
that prioritizes the information used to develop assumptions.  SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007.  The adoption of SFAS No. 157 is not expected
to have a material effect on our financial position, results of operations or
cash flows.





On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — Including an Amendment
of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to
measure financial instruments and certain other items at estimated fair value.
Most of the provisions of SFAS No. 159 are elective; however, the amendment
to FASB No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option (a) may generally be applied instrument by instrument,
(b) is irrevocable unless a new election date occurs, and (c) must be
applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning of
the previous fiscal year provided that the entity (i) makes that choice in
the first 120 days of that year, (ii) has not yet issued financial
statements for any interim period of such year, and (iii) elects to apply
the provisions of FASB 157. The adoption of SFAS No. 159 is not expected to have
a material effect on its financial position, results of operations or cash
flows.




In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-01, Accounting for Collaborative
Arrangements, (“EITF 07-1”). EITF 07-1 provides guidance for companies in
the biotechnology or pharmaceutical industries that may enter into agreements
with other companies to collaboratively develop, manufacture, and market a drug
candidate (Collaboration Agreements) and is effective for fiscal years beginning
after December 15, 2007. The adoption of EITF 07-1 is not expected to have a
material effect on the Company’s financial position, results of operations or
cash flows.








12


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




In June
2007, the EITF issued EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities ,(“EITF 07-3”). EITF 07-3 provides guidance for upfront
payments related to goods and services of research and development costs and is
effective for fiscal years beginning after December 15, 2007. The adoption of
EITF 07-3 is not expected to have a material effect on the Company’s financial
position, results of operations or cash flows.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent’s ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent’s ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have a material effect on its
financial position, results of operations or cash flows.




In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations.  This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control.  SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition.  SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date.  This
compares to the cost allocation method previously required by SFAS No.
141.  SFAS 141R will require an entity to recognize as an asset or
liability at fair value for certain contingencies, either contractual or
non-contractual, if certain criteria are met.  Finally, SFAS 141R will
require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date.  This Statement
will be effective for business combinations completed on or after the first
annual reporting period beginning on or after December 15,
2008.  Early adoption of this standard is not permitted and the
standards are to be applied prospectively only.  Upon adoption of this
standard, there would be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed.  The
adoption of SFAS No. 141R is not expected to have a material effect on its
financial position, results of operations or cash flows.





In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133.” (“ SFAS 161”). SFAS 161 establishes the disclosure
requirements for derivative instruments and for hedging activities with the
intent to provide financial statement users with an enhanced understanding of
the entity’s use of derivative instruments, the accounting of derivative
instruments and related hedged items under Statement 133 and its related
interpretations, and the effects of these instruments on the entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company does not expect its adoption of SFAS 161 to
have a material impact on its financial position, results of operations or cash
flows.





In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “ Determination of the Useful Life of
Intangible Assets” . This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, and other GAAP. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company is currently evaluating the impact of SFAS FSP 142-3,
but does not expect the adoption of this pronouncement will have a material
impact on its financial position, results of operations or cash
flows.







13




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB
14-1”). FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
believe the adoption of FSP APB 14-1 will have a significant effect on its
financial position, results of operations or cash flows.





Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not
require adoption until a future date and are not expected to have a material
impact on the financial statements upon adoption.






Note 3 Notes
Payable




During
2007, the Company borrowed $1,100,000 and repaid $200,000 under notes
payable.  These notes were secured by all assets of the Company as
well as the stock certificates of Pipex Therapeutics, EPI, Solovax and CD4; the
notes bore interest of prime plus 2% and were due March 30, 2010.  On
March 6, 2008, all of the outstanding principal and accrued interest was
repaid.




Note 4 Stockholders’ Equity
and Non-Controlling Interest




(A)
Preferred Stock Issuances





1.
For the Year Ended December 31, 2001





On
January 8, 2001, EPI issued 3,000,000 shares of Series A Convertible Preferred
Stock to the Founder serving as the CEO and Chairman of the Board of EPI in
exchange for $250,000 ($0.08 per share).  On January 5, 2007, pursuant
to the acquisition of EPI, these shares were cancelled and retired.





On
January 15, 2001, Pipex Therapeutics issued 5,421,554 shares of Series A
Convertible Preferred Stock to a founder serving as Chairman of the Board of
Pipex in exchange for $300,000 ($0.055 per share). On October 31, 2006, pursuant
to the reverse acquisition with Sheffield, these shares were cancelled and
retired.





On
January 31, 2001, Solovax issued 1,000,000 shares of Series A Convertible
Preferred Stock to the Founder of Solovax in exchange for $300,000 ($0.30 per
share).





On
February 7, 2001, CD4 issued 1,000,000 shares of Series A Convertible Preferred
Stock, to an affiliate of a founder in exchange for $300,000 ($0.30 per
share).




2.
For the Year Ended December 31, 2005




On March
10, 2005, EPI’s board of directors and stockholders voted to authorize the
designation of a Series B Convertible Preferred Stock.  From March
through June 2005, EPI issued 1,902,500 shares of Series B Convertible Preferred
Stock, at $1 per share, for proceeds of $1,902,500. In connection with this
offering, EPI paid $152,200 of offering costs that were charged against
additional paid in capital. The Company also granted 171,225 warrants as
compensation in connection with this equity raise.




On
January 5, 2007, pursuant to the acquisition of EPI, the shares of Series B
Convertible Preferred Stock were converted into 765,087 shares of Adeona common
stock and the warrants were converted into 68,858 warrants of Adeona. (See Note
1(E)(4))




14




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(B)
Common Stock Issuances of Issuer




For
the Year Ended 2006





During
October 2006, the Company issued 422,314 shares of common stock to an unrelated
third party in connection with the terms of a license agreement. The fair value
was $388,691 based upon the recent cash offering price at that time and was
charged to research and development expense.





During
October 2006, the Company converted all of its 5,421,554 shares of Series A,
convertible preferred stock in exchange for equivalent common shares. The fair
value of the exchange was based upon par value with a net effect of $0 to the
statement of equity.





On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606
warrants.  There were no gain or loss on this transaction since it was
with a related party.





During
October and November of 2006, the Company completed private placements of its
stock, which resulted in the issuance of 6,900,931 shares of common stock and
3,451,524 warrants. The net proceeds from the private placements were
$12,765,945, which included cash paid as direct offering costs of
$1,160,418.





For
the Year Ended 2007





During
2007, the Company issued 3,401,972 shares of common stock in connection with the
exercise of warrants for net proceeds of $6,972,809 ($2.22 per
share).





In
September and December of 2007, the Company issued an aggregate 2,920 shares of
common stock having a fair value of $20,000 ($6.85 per share) based on the
quoted closing trading price for license fees.




In
December 2007, the Company issued 5,102 shares of common stock having a fair
value of $25,000 ($4.90 per share) based on the quoted closing trading price for
a milestone payment.





For
the Year Ended 2008





In
January, April and August of 2008, the Company issued 37,948 shares of common
stock in connection with the exercise of stock options for net proceeds of
$4,428.  The related exercise prices were $0.09 and $0.18 per
share.





In March
and April of 2008, the Company issued 61,392 shares of common stock having a
fair value of $55,385 ($0.90 per share) based on the quoted closing trading
prices for payment of salaries to employees.





In April
and September 2008, the Company issued 127,845 shares of common stock having a
fair value of $90,042 ($0.70 per share) based on the quoted closing trading
price for consulting fees.





In May,
June, August and September of 2008, the Company issued an aggregate 138,505
shares of common stock having a fair value of $145,000 ($1.05 per share) based
on the quoted closing trading prices for license fees.





In June
2008, the Company issued 39,370 shares of common stock having a fair value of
$50,000 ($1.27 per share) based on the quoted closing trading price for a
milestone payment.











15







Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(C)
Common Stock Issuances of Subsidiaries




During
the period from January 8, 2001 (inception) to September 30, 2008, the Company’s
majority owned subsidiaries; CD4, Solovax, EPI and Epitope issued 419,000,
419,000, 825,000 and 125,000 shares of common stock, respectively, for an
aggregate $1,788. Of the 825,000 shares of common stock issued by EPI, 75,000
were converted into 30,161 common shares of Adeona and the remaining 750,000
shares were cancelled and retired for no additional consideration in the
acquisition of EPI on January 5, 2007.




(D)
Stock Incentive Plan




During
2001, Pipex Therapeutics’ Board and stockholders adopted the 2001 Stock
Incentive Plan (the “2001 Stock Plan”). This plan was assumed by Pipex in the
merger, in October 2006. As of the date of the merger, there were 1,489,353
options issued and outstanding. The total number of shares of stock with respect
to which stock options and stock appreciation rights may be granted to any one
employee of the Company or a subsidiary during any one-year period shall not
exceed 1,250,000. All awards pursuant to the Plan shall terminate upon the
termination of the grantee’s employment for any reason. Awards include options,
restricted shares, stock appreciation rights, performance shares and cash-based
awards (the “Awards”). The Plan contains certain anti-dilution provisions in the
event of a stock split, stock dividend or other capital adjustment, as defined
in the Plan. The Plan provides for a Committee of the Board to grant awards and
to determine the exercise price, vesting term, expiration date and all other
terms and conditions of the awards, including acceleration of the vesting of an
award at any time. As of September 30, 2008, there are 1,229,987 options issued
and outstanding under the 2001 Stock Plan.





On March
20, 2007, the Company’s Board of Directors approved the Company’s 2007 Stock
Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000
shares of common stock to be granted through incentive stock options,
nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to
officers, other employees, directors and consultants of the Company and its
subsidiaries. The exercise price of stock options under the plan is determined
by the compensation committee of the Board of Directors, and may be equal to or
greater than the fair market value of the Company’s common stock on the date the
option is granted. Options become exercisable over various periods from the date
of grant, and generally expire ten years after the grant date. This plan was
approved by stockholders on November 2, 2007. As of September 30, 2008, there
are 1,459,108 options issued and outstanding under the 2007 Stock
Plan.




Pursuant
to the provisions of 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.




The
Company has followed fair value accounting and the related provisions of SFAS
No. 123R for all share based payment awards since inception. 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
three and nine months ended September 30, 2008 and 2007 are as follows:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Exercise
      price
            
            $0.72
            
            $4.64
      - $6.80
            
            $0.72
      - $5.10
            
            $0.09
      - $22.50Expected
      dividends
            
            0%
            
            0%
            
            0%
            
            0%Expected
      volatility
            
            225%
            
            196.06%
      – 197.04%
            
            201.11%
      – 225%
            
            103.29%
      - 200%Risk
      fee interest rate
            
            3.95%
            
            4.79%
      – 5.16%
            
            3.52%
      – 4.02%
            
            4.18%
      - 5.16%Expected
      life of option
            
            10
      years
            
            5 -
      10 years
            
            10
      years
            
            5 -
      10 years








16


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




All
option grants are expensed in the appropriate period based upon vesting terms,
in each case with an offsetting credit to additional paid in capital. The
stock-based compensation expense recorded by the Company for the three and nine
months ended September 30, 2008 and 2007 and the period from inception to
September 30, 2008 with respect to stock option awards is as
follows:





Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,
            
            
            Inception
      to September 30, 20082008
            
            
            2007
            
            
            2008
            
            
            2007Research
      and development:employees
            
            $
            102,556
            
            
            $
            13,797
            
            
            $
            768,846
            
            
            $
            255,846
            
            
            $
            2,234,728non-employees
            
            
            21,071
            
            
            
            -
            
            
            
            313,319
            
            
            
            145,783
            
            
            
            519,062General
      and administrative:employees
            
            
            137,902
            
            
            
            44,098
            
            
            
            341,926
            
            
            
            172,431
            
            
            
            1,396,079non-employees
            
            
            -
            
            
            
            -
            
            
            
            30,850
            
            
            
            293,599
            
            
            
            969,625Total
            
            $
            261,529
            
            
            $
            57,895
            
            
            $
            1,454,941
            
            
            $
            867,659
            
            
            $
            5,119,494




Pursuant
to FAS 123R, the Company records stock based compensation based upon the stated
vested provisions in the related agreements, with recognition of expense
recorded on the straight line basis over the term of the related agreement. The
vesting provisions for these agreements have various terms as follows: immediate
vesting, half vesting immediately and the remainder over three years, quarterly
over three years, annually over three years, one-third immediate vesting and
remaining annually over two years, one half immediate vesting with remaining
vesting over six months and one quarter immediate vesting with the remaining
over three years.


A summary
of stock option activity for Adeona for the nine months ended September 30, 2008
(unaudited) and for the year ended December 31, 2007 is as follows:




Number
      of
              Shares
            
            Weighted
              Average
              Exercise
      PriceBalance
      at December 31, 2006
            
            
            1,613,855
            
            
            $
            1.45Granted
            
            
            700,176
            
            
            $
            6.21Exercised
            
            
            —
            
            
            $
            —Forfeited
            
            
            (16,667
            )
            
            $
            15.75Balance
      at December 31, 2007
            
            
            2,297,364
            
            
            $
            2.72Granted
            
            
            1,105,667
            
            
            $
            1.03Exercised
            
            
            (37,948)
            
            
            $
            0.12Forfeited
            
            
            (675,988
            )
            
            $
            5.01Balance
      at September 30, 2008 (unaudited)
            
            
            2,689,095
            
            
            $
            1.49




The
weighted average remaining contractual term for options outstanding at September
30, 2008 was 7.93 years. At September 30, 2008, the Company had 550,780 stock
options outstanding that had an exercise price less than the market price
on that date for an aggregate intrinsic value of $267,490.  Of the total
options granted, 1,835,607 are fully vested, exercisable and non-forfeitable and
have a weighted average exercise price of $1.61.




Of the
total 2,689,095 options outstanding, 1,374,830 options are held by related
parties of which 665,413 are fully vested, exercisable and
non-forfeitable.








17




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)




(E)
Stock Warrants




On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606 warrants to
purchase common stock. The warrants have an exercise price of $2.22 and a life
of 5 years.




In
October and November 2006, the Company issued warrants to purchase 3,451,524
shares of common stock as part of the private placement offering. The warrants
have an exercise price of $2.22 and each warrant has a life of 5
years.




In
addition, as part of the private placements, the Company issued warrants to
purchase 958,277 shares of common stock to the placement agent, which is a
company that is controlled by the Company’s Chairman and CEO. The warrants have
an exercise price of $2.22. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the transaction has a $0 net effect to
equity. The warrants are fully vested and non-forfeitable.




On
January 5, 2007, the Company issued warrants to purchase 68,858 shares of common
stock as part of the acquisition of EPI. (See Note (1)(F)(4))




On
February 15, 2007, the Company executed an agreement with a third party to
provide certain consulting services. Pursuant to the terms of the agreement, the
Company will issue warrants to purchase 100,000 shares of common stock upon the
achievement of various milestones as well as over the life of the contract. The
warrants have an exercise price of $3.75. The fair value of the warrants totals
$374,760 and was determined by using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%; expected volatility of 187.22%;
risk-free interest rate of 4.68% and an expected life of five years. As of June
30, 2008, 50,000 warrants have been issued for which the Company has recognized
stock based consulting expense for $187,500.




During
May through August 2007, the Company issued 127,406 shares of common stock in
exchange for common stock warrants for $2.22/share.  The net proceeds
totaled $282,841.




During
October and November 2007, the Company issued 3,274,566 shares of common stock
in connection with the exercise of common stock warrants, pursuant to a warrant
call for $2.22/share.  The warrant call had occurred due to the terms
by which the Company sold its common stock and warrants in private placement
offerings.  The net proceeds from the warrant call were $6,972,809,
which included cash paid as direct offering costs of $579,569.





In
connection with this warrant call, the Company entered into a warrant
solicitation agreement with Noble International Investments, Inc. (“Noble”). As
compensation for Noble’s services, the Company paid Noble a cash fee of $579,569
which totals 8% of the gross proceeds from the Holder’s exercise of warrants. In
addition, the Company issued Noble 327,456 common stock warrants. The warrants
have a term of five years, will contain customary anti-dilution provisions,
piggyback registration rights, and will be exercisable at a purchase price of
$6.36 per share.  The Company may, at its option, call the warrants if
the average daily trading price of the Company’s common stock exceeds, for at
least 20 of 30 consecutive trading days, a price per share that is equal to or
greater than 250% of the warrant’s exercise price of $6.36 per share, and there
is an effective registration statement registering the shares of the Company’s
common stock underlying the warrant. Noble will have the right at any time
during the five-year term of the warrants to exercise the warrants at its option
on a “cashless” basis, only if the Company fails to maintain an effective
registration statement registering the shares of the Company’s common stock
underlying the warrants. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the warrant grant has a $0 net effect to
equity. These warrants are fully vested and non-forfeitable.








18


Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





A summary
of warrant activity for Adeona for the nine months ended September 30, 2008
(unaudited) and for the year ended December 31, 2007 is as follows:





Number
      of
              Shares
            Weighted
      Average Exercise PriceBalance
      as December 31, 2006
            
            
            5,242,407
            
            $2.22Granted
            
            
            437,981
            
            $5.63Exercised
            
            
            (3,401,972
            )
            $2.22Forfeited
            
            
            —Balance
      at December 31, 2007
            
            
            2,278,416
            
            $2.22Granted
            
            
            8,333
            
            $3.75Exercised
            
            
            —Forfeited
            
            
            —Balance
      as September 30, 2008 (unaudited)
            
            
            2,286,749
            
            $2.88





All
outstanding warrants are fully vested and exercisable.







Warrants
      Outstanding and ExercisableRange
      of
              Exercise
              Price
            
            Number
              Outstanding
            
            Weighted
              Average
              Remaining
              Contractual
              Life$
            2.22
            
            1,840,435
            
            4.07
      Years$
            3.30
            
            68,858
            
            6.67
      Years$
            3.75
            
            50,000
            
            7.38
      Years$
            6.36
            
            327,456
            
            4.11
      Years2,286,749
            
            5.49
      Years




(F)
Options of Subsidiary




CD4 has
30,000 options outstanding and exercisable, with an exercise price of $0.20 and
a remaining contractual life of 2.23 years as of September 30,
2008.





Epitope
has 50,000 options outstanding and none exercisable, with an exercise price of
$.001 and a remaining contractual life of 9.75 years as of September 30,
2008.  These options vest annually over 5 years and have a fair value
of $50 which was determined using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%; expected volatility of 200%, risk
free interest rate of 2.47% and an expected life of 10 years.




(G)
Non-Controlling Interest




Since the
Company’s majority owned subsidiaries have never been profitable and present
negative equity, there has been no establishment of a positive non-controlling
interest. Since this value cannot be presented as a deficit balance, the
accompanying consolidated balance sheet does not reflect any
notation.






19




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)





Note 5
Commitments




(A)
License Agreements




Since
inception, the Company has entered into various option and license agreements
for the use of patents and their corresponding applications. These agreements
have been entered into with various educational institutions and hospitals.
These agreements contain payment schedules or stated amounts due for (a) option
and license fees, (b) expense reimbursements, and (c) achievement of success
milestones. All expenses related to these agreements have been recorded as
research and development.




In
connection with these agreements, the Company may be obligated to make future
milestone payments up to an amount of $19,425,000. Some of these payments may be
fulfilled through the issuance of the Company’s common stock, at the Company’s
option. As of September 30, 2008, the Company has achieved two milestones which
the Company fulfilled by issuing common stock having a fair value of $75,000.
See Note (4(B)).  The Company can give no assurances that any other
milestones will be achieved. In addition to the milestone payments, the Company
may be obligated to make royalty payments on future sales pursuant to the
agreements.




(B)
Research Agreement





In
September 2005, the Company entered into a three-year sponsored research
agreement with a University. Pursuant to that agreement, the Company sponsors
approximately $460,000 per year, payable in monthly installments. This agreement
can be extended for an additional two-year period.  The Company can
terminate the agreement by giving 90 days prior written notice.  On
March 20, 2008, the Company provided the University with written notice of
termination of the agreement.




(C)
Consulting Agreement





In August
2005, Adeona entered into an agreement with an individual to provide consulting
services for the Company’s research and development. The consultant was paid
$25,000 upon the execution of the agreement. The consultant will receive annual
consulting fees of $120,000 for each of the next three years. The consultant
also received 216,847 options having a fair value $59,960 and was determined
using the Black-Scholes model with the following assumptions: expected dividend
yield of 0%, expected volatility of 200%, risk free interest rate of 1.81% and
an expected life of 10 years.  On March 24, 2008, the Company granted
the individual an additional 216,667 options having a fair value of $437,667 and
was determined using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%; expected volatility of 221%, risk free interest
rate of 3.56% and an expected life of 10 years.  On September 16, 2008
this agreement was amended whereby the consultant will receive an hourly
consulting rate of $300 per hour for a minimum of 10 hours per month, payable in
either cash or restricted common stock rather than a quarterly fee of $30,000
effective October 1, 2008.




On
February 15, 2007, the Company executed an agreement with a third party to
provide certain services. Pursuant to the terms of the agreement, the Company
will pay $9,000 per month for a period of twelve months and grant 100,000 stock
warrants with a cashless exercise provision. These warrants vest upon various
milestones as well as over the life of the contract.





(D)
Employment Agreements




In
January 2005, the Company entered into a four-year employment agreement with the
Company’s Chairman and Chief Executive Officer. Pursuant to this agreement,
Adeona will pay an annual base salary of $297,000, an annual bonus equal to 30%
of base salary and a ten-year option to acquire 271,058 shares of common stock
at the completion of the Company’s private placement that occurred on October
31, 2006. As of June 30, 2008, 180,705 options have vested, with the remainder
vesting on October 31, 2008.The fair value of the
options totaled $544,827 and was determined using the Black-Scholes model with
the following assumptions: expected dividend yield of 0%, expected volatility of
200%, risk free interest rate of 4.61% and an expected life of 10 years. On July
20, 2007, the Board of Directors approved an amended and restated employment
agreement with the Chief Executive Officer. The amended employment agreement
provides that the Chief Executive Officer is to be paid a base salary of
$195,000 per year plus a guaranteed bonus of $100,000. The Chief Executive
Officer may also be entitled to discretionary transactional bonuses. In
addition, the amended agreement provides that the Chief Executive Officer has
waived the receipt of any salary and bonus payable under the original agreement,
which amounts to $275,645, for no additional consideration. This amount was
treated as a capital contribution to the Company in September
2007.  On July 1, 2008, the Chief Executive Officer resigned his
position with the Company but remains as Chairman and will continue to receive
compensation under this employment agreement.






20




Adeona
Pharmaceuticals, Inc. and Subsidiaries


(A
Development Stage Company)




Notes
to Consolidated Financial Statements


(Unaudited)







The
Company entered into an employment agreement with its President on May 24, 2006.
Pursuant to this agreement, Adeona will pay an annual base salary of $295,000
and a guaranteed bonus of one-third of base salary. Adeona has also granted a
ten-year option to purchase 664,252 shares of common stock, of which 332,126
have vested as of December 31, 2007. The remainder of these options will vest
quarterly over a three-year period. In the event of a termination, the Company
will provide six-month severance, payable over a six-month period.  On
March 5, 2008, the Company’s President has agreed to work for no cash
compensation until May 17, 2008 at which time his compensation will be at the
discretion of the compensation committee.  The President will be
eligible to receive a contingent bonus in the event that the Company is acquired
or the stock price retraces or exceeds to the level of the share price on
January 28, 2008. Additionally, the President agreed to eliminate severance
provisions of his agreement.  The Company has recorded contributed
services from a related party totaling $73,750 during 2008.  On July
1, 2008 the President resigned his position with the Company.




On
October 10, 2007, the Company entered into a three-year employment agreement
with its Chief Scientific Officer. The Company paid the Chief Scientific Officer
a $7,500 signing bonus and a base salary of $205,000 per year. The agreement
also provided that the Chief Scientific Officer was eligible for cash and
non-cash bonuses at the end of each of the Company’s fiscal years during the
term of the agreement at the discretion of the Company’s compensation committee
as well as additional commission-based cash and stock bonuses during each fiscal
year based on significant revenue-generating, out-licensing and merger and
acquisition transactions initiated and completed by the Chief Scientific
Officer, again at the discretion of the compensation committee. Pursuant to the
agreement, the Company granted a ten-year option to purchase 150,000 shares of
the Company’s common stock of which none are outstanding as of September 30,
2008.  This agreement was terminated on March 7, 2008.





On July
1, 2008, the Company's Board of Directors approved a compensation package with
its Vice Chairman as a result of his appointment as Chief Executive
Officer.  Under the terms of arrangement, the Chief Executive Officer
will receive an annual salary of $195,000.  The Chief Executive
Officer is also eligible for a bonus at the discretion of the Board of
Directors.  In the event of termination, the Company will provide
six-month severance, payable over the Company’s ordinary pay
periods.  The Company has also granted  a ten year option to
purchase 800,000 shares of the Company’s common stock, exercisable at $0.72 per
share, with one-quarter of the options vesting immediately, and the remainder
vesting quarterly in equal increments over three years.  These options
shall vest in full should the Company be acquired.  The fair value of
the options totaled $576,000 and was determined using the Black-Scholes model
with the following assumptions: expected dividend yield of 0%, expected
volatility of 225.79%, risk free interest rate of 3.95% and an expected life of
10 years.





Note 6 Corporate
Restructuring




On March
11, 2008, the Company announced that it has implemented cost reduction measures
in order to substantially reduce operating expenses given the delay in refilling
its New Drug Application for oral tetrathiomolybdate (oral TTM) for the
treatment of initially presenting neurologic Wilson’s disease.  As
part of the corporate restructuring, the Company eliminated positions in the
areas of manufacturing, analytical, quality control, quality assurance,
clinical, regulatory, diagnostic product development, principally relating to
the development of oral TTM and diagnostics division.





On July
8, 2008, the Company announced changes in senior management.  See Note
(5)(D).







21




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION AND RESULTS OF
OPERATIONS




The
following discussion should be read in conjunction with the attached unaudited
consolidated financial statements and notes thereto, and with our audited
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 2007, found in our Annual Report on Form 10-KSB. In addition to
historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Where possible, we
have tried to identify these forward looking statements by using words such as
“anticipate,” “believe,” “intends,” or similar expressions. Our actual results
could differ materially from those anticipated by the forward-looking statements
due to important factors and risks including, but not limited to, those set
forth under “Risk Factors” in Part II, Item 1A of this Report.





Overview




Since our
inception during January 2001, our efforts and resources have been focused
primarily on acquiring and developing our pharmaceutical products, raising
capital and recruiting personnel. We are a development stage company and have
had no product sales to date and we will not have any product sales until and
unless we receive approval from the FDA or receive approval from equivalent
foreign regulatory bodies to begin selling our pharmaceutical candidates. Our
major sources of working capital have been proceeds from equity financings from
our Chairman and various private financings, primarily involving private sales
of our common stock and other equity securities.




Our
company’s current corporate structure resulted from the October 2006 merger of a
newly-created wholly owned subsidiary of Sheffield Pharmaceuticals, Inc.
(“Sheffield”), a Delaware corporation incorporated in September 1993, and Pipex
Therapeutics, Inc., a Delaware corporation (“Pipex Therapeutics”). In connection
with that transaction, a wholly owned subsidiary of Sheffield merged with and
into Pipex Therapeutics, with Pipex Therapeutics remaining as the surviving
corporation and a wholly-owned subsidiary of Sheffield. On December 11, 2006,
Sheffield changed its name to Pipex Pharmaceuticals, Inc. (“Pipex”) and on
October 16, 2008 the Company changed its name to Adeona Pharmaceuticals, Inc.
(“Adeona”). In exchange for their shares of capital stock in Pipex Therapeutics,
the former stockholders of Pipex Therapeutics received shares of capital stock
of Sheffield representing approximately 98 percent of the outstanding equity of
Sheffield on a primary diluted basis after giving effect to the transaction,
with Sheffield assuming Pipex’s outstanding options and warrants. In addition,
the board of directors of Sheffield was reconstituted shortly following the
effective time of the transaction such that the directors of Sheffield were
replaced by our current directors, all of whom were previously directors of
Pipex Therapeutics. Further, upon the effective time of the merger, the business
of Sheffield was abandoned and the business plan of Pipex Therapeutics was
adopted. The transaction was therefore accounted for as a reverse acquisition
with Pipex Therapeutics as the acquiring party and Sheffield as the acquired
party. Accordingly, when we refer to our business and financial information
relating to periods prior to the merger, we are referring to the business and
financial information of Pipex Therapeutics, unless the context indicates
otherwise.




Critical
Accounting Policies




In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations. The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following discussion regarding research and development
expenses, general and administrative expenses and non-cash compensation expense
involve our most critical accounting policies.




Research
and development expenses consist primarily of manufacturing costs, license fees,
salaries and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and organizational affairs and other expenses
relating to the design, development, testing, and enhancement of our product
candidates, as well as an allocation of overhead expenses incurred by the
Company. We expense our research and development costs as they are
incurred.




General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including business development
and general legal activities, as well as an allocation of overhead expenses
incurred by the Company. We expense our general and administrative expenses as
they are incurred.





22




Our
results include non-cash compensation expense as a result of the issuance of
stock and stock option grants. Compensation expense for options granted to
employees represents the fair value of the award at the date of grant. 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”.




This
amount is being recorded over the respective vesting periods of the individual
stock options. The expense is included in the respective categories of expense
in the statement of operations. We expect to record additional non-cash
compensation expense in the future, which may be significant. However, because
some of the options are milestone-based, the total expense is
uncertain.




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




Results
of Operations




Three
Months Ended September 30, 2008 and 2007.




Research
and Development Expenses. For the three months ended September 30, 2008,
research and development expense was $863,272 as compared to $1,573,610 for the
three months ended September 30, 2007. The decrease of $710,338 is due primarily
to a decrease of  approximately $575,000 associated with payments
related the development of our licensed clinical drug candidates, a decrease in
salaries and related taxes of approximately $198,000 and a decrease in allocated
overhead expenses of approximately $16,000, offset by an increase of
approximately $80,000 in stock based compensation charges. .




General
and Administrative Expenses. For the three months ended September 30, 2008,
general and administrative expense was $606,685 as compared to $599,388 for the
three months ended September 30, 2007. The increase of $7,297 is due primarily
to an increase in stock based compensation charge of approximately $93,000, an
increase in salaries and payroll taxes of approximately $2,000, offset by a
decrease in professional fees of approximately $59,000 and an decrease in
allocated overhead of approximately $28,000.




Other
Income (Expense), net. For the three months ended September 30, 2008, other
income-net was $41,118 compared to $52,056 for the three months ended September
30, 2007. For the three months ended September 30, 2008, interest income was
$26,688 as compared to $66,041 for the three months ended September 30, 2007.
Interest income was lower for the period in 2008 as compared to the same period
in 2007 due to lower interest rates and lower levels of cash in interest bearing
accounts. For the three months ended September 30, 2008, other income was
$14,430 as compared to $0 for the three months ended September 30,
2007.  Other income for the quarter in 2008 relates to a gain on the
sale of equipment.  For the three months ended September 30, 2008,
interest expense was $0 as compared to $13,985 for the three months ended
September 30, 2007. Interest expense for the period in 2007 relates to interest
paid on the notes payable which were repaid in March 2008.




Net Loss.
Net loss for the three months ended September 30, 2008, was $1,428,839 as
compared to $2,120,942 for the three months ended September 30, 2007. This
decrease in net loss of $692,103 is attributable primarily to a decrease in
research and development expense of $710,338, offset by an increase in general
and administrative expenses of $7,297 and a decrease in other income-net of
$10,938 as discussed above.




Net Loss
Applicable to Common Shareholders. The net loss applicable to common
shareholders for the three months ended September 30, 2008, was $1,428,839 as
compared to $2,120,942 for the three months ended September 30, 2007. This
decrease in net loss applicable to common shareholders of $692,103 is
attributable primarily to a decrease in research and development expense of
$710,338, offset by an increase in general and administrative expenses of $7,297
and a decrease in other income-net of $10,938 as discussed above.




23




Nine
Months Ended September 30, 2008 and 2007.




Research
and Development Expenses. For the nine months ended September 30, 2008, research
and development expense was $4,156,255 as compared to $4,069,782 for the nine
months ended September 30, 2007. The increase of $86,473 is due primarily to an
increase in stock based compensation charges of approximately $242,000 and an
increase of allocated overhead of approximately $111,000 offset by a decrease of
approximately $254,000 in salaries and payroll taxes and a decrease
of  approximately $13,000 associated with payments related to the
development of our licensed clinical drug candidates.




General
and Administrative Expenses. For the nine months ended September 30, 2008,
general and administrative expense was $2,242,855 as compared to $2,852,126 for
the nine months ended September 30, 2007. The decrease of $609,271 is due
primarily to a decrease in stock based compensation charge of approximately
$734,000, a decrease in professional fees of $122,000, offset by an increase in
salaries and payroll taxes of approximately $175,000 and an increase in
allocated overhead expenses of $71,000.





Other
Income (Expense), net. For the nine months ended September 30, 2008, other
income-net was $109,102 compared to $189,028 for the nine months ended September
30, 2007. For the nine months ended September 30, 2008, interest income was
$108,503 as compared to $218,298 for the nine months ended September 30, 2007.
Interest income was lower for the period in 2008 as compared to the same period
in 2007, due to lower interest rates and lower levels of cash in interest
bearing accounts.  For the nine months ended September 30, 2008, other
income was $14,430 as compared to $0 for the nine months ended September 30,
2007.  Other income for the period in 2008 relates to a gain on the
sale of equipment. For the nine months ended September 30, 2008, interest
expense was $13,831 as compared to $29,270 for the nine months ended September
30, 2007. Interest expense for both periods relates to interest paid on the
notes payable which were repaid in March 2008.




Net Loss.
Net loss for the nine months ended September 30, 2008, was $6,290,008 as
compared to $6,732,880 for the nine months ended September 30, 2007. This
decrease in net loss is attributable primarily to a decrease in general and
administrative expenses of $609,271, offset by an increase in research and
development expenses of $86,473 and a decrease in other income-net of $79,926 as
discussed above.




Net Loss
Applicable to Common Shareholders. The net loss applicable to common
shareholders for the nine months ended September 30, 2007 includes a non-cash
charge of $12,409,722 related to the acquisition of Effective Pharmaceuticals,
Inc (“EPI”). The total of the non-cash charge was reflected through equal and
offsetting adjustments to additional paid-in-capital with no net impact on
stockholders’ equity. These amounts were considered in the determination of the
Company’s loss per common share amounts for the nine months ended September 30,
2007 and for the period from January 8, 2001 (inception) to September 30,
2008.







Liquidity
and Capital Resources




During
the nine months ended September 30, 2008, we had a net decrease in cash of
$5,057,195. Total cash resources as of September 30, 2008 was $6,435,607. During
the nine months ended September 30, 2008 and 2007, net cash used in operating
activities was $4,140,225 and $4,379,626 respectively. This cash was used to
fund our operations for the periods, adjusted for non-cash expenses and changes
in operating assets and liabilities.




Net cash
used in investing activities was $21,398 for the nine months ended September 30,
2008 compared to $1,743,313 net cash used in investing activities for the nine
months ended September 30, 2007.  The net cash used in investing
activities for the nine months ended September 30, 2008 resulted from the
purchase of property and equipment in the amount of $21,398.  The net
cash used in investing activities for the nine months ended September 30, 2007
resulted from $1,743,313 for the purchase of property and
equipment.






24




Net cash
used in financing activities was $895,572 for the nine months ended September
30, 2008 compared to $1,282,841 of net cash provided by financing activities for
the nine months ended September 30, 2007. The net cash used in financing
activities for the nine months ended September 30, 2008 resulted from $900,000
for the repayment on notes payable, less proceeds of $4,428 from the issuance of
common stock.  The net cash proceeds from financing activities for the
nine months ended September 30, 2007 resulted from proceeds from a note payable
in the amount of $1,100,000, proceeds from the sale of common stock in
connection with warrant exercise in the amount of $282,841 offset by repayments
of a note payable in the amount of $100,000.




Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as license fees from a potential
corporate partner, equity and debt financing. Such additional funds may not
become available on acceptable terms and there can be no assurance that any
additional funding that we do obtain will be sufficient to meet our needs in the
long term. We will continue to fund operations from cash on hand and through the
similar sources of capital previously described. We can give no assurances that
any additional capital that we are able to obtain will be sufficient to meet our
needs.




Current
and Future Financing Needs




We have
incurred an accumulated deficit of $37,366,490 through September 30, 2008. We
have incurred negative cash flow from operations since we started our business.
We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials, and our research and discovery
efforts. Based on our current plans, we believe that our cash will be sufficient
to enable us to meet our planned operating needs at least for the next 12
months.




However,
the actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:




●
            the
      progress of our research activities;●
            the
      number and scope of our research programs;●
            the
      progress of our pre-clinical and clinical development
      activities;●
            the
      progress of the development efforts of parties with whom we have entered
      into research and development agreements;●
            our
      ability to maintain current research and development programs and to
      establish new research and development and licensing
      arrangements;●
            our
      ability to achieve our milestones under licensing
      arrangements;●
            the
      costs involved in prosecuting and enforcing patent claims and other
      intellectual property rights; and●
            the
      costs and timing of regulatory
approvals.




We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our shares or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at all. If
we raise funds by selling additional shares of common stock or other securities
convertible into common stock, the ownership interest of our existing
stockholders will be diluted. If we are not able to obtain financing when
needed, we may be unable to carry out our business plan. As a result, we may
have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.





License
and Contractual Agreement Obligations





Below is
a table of our contractual obligations for the years 2008 through 2012 as of
September 30, 2008.





YearAgreements
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            TotalLicense
      Agreements
            
            $35,000
            
            $122,000
            
            $150,000
            
            $150,000
            
            $175,000
            
            $632,000Lease
      Agreements
            
            $35,344
            
            $145,733
            
            $150,152
            
            $25,148
            
            0
            
            $356,377Consulting
      Agreements
            
            $15,000
            
            $43,332
            
            $30,000
            
            0
            
            0
            
            $88,332Total
            
            $85,344
            
            $311,065
            
            $330,152
            
            $175,148
            
            $175,000
            
            $1,076,709







25




Product
Candidates




TRIMESTA TM (oral estriol)




In June
2007, a two year seven U.S. center, placebo controlled 150 patient phase IIb
clinical trial using TRIMESTA TM for the
treatment of relapsing-remitting Multiple Sclerosis (MS) was initiated under a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and NIH. This phase IIb clinical trial builds upon our
encouraging results from an earlier phase IIa clinical trial. The primary
purpose of this study is to evaluate the safety and efficacy of TRIMESTA TM in a
larger MS patient population with a one year blinded interim analysis. The
preclinical and clinical development of TRIMESTA TM has
been primary financed by grants from the NIH and various non-profit foundations.
Through September 30, 2008, we have incurred approximately $653,000 of costs
related to our development of TRIMESTA TM of
which approximately $49,500, $185,500 and $194,000 was incurred in fiscal years
2005, 2006 and 2007, respectively, and approximately $224,000 was incurred
during the first three quarters of  2008.





Oral
dnaJP1





In June
2008, we acquired Oral dnaJP1, an oral, candidate for the treatment of
rheumatoid arthritis (RA) which has completed a 160 patient, multi-center,
double-blind, randomized, placebo-controlled Phase II clinical trial for the
treatment of RA. Rheumatoid arthritis is an autoimmune disease which affects
approximately 20 million people worldwide.  Oral dnaJP1 is a epitope
specific immunotherapy for RA patients. Oral dnaJP1 is a heat shock protein
(hsp)-derived peptide which was previously identified as a contributor of T cell
mediated inflammation in RA. Immune responses to hsp are often found at sites of
inflammation and have an initially amplifying effect that needs to be
downregulated to prevent tissue damage. The mechanisms for this regulation
involve T cells with regulatory function that are specific for hsp-derived
antigens. This regulatory function is one of the key components of a "molecular
dimmer" whose physiologic function is to modulate inflammation independently
from its trigger. This function is impaired in autoimmunity and could be
restored for therapeutic purposes. Through September 30, 2008, we have incurred
approximately $95,000 of costs related to our development of Oral
dnaJP1.








Zinthionein
TM
(oral
zinc-monocysteine complex)




We plan
to initially develop Zinthionein TM as an
oral treatment for dry age-related macular degeneration (“dry AMD”). Zinthionein
has completed a six month double blind randomized placebo controlled trial in 80
dry AMD patients with statistically significant improvements in visual acuity,
contrast sensitivity and photorecovery times. During July 2008, we announced
detailed results following the publication of the study results in a
peer-reviewed ophthalmic journal. Through September 30, 2008, we have incurred
approximately $345,000 of costs related to our development of Zinthionein of
which $154,000 was incurred during 2007 and $191,000 was incurred in
2008.





EFFIRMA
TM
(oral
flupirtine)




A
scientific collaborator of ours has filed and received an IND with the FDA to
conduct a phase II clinical trial with EFFIRMA in fibromyalgia
patients.  We plan to fund this double-blind placebo controlled phase
II clinical study which is designed to enroll up to 90 patients with
fibromyalgia.  Through September 30, 2008, we have incurred approximately
$104,000 of costs related to our development of EFFIRMA TM , of
which $85,000 was incurred during 2007 and $19,000 was incurred during
2008.




Freebound
TM (metals diagnostic device)




We are
developing a proprietary diagnostic device, Freebound TM capable of measuring
levels of free and bound metals in biological samples. Altered metal
dyshomeostasis, in a particular copper, is associated with major disease
indications, such as Alzheimer’s disease.  Through September 30, 2008,
we have incurred approximately $56,000 of costs related to our development of
Freebound TM, of which $38,000 was incurred during 2008.






26


Oral TTM (oral
tetrathiomolybate)




Through
September 30, 2008, we have incurred approximately $3,598,000 of costs related
to our development of oral TTM, of which approximately $150,000, $1,061,000 and
$1,676,000 was incurred in fiscal years 2005, 2006 and 2007, respectively, and
approximately $711,000 was incurred for the nine months ended September 30,
2008.




We are
seeking potential U.S. and international corporate partners for the further
development of Oral TTM for Wilson's Disease, idiopathic pulmonary fibrosis
(IPF), Alzheimer’s disease and Huntington’s Disease.




Anti-CD4
802-2




Through
September 30, 2008, we have incurred $1,463,000 of costs related to our
development of anti-CD4 802-2 of which $58,000, $332,000, $303,000, $295,000,
$113,000, $161,000 and $121,000 was incurred in fiscal years 2001, 2002, 2003,
2004, 2005, 2006 and 2007 respectively and approximately $80,000 has been
incurred in 2008.




CORRECTA TM
(clotrimazole
emema)




In
November 2008, we provided Children's Hospital Boston notice of termination of
the license agreement.




Through
September 30, 2008, and prior to our termination of this agreement, we have
incurred approximately $359,000 of costs related to our development of CORRECTA
TM
of which approximately $103,000, $107,000 and $36,000 was incurred in fiscal
years 2005, 2006 and 2007, respectively, and $113,000 has been incurred during
2008.




Solovax
TM

(multivalent
T-cell vaccine for MS)








Through
September 30, 2008, and prior to our termination of this agreement, we have
incurred approximately $814,000 of costs related to our development of SOLOVAX
of which $107,000, $158,000, $164,000, $163,000, $67,000, $21,000 and $8,000 was
incurred in fiscal 2001, 2002, 2003, 2004, 2005, 2006 and 2007, respectively,
and $126,000 has been incurred  during 2008.




Based on
our current capital expenditures, we believe we currently have sufficient
capital to fund development activities of TRIMESTA TM , Oral
dnaJP1, Zinthionein, EFFIRMA TM ,
Freebound TM, oral TTM and anti-CD4 802-2, through November 2009. However,
if our business does not generate any cash flow through corporate partnering
transactions, we will need to raise additional capital to continue development
of the product beyond 2009. To the extent additional capital is not available
when we need it, we may be forced to sublicense our rights to our product
candidates, abandon our development efforts altogether, or lose our licenses to
our product candidates, any of which would have a material adverse effect on the
prospects of our business. See also the risks identified under the section
entitled “Risk Factors” in this report.




Additional
Licenses




We may
enter into additional license agreements relating to new drug
candidates.







27





ITEM
3. CONTROLS AND PROCEDURES




Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”), who also
serves as our principal financial and accounting officer, of the effectiveness
of the Company’s disclosure controls and procedures (as defined under Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Company’s CEO concluded that the
Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to the
Company’s management, including the Company’s CEO, as appropriate, to allow
timely decisions regarding required disclosure.







Changes
in Internal Control over Financial Reporting




There has
been no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
fiscal quarter ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.







28





PART
II—OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




Not
applicable.




ITEM
1A. RISK FACTORS




An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below, which are only a few of the risks associated with
investing in our common stock. You should be in a position to risk the loss of
your entire investment.






RISKS RELATING TO OUR BUSINESS




We are a
development stage company. We currently have no product revenues and will need
to raise additional capital to operate our business.




We are a
development stage company that has experienced significant losses since
inception and has a significant accumulated deficit. We expect to incur
additional operating losses in the future and expect our cumulative losses to
increase. To date, we have generated no product revenues. As of September 30,
2008, we have expended approximately $22.4 million on a consolidated basis
acquiring and developing our current product candidates. Until such time as we
receive approval from the FDA and other regulatory authorities for our product
candidates, we will not be permitted to sell our drugs and will not have product
revenues. Therefore, for the foreseeable future we will have to fund all of our
operations and capital expenditures from equity and debt offerings, cash on
hand, licensing fees, and grants. We will need to seek additional sources of
financing and such additional financing may not be available on favorable terms,
if at all. If we do not succeed in raising additional funds on acceptable terms,
we may be unable to complete planned pre-clinical and clinical trials or obtain
approval of our product candidates from the FDA and other regulatory
authorities. In addition, we could be forced to discontinue product development,
reduce or forego sales and marketing efforts, and forego attractive business
opportunities. Any additional sources of financing will likely involve the
issuance of our equity or debt securities, which will have a dilutive effect on
our stockholders.




We
are not currently profitable and may never become profitable.




We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect to incur
substantial losses for the foreseeable future and may never become profitable.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we do the following:




●
            continue
      to undertake pre-clinical development and clinical trials for our product
      candidates;●
            seek
      regulatory approvals for our product candidates;●
            implement
      additional internal systems and infrastructure;●
            lease
      additional or alternative office facilities; and●
            hire
      additional personnel, including members of our management
      team.




We also
expect to experience negative cash flow for the foreseeable future as we fund
our technology development with capital expenditures. As a result, we will need
to generate significant revenues in order to achieve and maintain profitability.
We may not be able to generate these revenues or achieve profitability in the
future. Our failure to achieve or maintain profitability could negatively impact
the value of our common stock and underlying securities.






29




We
have a limited operating history on which investors can base an investment
decision.




We are a
development-stage company and have not demonstrated our ability to perform the
functions necessary for the successful commercialization of any of our product
candidates. The successful commercialization of our product candidates will
require us to perform a variety of functions, including:




●
            continuing
      to undertake pre-clinical development and clinical
  trials;●
            participating
      in regulatory approval processes;●
            formulating
      and manufacturing products; and●
            conducting
      sales and marketing activities.




Our
operations have been limited to organizing and staffing our company, acquiring,
developing, and securing our proprietary technology, and undertaking
pre-clinical trials and Phase I/II, and Phase II and Phase III clinical trials
of our principal product candidates. These operations provide a limited basis
for you to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.




Our NDA for oral
TTM has not been accepted for filing and/or we may not obtain the necessary U.S.
or worldwide regulatory approvals to commercialize oral TTM or one of our
product(s).




On
November 28, 2007, we filed a New Drug Application (NDA) with the Food and Drug
Administration (FDA) seeking approval to market oral TTM (oral
tetrathiomolybdate) for initially presenting neurologic Wilson's disease. On
January 28, 2008 representing sixty (60) days from the date of NDA filing we
received notification from the FDA that our NDA has not been accepted for
further review and the FDA issued a refusal to file letter ("RTF"). In the RTF
letter the FDA cited various deficiencies in the NDA filing, including, the
formatting and presentation of the data, preliminary assessments concerning the
adequacy and quality of the clinical evidence to support the safety and efficacy
of oral TTM, the necessity to conduct a Segment III preclinical reproductive
toxicology study as well as chemistry, manufacturing and controls issues
regarding the identity, strength and purity of oral TTM. Given the receipt of
the RTF letter, we will face substantial delays in our ability to prepare and
re-file a new NDA, if at all, and potential approval to market oral
TTM.




On
February 26, 2008, we completed a Type A meeting with the FDA to discuss the
deficiencies raised in the RTF letter. Based on this meeting with the FDA, we
believe we reached an understanding with the FDA on a course of action to
resolve all of the filing issues raised in the RTF letter. Nevertheless, the FDA
raised concerns regarding the adequacy of the evidence of clinical efficacy,
safety, study quality, data collection and overall risk/benefit profile of oral
TTM for neurologic Wilson's disease as represented by the two completed clinical
trials of oral TTM for neurologic Wilson's disease that formed the basis of the
NDA. Even if we are successful in preparing and filing a revised NDA, we cannot
provide any assurances that a newly filed NDA will be accepted for filing or
that upon review of the NDA by the FDA, we will be successful in overcoming such
FDA concerns and that oral TTM for initially presenting neurologic Wilson's
disease will be approved by the FDA. The clinical trials for oral TTM which
formed the basis of the NDA filing were conducted over a period of 18 years from
1988 to 2005 prior to entering into our license agreement for oral TTM and were
conducted under an investigator initiated IND by our scientific advisor and
consultant, Dr. George Brewer under grant support from various non-profit
foundations and governmental agencies including the FDA’s Orphan Products Group.
In the event that we are able to prepare, file and obtain FDA acceptance of a
new NDA filing for oral TTM, we cannot provide any assurances that after the FDA
reviews our new submission, that the new NDA submission will overcome the FDA's
concerns raised in the RTF letter sufficient for approval of oral TTM or that
the FDA will not upon further review raise additional concerns regarding
manufacturing, clinical, or nonclinical which may impact the potential
approvability of oral TTM for the treatment of neurologic Wilson’s
disease.




We are
seeking potential business development corporate partners and potential
licensees that may support the further development of oral TTM for Wilson's
disease and other indications. In order to consider an enhanced resubmitted
NDA filing for oral TTM for the treatment of neurologic Wilson’s disease, at the
February 26, 2008 Type A meeting we discussed with the FDA that we may intend
to schedule a Type B meeting with the FDA to discuss potential next steps
if any for the development of oral TTM.  Should a Type B meeting
be requested by us and be scheduled, we intend to present potential,
available pharmacokinetic and pharmacodynamic data (such as and including oral
TTM's effects on lowering serum free copper levels in patients) from various
clinical trials as well as a summarization of the data from the previously
completed clinical trials with oral TTM for neurologic Wilson’s disease. The
feedback from this Type B meeting with the FDA will determine the timing of
future clinical trials of oral TTM for this indication and may result in us
discontinuing the development of oral TTM. Additionally, depending on the
analysis of additional data, the FDA may request a separate pharmacokinetic
study or additional clinical studies.  As of the date of this filing,
we have not scheduled a type B meeting with the FDA for oral TTM in Wilson’s
disease.






30





On March
17, 2008, Dr. George Brewer informed us that pursuant to a teleconference
between Dr. Brewer and the FDA of the same date, Dr. Brewer's physician
sponsored investigational new drug application (IND) for oral tetrathiomolybdate
for Wilson's disease had been placed on clinical hold pending the potential
resolution, if any, of  items described in the RTF. The IND that is
the subject of the clinical hold includes an active dose optimization comparator
protocol of oral tetrathiomolybdate that to date has enrolled and treated
approximately 40 neurologically presenting Wilson's disease patients the data
from which we intend to collect, analyze and present to the FDA at a Type B
meeting to be requested to discuss a potential revised New Drug Application
submission. We cannot provide any assurance that Dr. Brewer will be successful
in lifting the clinical hold imposed by the FDA, that we will be successful in
preparing and filing a revised NDA, that any such newly filed NDA will be
accepted for filing or that upon review of any such NDA by the FDA, we will be
successful in overcoming the concerns raised by the FDA and that oral
tetrathiomolybdate for initially presenting neurologic Wilson's disease will be
approved by the FDA. Based upon receipt of a written clinical hold letter
communicated to Dr. Brewer from the FDA and forwarded to us on March 26, 2008,
the FDA detailed its issues and concerns that are required to be addressed in
order to lift the clinical hold, including chemistry, manufacturing and control
(CMC) issues concerning the identity, strength and purity of oral TTM. We
presently intend to assist Dr. Brewer in resolving the CMC issues raised by the
FDA and do not presently intend to initiate patient dosing in our Italian
clinical trial of oral TTM for Alzheimer's disease until such issues are
resolved to the satisfaction of the FDA. We cannot provide any assurance that we
will be successful in overcoming such CMC issues to the satisfaction of the FDA.
Our license agreement with the University of Michigan required that we initiate
patient dosing for an additional clinical trial of oral TTM on or before August
5, 2008. Given our determination to withhold patient dosing of our
Italian Alzheimer's disease trial until the CMC issues raised by the FDA
are satisfied, during September 2008 we renegotiated  and amended this
provision of the license agreement with the University of Michigan. The written
clinical hold letter also provided feedback not related to the clinical hold per
se including the reference that the clinical endpoints, design and conduct of
the dose comparator clinical study that has enrolled 40 patients to date will
most likely not be sufficient for a NDA of oral TTM for neurologic Wilson's
disease. Based on this communication, we may request a Type B meeting with the
FDA with potential corporate partners, if any, in attendance to discuss next
steps for oral TTM development in neurologic Wilson's disease. Given the issues
raised by the FDA in its RTF letter of January 28, 2008 as well as the FDA's
written clinical hold letter to Dr. George Brewer forwarded to us on March 26,
2008, at the present time it appears that the FDA will not deem the three
existing clinical trials of oral TTM to be sufficient for a New Drug Application
of oral TTM for initially presenting neurologic Wilson's disease. Given the
limited number of patients afflicted by this disease, an additional clinical
trial of oral TTM for this indication will necessarily take a substantial amount
of time and resources to plan, enroll and complete. The design of such further
study is also uncertain given that existing drugs approved for Wilson's disease
appear to be contraindicated for initially presenting neurologic Wilson's
disease or too slow acting for this critically ill patient population. Should we
elect to abandon our efforts to seek U.S. and/or European approval of oral TTM
for neurologically presenting Wilson's disease we will most likely not have
sufficient resources to pursue all of the additional indications for oral TTM
that are the subject of our research and development, including, idiopathic
pulmonary fibrosis, Alzheimer's disease, primary biliary cirrhosis and
Huntington's disease. If we are are unable to identify interested corporate
partners for oral TTM, we may elect to abandon our efforts to develop oral TTM
for any or all of these indications, including, Wilson's disease.




We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from equivalent regulatory authorities in foreign jurisdictions to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval for any of our product candidates, we  must submit to the
FDA an NDA, demonstrating that the product candidate is safe for humans and
effective for its intended use and that the product  candidate can be
consistently manufactured and is stable. This demonstration requires significant
research and animal tests, which are referred to as “pre-clinical studies,”
human tests, which are referred to as “clinical trials” as well as the ability
to manufacture the product candidate, referred to as  “chemistry
manufacturing control” or “CMC.” We will also need to file additional
investigative new drug applications and protocols in order to initiate clinical
testing of our drug candidates in new therapeutic indications and delays in
obtaining required FDA and institutional review board approvals
to  commence such studies may delay our initiation of such planned
additional studies.




Satisfying
the FDA’s regulatory requirements typically takes many years, depending on the
type, complexity, and novelty of the product candidate, and requires substantial
resources for research development, and testing. We cannot predict whether our
research and clinical approaches will result in drugs that the FDA considers
safe for humans and effective for indicated uses. The FDA has substantial
discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing
studies.




The
approval process may also be delayed by changes in government regulation, future
legislation or administrative action, or changes in FDA policy that occur prior
to or during our regulatory review. Delays in obtaining regulatory approvals may
do the following:




●
            delay
      commercialization of, and our ability to derive product revenues from, our
      product candidates;●
            impose
      costly procedures on us; and●
            diminish
      any competitive advantages that we may otherwise
  enjoy.







31




Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
our product candidates. Failure to obtain FDA approval of any of our product
candidates will severely undermine our business by reducing our number of
salable products and, therefore, corresponding product revenues.




In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above. We cannot assure you that we will receive the
approvals necessary to commercialize our product candidate for sale outside the
United States.




We may not be
able to retain rights licensed to us by others to commercialize key products and
may not be able to establish or maintain the relationships we need to develop,
manufacture, and market our products.




In
addition to our own patent applications, we also currently rely on an exclusive
worldwide license agreement with the University of Michigan relating to various
uses of oral TTM. We also have an exclusive license agreement with the McLean
Hospital relating to the use of EFFIRMA to  treat fibromyalgia
syndrome; an exclusive license agreement with Thomas Jefferson University
relating to our CD4 inhibitor program; an exclusive  license agreement
with the Regents of the University of California relating to our TRIMESTA
technology; an exclusive license to our oral immunotherapeutic tolerance
program, named dnaJP1 from UCSD and an exclusive license agreement with Dr.
Newsome and Mr. Tate relating to our Zinthionein program. Each of these
agreements requires us to use our best efforts to commercialize each of the
technologies as well as meet certain diligence requirements and timelines in
order to keep the license agreement in effect. In the event we are not able to
meet our diligence requirements, we may not be able to retain the rights granted
under our agreements or renegotiate our arrangement with these institutions on
reasonable terms, or at all.




Furthermore,
we currently have very limited product development capabilities, and limited
marketing or sales capabilities. For us to research, develop, and test our
product candidates, we would need to contract with outside researchers, in most
cases those parties that did the original research and from whom we have
licensed the technologies.




We can
give no assurances that any of our issued patents licensed to us or any of our
other patent applications will provide us with significant proprietary
protection or be of commercial benefit to us. Furthermore, the issuance of a
patent is not conclusive as to its validity or enforceability, nor does the
issuance of a patent provide the patent holder with freedom to operate without
infringing the patent rights of others.




Developments by
competitors may render our products or technologies obsolete or
non-competitive.




Companies
that currently sell or are developing both generic and proprietary
pharmaceutical compounds to treat central-nervous-system and autoimmune diseases
include: Pfizer, Inc., Rigil Pharmaceuticals, Incyte Pharmaceuticals, Chelsea
Therapeutics International, Inc., Aton Pharma, GlaxoSmithKline Pharmaceuticals,
Alcon, Inc., Shire Pharmaceuticals, Plc., Schering-Plough, Organon NV, Merck
& Co., Eli  Lilly & Co., Serono, SA, Biogen Idec, Inc.,
Achillion, Ltd., Active Biotech, Inc., Panteri Biosciences, Meda, Merrimack
Pharmaceuticals, Inc.,  Merch-Schering AG, Forest Laboratories, Inc.,
Attenuon, LLC, Cypress Biosciences, Inc., Genentech, Neurotech, Amgen, Inc.,
Centocor/Johnson and Johnson, UCB Group, Abbott, Wyeth, OM Pharma, Cel-Sci
Pharmaceuticals, Novartis, Axcan Pharma, Inc., Teva Pharmaceuticals, Inc.,
Intermune, Inc.  Fibrogen, Inc., Active Biotech, CNSBio, Pty., Rare
Disease Therapeutics, Inc., Prana Biotechnology, Inc., Merz & Co.,
AstraZeneca Pharmaceuticals, Inc., Chiesi Pharmaceuticals,  Inc.,
Alcon, Inc., Bausch and Lomb, Inc., Targacept, Inc., and Johnson & Johnson,
Inc. Alternative technologies or alternative delivery or dosages of already
approved therapies are being  developed to treat dry AMD, autoimmune
inflammatory, rheumatoid arthritis, psoriasis, Fibromyalgia, MS, Huntington’s,
Alzheimer’s and Wilson’s diseases, several of which may be approved or are in
early and  advanced clinical trials, such as zinc based combinations,
Syk inhibitors, Jak inhibitors, connective tissue growth factors (CTGF),
FTY-720, Laquinimod, pirfenidone, milnacipram, Lyrica, anti-depressant
combinations, Rituxan, Enbrel, Cimzia, Humira, Remicade, Cymbalta, Effexor,
Actimmune and other interferon preparations. Unlike us, many of our competitors
have significant financial and human resources. In addition, academic research
centers may develop technologies that compete with our TRIMESTA, Zinthionein,
dnaJP1, CD4 inhibitors, EFFIRMA, CORRECTA and oral TTM technologies. Should
clinicians or regulatory authorities view these therapeutic regiments as more
effective than our products, this might delay or prevent us from obtaining
regulatory approval for our products, or it might prevent us from obtaining
favorable reimbursement rates from payers, such as Medicare, Medicaid and
private insurers.







32




Competitors
could develop and gain FDA approval of our products for a different
indication.




Since we
do not have composition of matter patent claims for oral TTM, EFFIRMA, Solovax
and TRIMESTA, others may obtain approvals for other uses of these products which
are not covered by our issued or pending patents. For example, the active
ingredients in both EFFIRMA and TRIMESTA have been approved for marketing in
overseas countries for different uses. Other companies, including the original
developers or licensees or affiliates may seek to develop EFFIRMA or TRIMESTA or
their respective active ingredient(s) for other  uses in the US or any
country we are seeking approval for. We cannot provide any assurances that any
other company may obtain FDA approval for products that contain EFFIRMA or
TRIMESTA in various formulations or delivery systems that might adversely affect
our ability to develop and market these products in the US.  We are
aware that other companies have intellectual property protection using the
active ingredients and have conducted clinical trials of EFFIRMA, oral TTM and
TRIMESTA for different applications that what we are
developing.  Should a competitor obtain FDA approval for their product
for any indication prior to us, we might be precluded under the Waxman-Hatch Act
to obtain approval for our product candidates for a period of five
years.  We cannot provide any assurances that our products will be FDA
approved prior to our competitors.




Other
companies could manufacture and develop oral TTM and its active ingredient,
tetrathiomolybdate, and secure approvals for different indications. We are aware
that a potential competitor has an exclusive license from the University of
Michigan (UM) to an issued U.S. patent that relates to the use of
tetrathiomolybdate to treat angiogenic  diseases (the “Angiogenic
Patent”) and is currently in phase I and phase II clinical trials for the
treatment of various forms of cancer. To our knowledge, this competitor and UM
have filed additional patent applications claiming various analog structures and
formulations of tetrathiomolybdate to treat various diseases. Further, we cannot
predict whether our competitor might obtain approval in the U.S. or Europe to
market tetrathiomolybdate for cancer or another indication ahead of us. We also
cannot predict whether, if issued, any patent corresponding to the Angiogenic
Patent may prevent us from conducting our business or result in lengthy and
costly litigation or the need for a license. Furthermore, if we need to obtain a
license to these or other patents in order to conduct our business, we may find
that it is not available to us on commercially reasonable  terms, or
is not available to us at all.




If
the FDA approves other products containing our active ingredients to treat
indications other than those covered by our issued or pending patent
applications, physicians may elect to prescribe a competitor’s products to treat
the  diseases for which we are developing—this is commonly referred to
as “off-label” use. While under FDA regulations a competitor is not allowed to
promote off-label uses of its product, the FDA does not regulate the practice of
medicine and, as a result, cannot direct physicians as to which source it should
use for these products they prescribe to their patients. Consequently, we might
be limited in our ability to prevent off-label use of a competitor’s product to
treat the diseases we are developing, even if we have  issued patents
for that indication. If we are not able to obtain and enforce these patents, a
competitor could use our products for a treatment or use not covered by any of
our patents.  We cannot provide any assurances that a competitor will
not obtain FDA approval for a product that contains the same active ingredients
as our products.






33




We
rely primarily on method patents and patent applications and various regulatory
exclusivities to protect the development of our technologies, and our ability to
compete may decrease or be eliminated if we are not able to protect our
proprietary technology.




Our
competitiveness may be adversely affected if we are unable to protect our
proprietary technologies. Other than our CD4 inhibitor, oral dnaJP1 and
Zinthionein program, we do not have composition of matter patents for TRIMESTA,
EFFIRMA, Solovax, oral TTM or their respective active ingredients estriol,
flupirtine, and tetrathiomolybdate.  We also expect to rely on patent
protection from an issued U.S. Patent for the use of oral TTM and related
compounds to treat inflammatory and fibrotic diseases (U.S. Patent No
6,855,340). These patents have been exclusively licensed to us. We have also
filed various pending patent applications which cover various formulations,
packaging, distribution & monitoring methods for oral TTM. We rely on issued
patent and pending patent applications for use of TRIMESTA to treat MS (issued
U.S. Patent No. 6,936,599) and various other therapeutic indications which have
been exclusively licensed to us. We have exclusively licensed issued U.S. Patent
No. 5,773,570, 6,153,200, 6,946,132, 6,989,146, 7,094,597, 7,301,005, including
foreign equivalents  along with several patent applications which
cover dnaJP1 and its uses, We have also exclusively licensed an issued patent
for the treatment of fibromyalgia with EFFIRMA TM.




Our
Zinthionein product candidate is exclusively licensed from its inventors, David
A. Newsome, M.D. and David Tate, Jr.  Zinthionein is the subject of
two issued U.S. patents, 7,164,035 and 6,586,611 and pending U.S. patent
application ser. no. 11/621,380 which cover composition of matter claims.In our
annual Form 10-KSB for the year ending December 31, 2007 filed March 31, 2008
(page 23), we described our receipt in March 2008 (and potential impact on claim
1 of our exclusively licensed issued U.S. patent 7,164,035) of an English
translation of a Russian disclosure, Zegzhda et. al. Chemical Abstracts Vol. 85
Abstract No. 186052 (1976) that was cited by the U.S. patent examiner during our
prosecution of the pending divisional U.S. patent application Ser. No.
11/621,390. In April 2008, we analyzed the zinc-cysteine complex described by
Zegzhda and concluded that such complex describes an insoluble zinc salt
and does not describe a non-zinc salt zinc monocyteine complex and
therefore believe that such disclosure should not affect the validity of any of
our issued U.S. patent claims relating our zinc-monocysteine
composition-of-matter claims.  We have filed a response and
declaration describing the results of our analysis with the U.S. Patent and
Trademark Office with respect to the Zegzhda reference with respect to U.S.
patent application ser. no. 11/621,380.   In an office action
dated August 20, 2008, the U.S. patent examiner did not accept our arguments
filed May 23, 2008 in connection with the Zegzhda reference under pending
divisional application ser. no. 11/621,390, to which we intend to respond.
Public copies of relevant and future communications can be obtained using the
electronic PAIR system of the U.S. Patent and Trademark Office.




The
patent positions of pharmaceutical companies are uncertain and may involve
complex legal and factual questions. We may incur significant expense in
protecting our intellectual property and defending or assessing claims with
respect to intellectual property owned by others. Any patent or other
infringement litigation by or against us could cause us to incur significant
expense and divert the attention of our management.




We may
also rely on the United States Drug Price Competition and Patent Term
Restoration Act, commonly known as the “Hatch-Waxman Amendments,” to protect
some of our current product candidates, specifically oral TTM, dnaJP1, TRIMESTA,
zincmonocystine, Anti-CD4 802-2, EFFIRMA and other future product candidates we
may develop. Once a drug containing a new molecule is approved by the FDA, the
FDA cannot accept an abbreviated NDA for a generic drug containing that molecule
for five years, although the FDA may accept and approve a drug containing the
molecule pursuant to an NDA supported by independent clinical data. Recent
amendments have been proposed that would narrow the scope of Hatch-Waxman
exclusivity and permit generic drugs to compete with our drug.






34


Others
may file patent applications or obtain patents on similar technologies or
compounds that compete with our products. We cannot predict how broad the claims
in any such patents or applications will be, and whether they will be allowed.
Once claims have been issued, we cannot predict how they will be construed or
enforced. We may infringe intellectual property rights of others without being
aware of it. If another party claims we are infringing their technology, we
could have to defend an expensive and time consuming lawsuit, pay a large sum if
we are found to be infringing, or be prohibited from selling or licensing our
products unless we obtain a license or redesign our product, which may not be
possible.




We also
rely on trade secrets and proprietary know-how to develop and maintain our
competitive position. Some of our current or former employees, consultants, or
scientific advisors, or current or prospective corporate collaborators, may
unintentionally or willfully disclose our confidential information to
competitors or use our proprietary technology for their own benefit.
Furthermore, enforcing a claim alleging the infringement of our trade secrets
would be expensive and difficult to prove, making the outcome uncertain. Our
competitors may also independently develop similar knowledge, methods, and
know-how or gain access to our proprietary information through some other
means.




We may fail to
retain or recruit necessary personnel, and we may be unable to secure the
services of consultants.




As of
October 15, 2008, we have 3 full-time employees and 3 part-time employees. We
have also engaged regulatory consultants to advise us on our dealings with the
FDA and other foreign regulatory authorities. We intend to recruit certain key
executive officers, including a Chief Medical Officer and/or Vice President of
Regulatory Affairs during 2008 and 2009. Our future performance will depend in
part on our ability to successfully integrate newly hired executive officers
into our management team and our ability to develop an effective working
relationship among senior management.




Currently,
we have not entered into a written employment agreement with Mr. Stergis, our
cofounder and Chief Executive Officer. We intend to enter into an employment
agreement with Mr. Stergis in a form substantially similar to our other former
executive officers.  However, we cannot provide any assurances that we
will be able to enter into this agreement with Mr. Stergis.  Certain
of our directors, (including Jeffrey Kraws, a director and former VP of Business
Development, Jeffrey Wolf, a director, and Dr. Kuo, a director) scientific
advisors, and consultants serve as officers, directors, scientific advisors, or
consultants of other biopharmaceutical or biotechnology companies which might be
developing competitive products to ours. None of our directors are obligated
under any agreement or understanding with us to make any additional products or
technologies available to us. Similarly, we can give no assurances, and we do
not expect and stockholders should not expect, that any biomedical or
pharmaceutical product or technology identified by any of our directors or
affiliates in the future would be made available to us.




We can
expect this to also be the case with personnel that we engage in the future. We
can give no assurances that any such other companies will not have interests
that are in conflict with our interests.




Losing
key personnel or failing to recruit necessary additional personnel would impede
our ability to attain our development objectives. There is intense competition
for qualified personnel in the drug-development field, and we may not be able to
attract and retain the qualified personnel we would need to develop our
business.




We rely
on independent organizations, advisors, and consultants to perform certain
services for us, including handling substantially all aspects of regulatory
approval, clinical management, manufacturing, marketing, and sales. We expect
that this will continue to be the case. Such services may not always be
available to us on a timely basis when we need them.




35


We
may experience difficulties in obtaining sufficient quantities of our products
or other compounds.




In order
to successfully commercialize our product candidates, we must be able to
manufacture our products in commercial quantities, in compliance with regulatory
requirements, at acceptable costs, and in a timely manner. Manufacture of the
types of biopharmaceutical products that we propose to develop present various
risks. For example, manufacture of the active ingredient in oral TTM and
Zinthionein is a complex process that can be difficult to scale up for purposes
of producing large quantities. This process can also be subject to delays,
inefficiencies, and poor or low yields of quality products. Furthermore, the
active ingredient of Zinthionein has been difficult to scale up at larger
quantities.  As such, we can give no assurances that we will be able
to scale up the manufacturing of Zinthionein.  Oral TTM is also known
to be subject to a loss of potency as a result of prolonged exposure to moisture
and other normal atmospheric conditions. The active ingredient of our dnaJP1
program is a 15 amino acid peptide.  Traditionally, peptide
manufacturing is costly, time consuming, resulting in low yields and poor
stability. We cannot give any assurances that we will not encounter this issues
when scaling up manufacturing for dnaJP1.  We are developing
proprietary formulations and specialty packaging solutions to overcome this
stability issue, but we can give no assurances that we will be successful in
meeting the stability requirements required for approval by regulatory
authorities such as the FDA or the requirements that our new proprietary
formulations and drug product will demonstrate satisfactory comparability to
less stable formulations utilized in prior clinical trials for oral TTM. We may
experience delays in demonstrating satisfactory stability requirements and drug
product comparability requirements that could delay our planned clinical trials
of for any of our products.




For
manufacturing and nonclinical information for TRIMESTA, we rely upon an
agreement with Organon, a division of Schering-Plough for access to clinical,
nonclinical, stability and drug supply relating to estriol, the active
ingredient in TRIMESTA which is currently in a phase IIb clinical trial for MS.
Should Organon terminate our agreement, this might delay enrollment and
commercialization plans for our TRIMESTA clinical trial program. Organon has
manufactured estriol for the European and Asian market for approximately 40
years.




Historically,
our manufacturing has been handled by contract manufacturers and compounding
pharmacies. We can give no assurances that we will be able to continue to use
our current manufacturer or be able to establish another relationship with a
manufacturer quickly enough so as not to disrupt commercialization of any of our
products, or that commercial quantities of any of our products, if approved for
marketing, will be available from contract manufacturers at acceptable
costs.




In
addition, any contract manufacturer that we select to manufacture our product
candidates might fail to maintain a  current “good
manufacturing practices” (cGMP) manufacturing facility. During February 2007, we
established a commercial manufacturing facility for oral
TTM product in Ann Arbor, MI and we have hired and trained our
employees to comply with the extensive regulations applicable to such a
facility. Given the delay of our NDA for oral TTM, we are currently exploring
strategic options for our GMP facility.  This might include sale of
the equipment and/or sublease of the facility.




The cost
of manufacturing certain product candidates may make them prohibitively
expensive. In order to successfully commercialize our product candidates we may
be required to reduce the costs of production, and we may find that we are
unable to do so. We may be unable to obtain, or may be required to pay high
prices for compounds manufactured or sold by others that we need for comparison
purposes in clinical trials and studies for our product candidates.






36




Clinical trials
are very expensive, time-consuming, and difficult to design and
implement.




Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time-consuming. We estimate that clinical trials of our
product candidates would take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. Commencement and completion
of clinical trials may be delayed by several factors,
including:




●
            unforeseen
      safety issues;●
            determination
      of dosing;●
            lack
      of effectiveness during clinical trials;●
            slower
      than expected rates of patient recruitment;●
            inability
      to monitor patients adequately during or after treatment;
    and●
            inability
      or unwillingness of medical investigators to follow our clinical
      protocols.




In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our submissions or conduct of our trials.




The results of
our clinical trials may not support our product candidate
claims.




Even if
our clinical trials are completed as planned, we cannot be certain that the
results will support our product-candidate claims. Success in pre-clinical
testing and phase II clinical trials does not ensure that later phase II or
phase III clinical trials will be successful. We cannot be sure that the results
of later clinical trials would replicate the results of prior clinical trials
and pre-clinical testing. Clinical trials may fail to demonstrate that our
product candidates are safe for humans and effective for indicated uses. Any
such failure could cause us to abandon a product candidate and might delay
development of other product candidates. Any delay in, or termination of, our
clinical trials would delay our obtaining FDA approval for the affected product
candidate and, ultimately, our ability to commercialize that product
candidate.




Physicians and
patients may not accept and use our technologies.




Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our product will depend upon a number of
factors, including the following:




●
            the
      perception of members of the health care community, including physicians,
      regarding the safety and effectiveness of our drugs;●
            the
      cost-effectiveness of our product relative to competing
      products;●
            availability
      of reimbursement for our products from government or other healthcare
      payers; and●
            the
      effectiveness of marketing and distribution efforts by us and our
      licensees and distributors, if any.




Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.







37






We depend on
researchers who are not under our control.




Since we
have in-licensed all of our product candidates, we depend upon independent
investigators and scientific collaborators, such as universities and medical
institutions or private physician scientists, to conduct our pre-clinical and
clinical trials under agreements with us. These collaborators are not our
employees and we cannot control the amount or timing of resources that they
devote to our programs or the timing of their procurement of clinical-trial
data. Should any of these scientific inventors/advisors become disabled or die
unexpectedly, we may be forced to scale back or terminate development of that
program.  They may not assign as great a priority to our programs or
pursue them as diligently as we would if we were undertaking those programs
ourselves. Failing to devote sufficient time and resources to our
drug-development programs, or substandard performance, could result in delay of
any FDA applications and our commercialization of the drug candidate
involved.





These
collaborators may also have relationships with other commercial entities, some
of which may compete with us. Our collaborators assisting our competitors at our
expense could harm our competitive position. For example, we are highly
dependent on scientific collaborators for our dnaJP1, TRIMESTA,
Zinthionein, CD4 Inhibitor, EFFIRMA and oral TTM development programs.
Specifically, all of the clinical trials have been conducted under
physician-sponsored investigational new drug applications (INDs), not
corporate-sponsored INDs. Generally, we have experienced difficulty in
collecting data generated from these physican sponsored clinical trials or
physician sponsored INDs for our programs.  We cannot provide any
assurances that we will not experience any additional delays in the
future.  For example, the clinical trials for oral TTM for the
treatment of neurologic Wilson’s disease have been conducted and completed prior
to us licensing this technology from the University of Michigan. Due to various
patient privacy regulations and other administrative matters, we have
experienced delays and/or an inability to obtain clinical trial data relating to
oral TTM.  We have also experienced similar difficulties with our
Zinthionein program.  As such, this delay or inability to obtain any
data might result our inability to advance our products through the regulatory
process or obtain pharmaceutical partners for them.





We are
also highly dependent on government and private grants to fund certain of our
clinical trials for our product candidates. For example, TRIMESTA has received a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and the National Institutes of Health (NIH) which funds a
majority of our ongoing phase IIb clinical trial in relapsing
remitting  multiple sclerosis. If our scientific collaborator is
unable to maintain these grants, we might be forced to scale back or terminate
the development of this product candidate.




We have no
experience selling, marketing, or distributing products and do not have the
capability to do so.




We
currently have no sales, marketing, or distribution capabilities. We do not
anticipate having resources in the foreseeable future to allocate to selling and
marketing our proposed products. Our success will depend, in part, on whether we
are able to enter into and maintain collaborative relationships with a
pharmaceutical or a biotechnology company charged with marketing one or more of
our products. We may not be able to establish or maintain such collaborative
arrangements or to commercialize our products in foreign territories, and even
if we do, our collaborators may not have effective sales forces.




If we do
not, or are unable to, enter into collaborative arrangements to sell and market
our proposed products, we will need to devote significant capital, management
resources, and time to establishing and developing an in-house marketing and
sales force with technical expertise. We may be unsuccessful in doing
so.






38


If we fail to
maintain positive relationships with particular individuals, we may be unable to
successfully develop our product candidates, conduct clinical trials, and obtain
financing.




If we
fail to maintain positive relationships with members of our management team or
if these individuals decrease their contributions to our company, our business
could be adversely impacted. We do not carry key employee insurance policies for
any of our key employees.




We also
rely greatly on employing and retaining other highly trained and experienced
senior management and scientific personnel. The competition for these and other
qualified personnel in the biotechnology field is intense. If we are not able to
attract and retain qualified scientific, technical, and managerial personnel, we
probably will be unable to achieve our business objectives.




We may not be
able to compete successfully for market share against other drug
companies.




The
markets for our product candidates are characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with existing and future drugs and therapies developed,
manufactured, and marketed by others. Competing products may provide greater
therapeutic convenience or clinical or other benefits for a specific indication
than our products, or may offer comparable performance at a lower cost. If our
products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.




We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies, or other public and private research
organizations. Many of these competitors have therapies to treat autoimmune
fibrotic and central nervous system diseases already approved or in development.
In addition, many of these competitors, either alone or together with their
collaborative partners, operate larger research-and-development programs than we
do, have substantially greater financial resources than we do, and have
significantly greater experience in the following areas:




●
            developing
      drugs;●
            undertaking
      pre-clinical testing and human clinical trials;●
            obtaining
      FDA and other regulatory approvals of drugs;●
            formulating
      and manufacturing drugs; and●
            launching,
      marketing and selling drugs.




We
may incur substantial costs as a result of litigation or other proceedings
relating to patent and other intellectual property rights, as well as costs
associated with frivolous lawsuits.




If
any other person files patent applications, or is issued patents, claiming
technology also claimed by us in pending applications, we may be required to
participate in interference proceedings in the U.S. Patent and Trademark Office
to determine priority of invention. We, or our licensors, may also need to
participate in interference proceedings involving our issued patents and pending
applications of another entity.




We
cannot guarantee that the practice of our technologies will not conflict with
the rights of others. In some foreign jurisdictions, we could become involved in
opposition proceedings, either by opposing the validity of another’s foreign
patent or by persons opposing the validity of our foreign patents.




We
may also face frivolous litigation or lawsuits from various competitors or from
litigious securities attorneys. The cost to us of any litigation or other
proceeding relating to these areas, even if resolved in our favor, could be
substantial and could distract management from our business. Uncertainties
resulting from initiation and continuation of any litigation could have a
material adverse effect on our ability to continue our operations.






39




If we infringe
the rights of others we could be prevented from selling products or forced to
pay damages.




If our
products, methods, processes, and other technologies are found to infringe the
proprietary rights of other parties, we could be required to pay damages, or we
may be required to cease using the technology or to license rights from the
prevailing party. Any prevailing party may be unwilling to offer us a license on
commercially acceptable terms.




Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.




Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement is available from government and
health administration authorities, private health maintenance organizations,
health insurers, and other healthcare payers.




Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. Healthcare payers, including Medicare, are challenging the prices
charged for medical products and services. Government and other healthcare
payers increasingly attempt to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs. Even if our product
candidates are approved by the FDA, insurance coverage may not be available, or
may be inadequate, to cover the cost of our drugs. This could affect our ability
to commercialize our products.




We
may not be able to obtain adequate insurance coverage against product liability
claims.




Our
business exposes us to the product liability risks inherent in the testing,
manufacturing, marketing, and sale of human therapeutic technologies and
products. Even if it is available, product liability insurance for the
pharmaceutical and biotechnology industry generally is expensive. Adequate
insurance coverage may not be available at a reasonable cost.




RISKS
RELATING TO OUR STOCK




We will seek to
raise additional funds in the future, which may be dilutive to stockholders or
impose operational restrictions.




We expect
to seek to raise additional capital in the future to help fund development of
our proposed products. If we raise additional capital through the issuance of
equity or debt securities, the percentage ownership of our current stockholders
will be reduced. We may also enter into strategic transactions, issue equity as
part of license issue fees to our licensors, compensate consultants or settle
outstanding payables using equity that may be dilutive. Our stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock. If we cannot raise additional funds, we will
have to delay development activities of our products candidates.




We are controlled
by our current officers, directors, and principal
stockholders.




Currently,
our directors, executive officers, and principal stockholders beneficially own a
majority of our common stock. As a result, they will be able to exert
substantial influence over the election of our board of directors and the vote
on issues submitted to our stockholders.





40




Our
shares of common stock are from time to time thinly traded, so stockholders may
be unable to sell at or near ask prices or at all if they need to sell shares to
raise money or otherwise desire to liquidate their shares.




Our
common stock has from time to time been “thinly-traded,” meaning that the number
of persons interested in purchasing our common stock at or near ask prices at
any given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non­existent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give
stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading
levels will be sustained.




Our compliance
with the Sarbanes-Oxley Act and SEC rules concerning internal controls may be
time consuming, difficult and costly.




Although
individual members of our management team have experience as officers of
publicly traded companies, much of that experience came prior to the adoption of
the Sarbanes-Oxley Act of 2002. It may be time consuming, difficult and costly
for us to develop and implement the internal controls and reporting procedures
required by Sarbanes-Oxley. We may need to hire additional financial reporting,
internal controls and other finance staff in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with Sarbanes-Oxley’s internal controls requirements, we may not be able
to obtain the independent accountant certifications that Sarbanes-Oxley Act
requires publicly-traded companies to obtain.




We cannot assure
you that the common stock will be liquid or that it will remain listed on a
securities exchange.




We cannot
assure you that we will be able to maintain the listing standards of the
American Stock Exchange. The American Stock Exchange requires companies to meet
certain listing criteria including certain minimum stockholders' equity and
equity prices per share. We may not be able to maintain such minimum
stockholders' equity or prices per share or may be required to effect a reverse
stock split to maintain such minimum prices and/or issue additional equity
securities in exchange for cash or other assets, if available, to maintain
certain minimum stockholders' equity required by the American Stock
Exchange.




There may be
issuances of shares of preferred stock in the future.




Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.




We have never
paid dividends.




We have
never paid cash dividends on our common stock and do not anticipate paying any
for the foreseeable future.






41


RISKS
RELATED TO OUR INDUSTRY




Government
Regulation




The FDA,
comparable foreign regulators and state and local pharmacy regulators impose
substantial requirements upon clinical development, manufacture and marketing of
pharmaceutical products. These and other entities regulate research and
development and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising, and
promotion of our products. The drug approval process required by the FDA under
the Food, Drug, and Cosmetic Act generally involves:




●
            Preclinical
      laboratory and animal tests;●
            Submission
      of an IND, prior to commencing human clinical trials;●
            Adequate
      and well-controlled human clinical trials to establish safety and efficacy
      for intended use;●
            Submission
      to the FDA of a NDA; and●
            FDA
      review and approval of a NDA.




The
testing and approval process requires substantial time, effort, and financial
resources, and we cannot be certain that any approval will be granted on a
timely basis, if at all.




Preclinical
tests include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, and animal studies to assess potential safety and
efficacy. Certain preclinical tests must be conducted in compliance with good
laboratory practice regulations. Violations of these regulations can, in some
cases, lead to invalidation of the studies, requiring them to be replicated. In
some cases, long-term preclinical studies are conducted concurrently with
clinical studies.




We will
submit the preclinical test results, together with manufacturing information and
analytical data, to the FDA as part of an IND, which must become effective
before we begin human clinical trials. The IND automatically becomes effective
30 days after filing, unless the FDA raises questions about conduct of the
trials outlined in the IND and imposes a clinical hold, as occurred with oral
TTM, in which case, the IND sponsor and FDA must resolve the matters before
clinical trials can begin. It is possible that our submission may not result in
FDA authorization to commence clinical trials.




Clinical
trials must be supervised by a qualified investigator in accordance with good
clinical practice regulations, which include informed consent requirements. An
independent Institutional Review Board (“IRB”) at each medical center reviews
and approves and monitors the study, and is periodically informed of the study’s
progress, adverse events and changes in research. Progress reports are submitted
annually to the FDA and more frequently if adverse events occur.




Human
clinical trials typically have three sequential phases that may
overlap:




Phase I:
The drug is initially tested in healthy human subjects or patients for safety,
dosage tolerance, absorption, metabolism, distribution, and
excretion.




Phase II:
The drug is studied in a limited patient population to identify possible adverse
effects and safety risks, determine efficacy for specific diseases and establish
dosage tolerance and optimal dosage.




Phase
III: When phase II evaluations demonstrate that a dosage range is effective with
an acceptable safety profile, phase III trials to further evaluate dosage,
clinical efficacy and safety, are undertaken in an expanded patient population,
often at geographically dispersed sites.






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We cannot
be certain that we will successfully complete phase I, phase II, or phase III
testing of our product candidates within any specific time period, if at all.
Furthermore, the FDA, an IRB or the IND sponsor may suspend clinical trials at
any time on various grounds, including a finding that subjects or patients are
exposed to unacceptable health risk. Concurrent with these trials and studies,
we also develop chemistry and physical characteristics data and finalize a
manufacturing process in accordance with good manufacturing practice (“GMP”)
requirements. The manufacturing process must conform to consistency and quality
standards, and we must develop methods for testing the quality, purity, and
potency of the final products. Appropriate packaging is selected and tested, and
chemistry stability studies are conducted to demonstrate that the product does
not undergo unacceptable deterioration over its shelf-life. Results of the
foregoing are submitted to the FDA as part of a NDA for marketing and commercial
shipment approval. The FDA reviews each NDA submitted and may request additional
information.




Once the
FDA accepts the NDA for filing, it begins its in-depth review. The FDA has
substantial discretion in the approval process and may disagree with our
interpretation of the data submitted. The process may be significantly extended
by requests for additional information or clarification regarding information
already provided. As part of this review, the FDA may refer the application to
an appropriate advisory committee, typically a panel of clinicians.
Manufacturing establishments often are inspected prior to NDA approval to assure
compliance with GMPs and with manufacturing commitments made in the
application.




Submission
of a NDA with clinical data requires payment of a fee (for fiscal year 2008,
$1,178,500). In return, the FDA assigns a goal of ten months for issuing its
“complete response,” in which the FDA may approve or deny the NDA, or require
additional clinical data. Even if these data are submitted, the FDA may
ultimately decide the NDA does not satisfy approval criteria. If the FDA
approves the NDA, the product becomes available for physicians prescription.
Product approval may be withdrawn if regulatory compliance is not maintained or
safety problems occur. The FDA may require post-marketing studies, also known as
phase IV studies, as a condition of approval, and requires surveillance programs
to monitor approved products that have been commercialized. The agency has the
power to require changes in labeling or prohibit further marketing based on the
results of post-marketing surveillance.




Satisfaction
of these and other regulatory requirements typically takes several years, and
the actual time required may vary substantially based upon the type, complexity
and novelty of the product. Government regulation may delay or prevent marketing
of potential products for a considerable period of time and impose costly
procedures on our activities. We cannot be certain that the FDA or other
regulatory agencies will approve any of our products on a timely basis, if at
all. Success in preclinical or early-stage clinical trials does not assure
success in later-stage clinical trials. Data obtained from pre-clinical and
clinical activities are not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Even if
a product receives regulatory approval, the approval may be significantly
limited to specific indications or uses.




Even
after regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in obtaining, or
failures to obtain regulatory approvals would have a material adverse effect on
our business.




Any
products manufactured or distributed by us pursuant to FDA approvals are subject
to pervasive and continuing FDA regulation, including record-keeping
requirements, reporting of adverse experiences, submitting periodic reports,
drug sampling and distribution requirements, manufacturing or labeling changes,
record-keeping requirements, and compliance with FDA promotion and advertising
requirements. Drug manufacturers and their subcontractors are required to
register their facilities with the FDA and state agencies, and are subject to
periodic unannounced inspections for GMP compliance, imposing procedural and
documentation requirements upon us and third-party manufacturers. Failure to
comply with these regulations could result, among other things, in suspension of
regulatory approval, recalls, suspension of production or injunctions, seizures,
or civil or criminal sanctions. We cannot be certain that we or our present or
future subcontractors will be able to comply with these
regulations.




The FDA
regulates drug labeling and promotion activities. The FDA has actively enforced
regulations prohibiting the marketing of products for unapproved uses. The FDA
permits the promotion of drugs for unapproved uses in certain circumstances,
subject to stringent requirements. We and our product candidates are subject to
a variety of state laws and regulations which may hinder our ability to market
our products. Whether or not FDA approval has been obtained, approval by foreign
regulatory authorities must be obtained prior to commencing clinical trials, and
sales and marketing efforts in those countries. These approval procedures vary
in complexity from country to country, and the processes may be longer or
shorter than that required for FDA approval. We may incur significant costs to
comply with these laws and regulations now or in the future.






43




The FDA’s
policies may change, and additional government regulations may be enacted which
could prevent or delay regulatory approval of our potential products. Increased
attention to the containment of health care costs worldwide could result in new
government regulations materially adverse to our business. We cannot predict the
likelihood, nature or extent of adverse governmental regulation that might arise
from future legislative or administrative action, either in the U.S. or
abroad.




Other Regulatory
Requirements




The U.S.
Federal Trade Commission and the Office of the Inspector General of the U.S.
Department of Health and Human Services (“HHS”) also regulate certain
pharmaceutical marketing practices. Government reimbursement practices and
policies with respect to our products are important to our success.




We are
subject to numerous federal, state and local laws relating to safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. We may
incur significant costs to comply with these laws and regulations. The
regulatory framework under which we operate will inevitably change in light of
scientific, economic, demographic and policy developments, and such changes may
have a material adverse effect on our business.




European
Product Approval




Prior
regulatory approval for human healthy volunteer studies (phase I studies) is
required in member states of the European Union (E.U.). Summary data from
successful phase I studies are submitted to regulatory authorities in member
states to support applications for phase II studies. E.U. authorities typically
have one to three months (which often may be extended in their discretion) to
raise objections to the proposed study. One or more independent ethics
committees (similar to U.S. IRBs) review relevant ethical issues.




For E.U.
marketing approval, we submit to the relevant authority for review a dossier, or
MAA (Market Authorization Application), providing information on the quality of
the chemistry, manufacturing and pharmaceutical aspects of the product as well
as non-clinical and clinical data.




Approval
can take several months to several years, and can be denied, depending on
whether additional studies or clinical trials are requested (which may delay
marketing approval and involve unbudgeted costs) or regulatory authorities
conduct facilities (including clinical investigation site) inspections and
review manufacturing procedures, operating systems and personnel qualifications.
In many cases, each drug manufacturing facility must be approved, and further
inspections may occur over the product’s life.




The
regulatory agency may require post-marketing surveillance to monitor for adverse
effects or other studies. Further clinical studies are usually necessary for
approval of additional indications. The terms of any approval, including
labeling content, may be more restrictive than expected and could affect the
marketability of a product.




Failure
to comply with these ongoing requirements can result in suspension of regulatory
approval and civil and criminal sanctions. European renewals may require
additional data, resulting in a license being withdrawn. E.U. regulators have
the authority to revoke, suspend or withdraw approvals, prevent companies and
individuals from participating in the drug approval process, request recalls,
seize violative products, obtain injunctions to close non-compliant
manufacturing plants and stop shipments of violative products.




Pricing
Controls




Pricing
for products under approval applications is also subject to regulation.
Requirements vary widely between countries and can be implemented disparately
intra-nationally. The E.U. generally provides options for member states to
control pricing of medicinal products for human use, ranging from specific
price-setting to systems of direct or indirect controls on the producer’s
profitability. U.K. regulation, for example, generally provides controls on
overall profits derived from sales to the U.K. National Health Service that are
based on profitability targets or a function of capital employed in servicing
the National Health Service market. Italy generally utilizes a price monitoring
system based on the European average price over the reference markets of France,
Spain, Germany and the U.K. Italy typically establishes price within a
therapeutic class based on the lowest price for a medicine belonging to that
category. Spain generally establishes selling price based on prime cost plus a
profit margin within a range established yearly by the Spanish Commission for
Economic Affairs.




There can
be no assurance that price controls or reimbursement limitations will result in
favorable arrangements for our products.







44


Third-Party
Reimbursements




In the
U.S., the E.U. and elsewhere, pharmaceutical sales are dependent in part on the
availability and adequacy of reimbursement from third party payers such as
governments and private insurance plans. Third party payers are increasingly
challenging established prices, and new products that are more expensive than
existing treatments may have difficulty finding ready acceptance unless there is
a clear therapeutic benefit.




In the
U.S., consumer willingness to choose a self-administered outpatient prescription
drug over a different drug or other form of treatment often depends on the
manufacturer’s success in placing the product on a health plan formulary or drug
list, which results in lower out-of-pocket costs. Favorable formulary placement
typically requires the product to be less expensive than what the health plan
determines to be therapeutically equivalent products, and often requires
manufacturers to offer rebates. Federal law also requires manufacturers to pay
rebates to state Medicaid programs in order to have their products reimbursed by
Medicaid. Medicare, which covers most Americans over age 65 and the disabled,
has adopted a new insurance regime that will offer eligible beneficiaries
limited coverage for outpatient prescription drugs effective January 1, 2006.
The prescription drugs that are covered under this insurance are specified on a
formulary published by Medicare. As part of these changes, Medicare is adopting
new payment formulas for prescription drugs administered by providers, such as
hospitals or physicians that are generally expected to lower
reimbursement.




The E.U.
generally provides options for member states to restrict the range of medicinal
products for which their national health insurance systems provide
reimbursement. Member states can opt for a “positive” or “negative” list, with
the former listing all covered medicinal products and the latter designating
those excluded from coverage. The E.U., the U.K. and Spain have negative lists,
while France uses a positive list. Canadian provinces establish their own
reimbursement measures. In some countries, products may also be subject to
clinical and cost effectiveness reviews by health technology assessment bodies.
Negative determinations in relation to our products could affect prescribing
practices. In the U.K., the National Institute for Clinical Excellence (“NICE”)
provides such guidance to the National Health Service, and doctors are expected
to take it into account when choosing drugs to prescribe. Health authorities may
withhold funding from drugs not given a positive recommendation by NICE. A
negative determination by NICE may mean fewer prescriptions. Although NICE
considers drugs with orphan status, there is a degree of tension on the
application of standard cost assessment for orphan drugs, which are often priced
higher to compensate for a limited market. It is unclear whether NICE will adopt
a more relaxed approach toward the assessment of orphan drugs.




We cannot
assure you that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.




Fraud and Abuse
Laws




The U.S.
federal Medicare/Medicaid anti-kickback law and similar state laws prohibit
remuneration intended to induce physicians or others either to refer patients,
or to acquire or arrange for or recommend the acquisition of health care
products or services. While the federal law applies only to referrals, products
or services receiving federal reimbursement, state laws often apply regardless
of whether federal funds are involved. Other federal and state laws prohibit
anyone from presenting or causing to be presented false or fraudulent payment
claims. Recent federal and state enforcement actions under these statutes have
targeted sales and marketing activities of prescription drug manufacturers. As
we begin to market our products to health care providers, the relationships we
form, such as compensating physicians for speaking or consulting services,
providing financial support for continuing medical education or research
programs, and assisting customers with third-party reimbursement claims, could
be challenged under these laws and lead to civil or criminal penalties,
including the exclusion of our products from federally-funded reimbursement.
Even an unsuccessful challenge could cause adverse publicity and be costly to
respond to, and thus could have a material adverse effect on our business,
results of operations and financial condition. We intend to consult counsel
concerning the potential application of these and other laws to our business and
to our sales, marketing and other activities to comply with them. Given their
broad reach and the increasing attention given them by law enforcement
authorities, however, we cannot assure you that some of our activities will not
be challenged.






45


Patent
Restoration and Marketing Exclusivity




The U.S.
Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman)
permits the FDA to approve Abbreviated New Drug Applications (“ANDAs”) for
generic versions of innovator drugs, as well as NDAs with less original clinical
data, and provides patent restoration and exclusivity protections to innovator
drug manufacturers. The ANDA process permits competitor companies to obtain
marketing approval for drugs with the same active ingredient and for the same
uses as innovator drugs, but does not require the conduct and submission of
clinical studies demonstrating safety and efficacy. As a result, a competitor
could copy any of our drugs and only need to submit data demonstrating that the
copy is bioequivalent to gain marketing approval from the FDA. Hatch-Waxman
requires a competitor that submits an ANDA, or otherwise relies on safety and
efficacy data for one of our drugs, to notify us and/or our business partners of
potential infringement of our patent rights. We and/or our business partners may
sue the company for patent infringement, which would result in a 30-month stay
of approval of the competitor’s application. The discovery, trial and appeals
process in such suits can take several years. If the litigation is resolved in
favor of the generic applicant or the challenged patent expires during the
30-month period, the stay is lifted and the FDA may approve the application.
Hatch-Waxman also allows competitors to market copies of innovator products by
submitting significantly less clinical data outside the ANDA context. Such
applications, known as “505(b)(2) NDAs” or “paper NDAs,” may rely on clinical
investigations not conducted by or for the applicant and for which the applicant
has not obtained a right of reference or use and are subject to the ANDA
notification procedures described above.




The law
also restores a portion of a product’s patent term that is lost during clinical
development and NDA review, and provides statutory protection, known as
exclusivity, against FDA approval or acceptance of certain competitor
applications. Restoration can return up to five years of patent term for a
patent covering a new product or its use to compensate for time lost during
product development and regulatory review. The restoration period is generally
one-half the time between the effective date of an IND and submission of an NDA,
plus the time between NDA submission and its approval (subject to the five-year
limit), and no extension can extend total patent life beyond 14 years after the
drug approval date. Applications for patent term extension are subject to U.S.
Patent and Trademark Office (“USPTO”) approval, in conjunction with FDA.
Approval of these applications takes at least six months, and there can be no
guarantee that it will be given at all.




Hatch-Waxman
also provides for differing periods of statutory protection for new drugs
approved under an NDA. Among the types of exclusivity are those for a “new
molecular entity” and those for a new formulation or indication for a
previously-approved drug. If granted, marketing exclusivity for the types of
products that we are developing, which include only drugs with innovative
changes to previously-approved products using the same active ingredient, would
prohibit the FDA from approving an ANDA or 505(b)(2) NDA relying on safety and
efficacy data for three years. This three-year exclusivity, however, covers only
the innovation associated with the original NDA. It does not prohibit the FDA
from approving applications for drugs with the same active ingredient but
without our new innovative change. These marketing exclusivity protections do
not prohibit FDA from approving a full NDA, even if it contains the innovative
change.






46





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





In April
2008, we issued a total of 37,603 shares of our common stock to 8 of our
employees and 13,887 shares of our common stock to a consultant for services
rendered. These offerings and sales of shares qualified for exemption under
Section 4(2) of the Securities Act of 1933 since the issuance did not involve a
public offering. The offerings were not a public offering as defined in Section
4(2) because the offer and sale was made to an insubstantial number of persons
and because of the manner of the offering. The offerings were done with no
general solicitation or advertising by the Registrant. Based on an analysis of
the above factors, the Registrant has met the requirements to qualify for
exemption under Section 4(2) of the Securities Act of 1933 for these
sales.





In May
and June 2008, we issued a total of 106,630 shares of our common stock to 2
universities for license fees and 39,370 shares to a university for a milestone
payment. These offerings and sales of shares qualified for exemption under
Section 4(2) of the Securities Act of 1933 since the issuances did not involve a
public offering. The offerings were not a public offering as defined in Section
4(2) because the offer and sale was made to an insubstantial number of persons
and because of the manner of the offering. The offerings were done with no
general solicitation or advertising by the Registrant. Based on an analysis of
the above factors, the Registrant has met the requirements to qualify for
exemption under Section 4(2) of the Securities Act of 1933 for these
sales.





In August
and September 2008, we issued a total of 113,958 shares of our common stock to 2
consultants for services rendered and 31,875 shares to 2 universities for
license fees .  These offering and sales of shares qualified for
exemption under Section 4(2) of the Securities Act of 1933 since the issuances
did not involve a public offering. The offerings were not a public offering as
defined in Section 4(2) because the offer and sale was made to an insubstantial
number of persons and because of the manner of the offering. This offering was
done with no general solicitation or advertising by the Registrant. Based on an
analysis of the above factors, the Registrant has met the requirements to
qualify for exemption under Section 4(2) of the Securities Act of 1933 for these
sales.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




Not
applicable.




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





Not
applicable.





ITEM
5. OTHER INFORMATION




Not
applicable.





47




ITEM
6. EXHIBITS






31.1
            Certification
      pursuant to Rule 13a-14(a)/15d-14(a)32.1
            Certification
      pursuant to Section 1350 of the Sarbanes-Oxley Act of
  2002.





48




SIGNATURE




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









ADEONA
PHARMACEUTICALS, INC.


By:
  /s/ Nicholas
Stergis


Nicholas
Stergis


Chief
Executive Officer


(Principal
Executive Officer and Principal Financial Officer)


Date:
November 14, 2008