**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**


(Mark
      One)




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934




For
      the
      quarterly period ended **September
      30, 2008**




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT




For
      the
      transition period from  to




Commission
      file number: 000-52998





**Transdel
      Pharmaceuticals, Inc.**


(Exact
      Name of Registrant in Its Charter)




Delaware
            
            45-0567010(State or Other Jurisdiction of Incorporation
              or Organization)
            
            (I.R.S. Employer Identification No.)4225 Executive Square, Suite 485
              La Jolla, CA
            
            92037(Address of Principal Executive Offices)
            
            (Zip Code)




(858)
        457-5300
 (Registrant’s
        Telephone Number, Including Area Code)
   
 (Former
        Name, Former Address and Former Fiscal Year, if Changed Since Last
        Report)




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




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




As
      of
      November 12, 2008, 15,545,184 shares of issuer’s common stock, with $0.001 par
      value per share were outstanding.





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
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act (Check
      One):





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
            Smaller
                reporting companyx(Do not check if a smaller reporting company)







**TRANSDEL PHARMACEUTICALS,
      INC.**


**(A
      Development Stage Company)**




Table
      of Contents




**Page**Part
                I
            
            FINANCIAL
                INFORMATION
            
            2Item
                1.
            
            Financial
                Statements
            
            2Condensed
                Consolidated Balance Sheets - September 30, 2008 (Unaudited) and
                December 31, 2007
            
            2Unaudited
                Condensed Consolidated Statements of Operations for the three and
                nine-month periods ended September 30, 2008 and 2007
            
            3Unaudited
                Condensed Consolidated Statements of Cash Flows for the nine-month
                periods
                ended September 30, 2008 and 2007
            
            4Notes
                to the Unaudited Condensed Consolidated Financial
                Statements
            
            5Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            13Item
                4T.
            
            Controls
                and Procedures
            
            15Part
                II
            
            OTHER
                INFORMATION
            
            16Item
                1A.
            
            Risk
                Factors
            
            16Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            23Item
                6.
            
            Exhibits
            
            23




1




**PART
      I**


**FINANCIAL
      INFORMATION**





**Item
      1.**  **Financial
      Statements.**





**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**




**September 30,**
              **2008**
            
            **December 31,**
              **2007****(Unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            5,775,523
            
            $
            3,706,369Prepaid
                consulting fees
            
            
            764
            
            
            488,748Prepaid
                expenses and other current assets
            
            
            210,000
            
            
            45,604Total
                current assets
            
            
            5,986,287
            
            
            4,240,721Equipment,
                net
            
            
            2,714
            
            
            —Total
                assets
            
            $
            5,989,001
            
            $
            4,240,721**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            523,516
            
            $
            696,340Accrued
                expenses and payroll liabilities
            
            
            83,953
            
            
            53,901Total
                liabilities
            
            
            607,469
            
            
            750,241Stockholders’
                equity:Preferred
                stock, $0.001 par value; 5,000,000 shares authorized, none
                outstanding
            
            
            —
            
            
            —Common
                stock, $0.001 par value; 50,000,000 shares authorized, 15,462,616
                and
                13,727,004 shares issued and outstanding as of September 30, 2008
                and
                December 31, 2007
            
            
            15,462
            
            
            13,727Additional
                paid-in capital
            
            
            14,794,604
            
            
            10,554,298Deficit
                accumulated during the development stage
            
            
            (9,428,534
            )
            
            (7,077,545
            )Total
                stockholders’ equity
            
            
            5,381,532
            
            
            3,490,480Total
                liabilities and stockholders’ equity
            
            $
            5,989,001
            
            $
            4,240,721


2


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**




**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,**
            
            **For the**
              **Period From**
              **July 24, 1998**
              **(Inception)**
              **Through**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**
            
            **2008**Operating
                expenses:Selling,
                general and administrative
            
            $
            305,221
            
            $
            247,891
            
            $
            1,315,400
            
            $
            499,227
            
            $
            4,398,981Research
                and development
            
            
            529,455
            
            
            721,253
            
            
            1,466,638
            
            
            806,300
            
            
            4,024,382Operating
                loss
            
            
            834,676
            
            
            969,144
            
            
            2,782,038
            
            
            1,305,527
            
            
            8,423,363Other
                income (expense):Interest
                expense
            
            
            —
            
            
            (1,552,903
            )
            
            —
            
            
            (1,563,504
            )
            
            (1,575,755
            )Interest
                income
            
            
            19,721
            
            
            12,983
            
            
            56,049
            
            
            14,352
            
            
            105,670Gain
                on forgiveness of liabilities
            
            
            —
            
            
            —
            
            
            —
            
            
            89,914
            
            
            89,914Gain
                on settlement
            
            
            —
            
            
            —
            
            
            375,000
            
            
            —
            
            
            375,000Total
                other income (expense), net
            
            
            19,721
            
            
            (1,539,920
            )
            
            431,049
            
            
            (1,459,238
            )
            
            (1,005,171
            )Net
                loss
            
            $
            (814,955
            )
            $
            (2,509,064
            )
            $
            (2,350,989
            )
            $
            (2,764,765
            )
            $
            (9,428,534
            )Basic
                and diluted loss per common share
            
            $
            (0.05
            )
            $
            (0.29
            )
            $
            (0.16
            )
            $
            (0.38
            )Weighted
                average common shares outstanding
            
            
            15,462,616
            
            
            8,745,363
            
            
            14,586,704
            
            
            7,204,663


3




**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**




**Nine Months Ended**
              **September 30,**
            
            **For The Period**
              **From   July   24,**
              **1998****(Inception)**
              **Through**
              **September 30,****2008**
            
            **2007**
            
            **2008****Cash
                from operating activities:**Net
                loss
            
            $
            (2,350,989
            )
            $
            (2,764,765
            )
            $
            (9,428,534
            )Adjustments
                to reconcile net loss to net cash used in
                operating activities:Estimated
                fair value of contributed services
            
            
            —
            
            
            175,000
            
            
            2,475,000Gain
                on forgiveness of liabilities
            
            
            —
            
            
            (89,914
            )
            
            (89,914
            )Amortization
                of prepaid consulting fees and depreciation
            
            
            284,598
            
            
            28,752
            
            
            485,850Non-cash
                interest on notes payable
            
            
            —
            
            
            1,563,504
            
            
            1,575,755Stock-based
                compensation
            
            
            504,566
            
            
            43,051
            
            
            689,088Changes
                in operating assets and liabilities:Prepaid
                consulting costs
            
            
            —
            
            
            (140,000
            )
            
            (140,000
            )Prepaid
                expenses and other current assets
            
            
            (164,396
            )
            
            (44,132
            )
            
            (210,000
            )Accounts
                payable
            
            
            (172,824
            )
            
            117,102
            
            
            613,430Accrued
                expenses and payroll liabilities
            
            
            30,052
            
            
            42,128
            
            
            83,953Net
                cash used in operating activities
            
            
            (1,868,993
            )
            
            (1,069,274
            )
            
            (3,945,372
            )**Cash
                flows from investing activities:**Purchase
                of equipment
            
            
            (3,154
            )
            
            —
            
            
            (3,154
            )Net
                cash used in investing activities
            
            
            (3,154
            )
            
            —
            
            
            (3,154
            )**Cash
                flows from financing activities:**Proceeds
                from notes payable to stockholders
            
            
            —
            
            
            —
            
            
            226,300Proceeds
                from notes payable
            
            
            —
            
            
            1,500,000
            
            
            1,500,000Capital
                contributions
            
            
            —
            
            
            105,907
            
            
            168,707Proceeds
                from purchase of common stock and exercise of warrants and stock
                options
            
            
            —
            
            
            25,750
            
            
            49,950Net
                proceeds from Private Placements
            
            
            3,941,301
            
            
            3,735,167
            
            
            7,779,092Net
                cash provided by financing activities
            
            
            3,941,301
            
            
            5,366,824
            
            
            9,724,049**Net
                change in cash and cash equivalents**
            
            
            2,069,154
            
            
            4,297,550
            
            
            5,775,523**Cash
                and cash equivalents, beginning of period**
            
            
            3,706,369
            
            
            542
            
            
            —**Cash
                and cash equivalents, end of period**
            
            $
            5,775,523
            
            $
            4,298,092
            
            $
            5,775,523**Supplemental
                disclosure of cash flow information:**Adjustment/issuance
                of common stock and warrants to consulting firms for prepaid consulting
                fees, net
            
            $
            (203,826
            )
            $
            550,000
            
            $
            346,174Conversion
                of notes payable and accrued interest into common stock
            
            $
            —
            
            $
            1,530,177
            
            $
            1,530,177Forgiveness
                of notes payable and accrued interest to shareholders
            
            $
            —
            
            $
            241,701
            
            $
            241,701Conversion
                of notes payable to shareholders
            
            $
            —
            
            $
            —
            
            $
            196,300


4


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**




**Note
      1.    Business Description**





Transdel
      Pharmaceuticals, Inc. (“Transdel” or the “Company”) is a specialty
      pharmaceutical company focused on the development and commercialization of
      non-invasive topically delivered products. The Company’s lead topical drug,
      Ketotransdel TM utilizes
      the Company’s proprietary Transdel TM cream
      formulation to facilitate the passage of ketoprofen, a non-steroidal
      anti-inflammatory drug (“NSAID”), through the skin barrier to reach targeted
      underlying tissue where the drug exerts its localized anti-inflammatory and
      analgesic effect. The Company is also investigating other drug candidates and
      treatments for transdermal delivery using the Transdel TM platform
      technology for products in pain management and other therapeutic
      areas.





**Note
      2. Basis of Presentation**





The
      Company has prepared the accompanying unaudited condensed consolidated financial
      statements in accordance with United States generally accepted accounting
      principles (“GAAP”) for interim financial information and with the rules and
      regulations of the Securities and Exchange Commission (the “SEC”) related to a
      Quarterly Report on Form 10-Q and Article 8 of Regulation S-X. Accordingly,
      they
      do not include all of the information and disclosures required by GAAP for
      annual financial statements.   The consolidated financial statements
      include the accounts of Transdel and its wholly owned subsidiary, Transdel
      Pharmaceuticals Holdings, Inc. (formerly known as Trans-Pharma Corporation).
      All
      significant intercompany balances and transactions have been eliminated in
      consolidation. In the opinion of the Company’s management, the accompanying
      condensed consolidated financial statements contain all the adjustments
      necessary (consisting only of normal recurring accruals) to make the financial
      position of the Company as of September 30, 2008, the results of operations
      for
      three and nine months ended September 30, 2008 and 2007, and cash flows for
      the
      nine months ended September 30, 2008 and 2007, fairly stated. The condensed
      consolidated financial statements should be read in conjunction with the audited
      financial statements for the year ended December 31, 2007 contained in
      Form 10-KSB filed on March 26, 2008 with the SEC. Interim operating results
      are
      not necessarily indicative of operating results for the full year.





**Note
      3. Merger with Public Company and Reorganization**





On
      September 17, 2007, Transdel entered into an Agreement of Merger and Plan of
      Reorganization (the “Merger Agreement”) by and among Transdel, Transdel
      Pharmaceuticals Holdings, Inc., a privately held Nevada corporation (“Transdel
      Holdings”), and Trans-Pharma Acquisition Corp., a newly formed, wholly owned
      Delaware subsidiary of Transdel (“Acquisition Sub”). Upon closing of the merger
      transaction contemplated under the Merger Agreement (the “Merger”), Acquisition
      Sub merged with and into Transdel Holdings, and Transdel Holdings, as the
      surviving corporation, became a wholly owned subsidiary of
      Transdel.




In
      connection with the Merger, 1,849,993 shares of Transdel common stock remain
      outstanding and all other outstanding shares of Transdel were cancelled. Also,
      at the closing of the Merger, each share of Transdel Holdings common stock
      issued and outstanding immediately prior to the closing of the Merger was
      exchanged for the right to receive 0.15625 of one share of Transdel’s common
      stock. An aggregate of 8,000,000 shares of Transdel’s common stock, which
      included 195,313 shares of restricted stock which were subject to forfeiture
      (see Note 7), were issued to the holders of Transdel Holdings’ common stock. As
      a result of the transaction, the former owners of Transdel Holdings became
      the
      controlling stockholders of Transdel. Accordingly, the merger of Transdel
      Holdings and Transdel is a reverse merger that has been accounted for as a
      recapitalization of Transdel Holdings.





Effective
      on September 17, 2007, and for all reporting periods thereafter, Transdel’s
      operating activities, including any prior comparative period, will include
      only
      those of Transdel Holdings. All references to shares and per share amounts
      in
      the accompanying condensed consolidated financial statements have been restated
      to reflect the aforementioned share exchange.


5


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**




**Note
      4.    Summary of Significant Accounting
      Policies**




*Going
      Concern* .
      The
      accompanying unaudited condensed consolidated financial statements have been
      prepared on a going-concern basis, which contemplates the realization of assets
      and the satisfaction of liabilities in the normal course of business. The
      Company has incurred recurring operating losses, had negative operating cash
      flows and has not recognized any revenues since July 24,
      1998 (“Inception”). In addition, the Company had an accumulated deficit
      during the development stage of $9,428,534 at September 30, 2008. These factors
      raise substantial doubt about the Company’s ability to continue as a going
      concern.





The
      Company’s continuation as a going concern is dependent on its ability to obtain
      additional financing to fund operations, implement its business model, and
      ultimately, to attain profitable operations. The Company intends to obtain
      additional financing to fund its operations through equity or debt financing,
      or
      a corporate partnership for its lead topical drug, KetotransdelTM .
      However, there is no assurance that sufficient financing will be available
      or,
      if available, on terms that would be acceptable to the Company.





The
      unaudited condensed consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of recorded asset
      amounts or the amounts and classification of liabilities that might be necessary
      should the Company be unable to continue as a going concern.





*Development
      Stage Enterprise.* The
      Company is a development stage company as defined in Statement of Financial
      Accounting Standards (“SFAS”) No. 7, *Accounting
      and Reporting by Development Stage Enterprises* . The
      Company is devoting substantially all of its present efforts to establish a
      new
      business, and its planned principal operations have not yet commenced. All
      losses accumulated since Inception have been considered as part of the Company’s
      development stage activities.





*Research
      and Development.* Research
      and development costs are charged to expense when incurred.





*Cash
      and cash equivalents* .
      Cash
      equivalents consist of highly liquid investments with maturities of three months
      or less from the original purchase date.





*Concentrations
      of Credit Risk.* Financial instruments that potentially subject the Company to a concentration
      of
      credit risk consist primarily of cash and cash equivalents. In order to minimize
      the Company’s risk related to the cash equivalents, they are maintained in a
      money market demand account. Due to the short-term nature of this investment,
      the Company believes that there is no material exposure to interest rate risk.
      The Company maintains its cash and cash equivalents at a high-quality
      institution that is insured by the Federal Deposit Insurance Corporation
      (“FDIC”). The Company performs an ongoing evaluation of this
      institution.  On October 3, 2008, FDIC deposit insurance temporarily
      increased from $100,000 to $250,000 through December 31, 2009, therefore, based
      on the cash and cash equivalent balance as of September 30, 2008, the Company
      had $5,525,523 in excess of the increased limit.





*Fair
      Value of Financial Instruments.* The fair
      values of the Company’s cash and cash equivalents, accounts payable and accrued
      expenses approximate their carrying values due to their short
      maturities.





*Beneficial
      Conversion Feature.* The
      convertible features of the convertible notes provided for a rate of conversion
      that was below market value (see Note 5). Such feature is normally characterized
      as a “beneficial conversion feature” (“BCF”). Pursuant to Emerging Issues Task
      Force Issue (“EITF”) No. 98-5 *Accounting
      For Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratio,* and EITF
      No. 00-27, *Application
      of EITF Issue No. 98-5 To Certain Convertible Instruments,* the
      relative fair values of the BCFs have been recorded as a discount from the
      face
      amount of the respective debt instrument. The Company recorded the corresponding
      debt discount related to the BCF as interest expense when the related instrument
      was converted into the Company’s common stock.





*Revenue
      Recognition.* The
      Company will recognize revenues in accordance with the SEC Staff Accounting
      Bulletin (“SAB”) No. 101, *Revenue
      Recognition* , as
      amended by SAB No. 104. SAB No. 104 requires that four basic criteria must
      be
      met before revenue can be recognized: (1) persuasive evidence of an arrangement
      exists; (2) delivery has occurred; (3) the selling price is fixed and
      determinable; and (4) collectibility is reasonably assured. Determination of
      criteria (3) and (4) will be based on management’s judgments regarding the fixed
      nature of the selling prices of the products delivered and the collectibility
      of
      those amounts. Provisions for discounts and rebates to customers, estimated
      returns and allowances, and other adjustments will be provided for in the same
      period the related sales are recorded. The Company will defer any revenue for
      which the product has not been delivered or for which services have not been
      rendered or are subject to refund until such time that the Company and the
      customer jointly determine that the product has been delivered or services
      have
      been rendered or no refund will be required.


6




**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**




**Note
      4.    Summary of Significant Accounting Policies,
      continued**  **





As
      of
      September 30, 2008, the Company had not generated any revenues and the Company
      does not anticipate that it will generate any revenues until one or more of
      its
      drug candidates are approved by the U.S. Food and
      Drug Administration (“FDA”) or until the Company is able to
      commercialize one of its cosmetic products. Also, effective sales and marketing
      support must be in place for either the drug candidates or the cosmetic products
      in order to generate any revenues.  The FDA approval process is highly
      uncertain and the Company cannot estimate when it will generate revenues at
      this
      time from sales of its drug candidates.  Similarly, the Company currently
      cannot estimate when it will generate revenues from the cosmetic
      products.





*Stock-Based
      Compensation.* Effective January 1, 2006, the Company adopted SFAS No. 123 (revised
      2004), *Share-Based
      Payment* ,
      (‘‘SFAS
      No. 123R’’), which is a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      SFAS
      No. 123R supersedes Accounting Principles Board Opinion (“APB”) No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS No. 95, *Statement
      of Cash Flows* .
      SFAS
      123R requires all share-based payments to employees, including grants of
      employee stock options and restricted stock grants, to be recognized in the
      financial statements based upon their fair values. The Company recorded total
      stock-based compensation of $504,566, $43,051 and $689,088 for the nine months
      ended September 30, 2008 and 2007 and for the period from Inception to September
      30, 2008, respectively, for options and restricted stock granted and vested
      which is included in general and administrative expenses and research and
      development expenses in the amount of $204,323 and $300,243, respectively,
      for
      the nine months ended September 30, 2008, $8,385 and $34,666, respectively,
      for
      the nine months ended September 30, 2007, and $267,902 and $421,186,
      respectively, for the period from Inception to September 30, 2008. The fair
      value of the unvested stock option grants amounted to approximately $791,000
      as
      of September 30, 2008.




The
      Company’s accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of SFAS No.
      123, EITF No. 96-18, *Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services,* and EITF
      No. 00-18, *Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees.* As
      such, the value of the applicable stock-based compensation is periodically
      remeasured and income or expense is recognized during their vesting terms.
      The
      measurement date for the fair value of the equity instruments issued is
      determined at the earlier of (i) the date at which a commitment for performance
      by the consultant or vendor is reached or (ii) the date at which the consultant
      or vendor’s performance is complete. In the case of equity instruments issued to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement. In accordance with EITF No. 00-18, an asset
      acquired in exchange for the issuance of fully vested, nonforfeitable equity
      instruments should not be presented or classified as an offset to equity on
      the
      grantor’s balance sheet once the equity instrument is granted for accounting
      purposes. Accordingly, the Company recorded the fair value of nonforfeitable
      equity instruments issued for future consulting services as prepaid consulting
      fees in its condensed consolidated balance sheets (see Note 6).





*Basic
      and Diluted Loss per Common Share* .
      In
      accordance with SFAS No. 128, *Earnings
      Per Share* ,
      and SAB
      No. 98, basic net loss per common share is computed by dividing net loss for
      the
      period by the weighted average number of common shares outstanding during the
      period.  Under SFAS No. 128, diluted net loss per share is computed by
      dividing the net loss for the period by the weighted average number of common
      and common equivalent shares, such as stock options and warrants outstanding
      during the period.





Basic
      and
      diluted net loss applicable to common stock per share is computed using the
      weighted average number of common shares outstanding during the period. Common
      stock equivalents (prior to application of the treasury stock, if converted
      method) from stock options, warrants and convertible notes were 1,812,730 and
      1,151,708 for the nine months ended September 30, 2008 and 2007, respectively,
      are excluded from the calculation of diluted net loss per share for all periods
      presented because the effect is anti-dilutive.





*Use
      of Estimates.* The
      preparation of financial statements in conformity with GAAP requires management
      to make estimates and judgments that affect the reported amounts of assets,
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and reported amounts of revenues and expenses during
      the reporting periods. Significant estimates made by management are, among
      others, the valuation and realizability of contributed services, stock options,
      deferred taxes and stock-based compensation issued to non-employees. Actual
      results could differ from those estimates.


7




**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**




**Note
      5. Notes Payable**





In
      August
      2005, the Company issued seven convertible promissory notes in the aggregate
      amount of $226,300 to various stockholders (collectively the “Stockholders’
Notes”). The Stockholders’ Notes bore interest at 4% per annum and were to
      mature on August 25, 2010. In connection with the issuance of the Stockholders’
Notes, the Company granted warrants that were exercisable into an aggregate
      35,359 shares of the Company’s common stock. The warrants were determined to
      have an insignificant fair value.





In
      May
      2007, the holders of the Stockholders’ Notes and related warrants forgave the
      amounts due and forfeited the related warrants. In connection with the
      forgiveness, the Company recorded additional paid-in capital of $241,701 equal
      to the value of the Stockholders’ Notes and related accrued interest. Interest
      expense on the Stockholders’ Notes was $3,150 and $15,401 for nine months ended
      September 30, 2007 and the period from Inception to September 30, 2008,
      respectively.





In
      May
      and June 2007, the Company issued convertible notes payable to various lenders
      for an aggregate amount of $1,500,000 (collectively, the “2007 Notes”). Each of
      the 2007 Notes included interest at 7% per annum and were to mature on December
      16, 2007 (“Maturity Date”). However, as a result of the Merger and Private
      Placement (see Note 6), the entire outstanding principal amount and accrued
      interest was converted into the Company’s common stock at a conversion price
      equal to $1.00 per share, which resulted in the issuance of 1,530,177 shares.
      Also, the Company recorded a debt discount of $1,530,177, which was amortized
      immediately to interest expense upon the conversion of the 2007 Notes. Excluding
      the debt discount, interest expense on the 2007 Notes was $30,177 for the nine
      months ended September 30, 2007 and the period from Inception to September
      30,
      2008.




**Note
      6. Stockholders’ Equity**





On
      May
      12, 2008, the Company sold 1,818,180 shares of common stock for gross proceeds
      of $4,000,000 through a follow-on private placement (the “Follow-On Private
      Placement”) to accredited investors. In addition, the investors received
      warrants to purchase 227,272 shares of common stock for a period of five years
      at a cash and cashless exercise price of $4.40 and $5.50 per share,
      respectively. In connection with the Follow-On Private Placement, the Company
      incurred expenses of $22,470, which was recorded as a reduction of additional
      paid-in capital.





Concurrent
      with the Merger, the Company sold 2,071,834 shares of common stock for gross
      proceeds of $4,143,667 through a private placement (the “Private Placement”). In
      addition, the investors received warrants to purchase 517,958 shares of common
      stock for a period of five years at a cash and cashless exercise price of $4.00
      and $5.00 per share, respectively. In connection with the Private Placement,
      the
      Company incurred placement agent fees and other related expenses totaling
      $342,105 of which $36,229 was incurred in 2008, and issued warrants to purchase
      up to 33,750 shares of common stock for a period of three years at a cash and
      cashless exercise price of $4.00 and $5.00 per share, respectively.




In
      September 2007, the Company entered into three, one-year consulting agreements
      with three separate firms to provide services related to investor
      communications. The terms per one of the agreements, among other items, include
      monthly payments of $7,500 plus expenses and for another agreement a
      non-refundable fee of $140,000. Also, in the aggregate, 275,000 shares of common
      stock were issued in accordance with the terms of the agreements along with
      a
      warrant to purchase 18,750 shares of common stock for a period of five years
      at
      a cash and cashless exercise price of $4.00 and $5.00, respectively. The fair
      value of the stock and warrants were valued at $550,000. The estimated costs
      of
      the consulting agreements, including the stock, warrants and non-refundable
      fee
      were amortized over the one-year terms.




In
      accordance with EITF No. 00-18, 100,000 of the 275,000 shares of common stock
      are subject to remeasurement on a periodic basis as the performance condition
      for these shares is not satisfied until the end of the contract term. The
      remeasurement for the 100,000 shares was completed in two stages. First, in
      February 2008, the consulting agreement associated with these shares was
      terminated and as a condition of the termination, the firm retained 50,000
      shares and transferred the remaining 50,000 shares to another firm. Therefore,
      since the performance obligation related to the 50,000 shares, retained by
      the
      terminated consulting firm, is complete, they were revalued as of the February
      termination date to $60,000, which was the fair market value of the shares
      on
      the termination date. Second, the remaining 50,000 shares that were transferred
      to the other firm will be utilized for the payment of investor relation
      services. The Company originally estimated that these shares would be utilized
      and earned for investor relations services by the end of the one-year term,
      however, these 50,000 shares along with 32,568 (for an aggregate of 82,568)
      shares from the issuance of common stock to one of the other consulting firms
      were not earned as of September 30, 2008. Therefore, these shares are being
      held
      for final disposition for investor relation services to be provided to the
      Company. As a result, in accordance with EITF Topic D-90, these shares are
      not
      considered issued and outstanding as of September 30, 2008. The Company fully
      intends to utilize these shares for payment of investor relation services within
      the next six to nine months. For the nine months ended September 30, 2008 and
      2007 and for the period from Inception through September 30, 2008, the Company
      amortized $284,598, $28,752 and $485,850, respectively, of prepaid
      consulting fees which is included as part of selling, general and administrative
      expenses.


8




**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**Note
      6. Stockholders’ Equity, continued**





On
      April
      24, 2008, the Company entered into a one-year consulting agreement with a firm
      to provide the Company with financial advisory services. As compensation for
      the
      services, the Company issued a three-year warrant to purchase 5,000 shares
      of
      the Company’s common stock at a cash and cashless price of $2.00 per share. The
      fair value of the warrant, determined based on the Black-Scholes pricing model,
      was valued at $1,310, which is being amortized over the one-year
      term.





**Note
      7. Stock Option Plans**





On
      September 17, 2007, the Company’s board of directors and stockholders adopted
      the 2007 Incentive Stock and Awards Plan (the “Plan”), which provides for the
      issuance of a maximum of 1,500,000 shares of Common Stock. The purpose of the
      Plan is to provide an incentive to attract and retain directors, officers,
      consultants, advisors and employees whose services are considered valuable,
      to
      encourage a sense of proprietorship and to stimulate an active interest of
      such
      persons into the Company’s development and financial success. Under the Plan,
      the Company is authorized to issue incentive stock options intended to qualify
      under Section 422 of the Code, non-qualified stock options and restricted stock.
      The Plan will be administered by the Company’s Board of Directors until such
      time as such authority has been delegated to a committee of the board of
      directors. On
      November 5, 2008, the Company’s shareholders approved an increase to the number
      of authorized shares for issuance to 3,000,000.




Pursuant
      to the terms of the Private Placement, for one year following the initial
      closing of the Private Placement, the Company may not issue options to purchase
      shares of common stock at an exercise price below $2.00 per share. In addition,
      for a period of 18 months following the initial closing of the Private
      Placement, the Company may not file a registration statement, including, without
      limitation, a registration statement on Form S-8, covering the resale of any
      shares of common stock issued pursuant to an employee benefit plan.





A
      summary
      of the status of the Plan for the nine months ended September 30, 2008 is as
      follows:





**Number**
              **of Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Options outstanding – Beginning of Period
            
            
            610,000
            
            $
            2.01Granted
            
            
            600,000
            
            
            2.00Exercised
            
            
            —
            
            
            —Cancelled
            
            
            (200,000
            )
            
            (2.00
            )Options
                outstanding – End of Period
            
            
            1,010,000
            
            $
            2.01Options
                exercisable – End of Period
            
            
            204,167Weighted
                average remaining contractual life of the outstanding options – End
                of period
            
            
            9.3
                yearsAggregate
                intrinsic value – End of Period
            
            
            —





All
      options granted to date expire on the ten year anniversary of the issuance
      date
      and vest on a quarterly basis over one to three years.    The Company
      uses the Black-Scholes option pricing model to estimate the grant-date fair
      value of share-based awards under SFAS No. 123R. The Black-Scholes model
      requires subjective assumptions regarding future stock price volatility and
      expected time to exercise, along with assumptions about the risk-free interest
      rate and expected dividends, which affect the estimated fair values of the
      Company’s stock-based awards. The expected term of options granted was
      determined in accordance with the simplified approach as defined by SAB No.
      107, *Share-Based
      Payment* , as the
      Company has very limited historical data on employee exercises and post-vesting
      employment termination behavior. The expected volatility is based on the
      historical volatilities of the common stock of comparable publicly traded
      companies based on the Company’s belief that it currently has limited historical
      data regarding the volatility of its stock price on which to base a meaningful
      estimate of expected volatility. The risk-free rate selected to value any
      particular grant is based on the U.S. Treasury rate that corresponds to the
      expected term of the grant effective as of the date of the grant. The Company
      used 0% as an expected dividend yield assumption. These factors could change
      in
      the future, affecting the determination of stock-based compensation expense
      in
      future periods. Utilizing these assumptions, the fair value is determined at
      the
      date of grant. In accordance with SFAS No. 123R, the financial statement effect
      of forfeitures is estimated at the time of
      grant
      and revised, if necessary, if the actual effect differs from those estimates.
      As
      of September 30, 2008, management’s future estimates are that the effect of
      forfeitures on the financial statements will be insignificant. As of September
      30, 2008, there was approximately $791,000 of total unrecognized
      compensation expense related to unvested stock-based compensation under the
      Plan. That expense is expected to be recognized over the weighted-average period
      of 2.3 years.


9


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**




**Note
      7. Stock Option Plans** , **continued**





Furthermore,
      in August 2007, the Company issued a restricted stock grant to an executive
      of
      the Company for 195,313 shares of the Company’s common stock upon closing of the
      Merger (See Note 3). The restricted stock grant was scheduled to vest 100%
      on
      March 17, 2009 and valued at approximately $391,000, which was being amortized
      over the 18 month period. However, on April 4, 2008, the Company’s Board of
      Directors waived any restrictions or forfeiture conditions on the shares of
      restricted common stock in conjunction with the executive’s resignation and a
      separation agreement entered into between the Company and the executive.
      Therefore, the remaining unrecognized expense of $236,000 was fully amortized
      as
      a result of the waiver of the restrictions and forfeiture
      conditions.





**Note
      8.    Stock Warrants**





In
      addition to the warrants issued in conjunction with the Private Placement and
      the Follow-On Private Placement, the Company issued a warrant to purchase shares
      of its common stock to a firm in connection with a consulting agreement at
      an
      exercise price of $4.00 (or cashless exercise price of $5.00). The expiration
      of
      the outstanding warrants occurs through May 2013 at various periods (see Note
      6).





A
      summary
      of the status of the warrants for the period ended September 30, 2008, is as
      follows:





**Number of**
              **Shares**
              **Subject to**
              **Warrants**
              **Outstanding**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Warrants
                outstanding – Beginning of Period
            
            
            570,458
            
            $
            4.00Granted
            
            
            232,272
            
            
            4.35Exercised
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            —Warrants
                outstanding – End of Period
            
            
            802,730
            
            $
            4.10Weighted
                average remaining contractual life of the outstanding warrants – End
                of Period
            
            
            4.07
                years




**Note
      9. Recent Accounting Pronouncements**





The
      following pronouncements have been issued by the Financial Accounting Standards
      Board (“FASB”):





In
      December 2007, the FASB issued SFAS No. 141R, *Business
      Combinations* .
      SFAS
      No. 141R provides companies with principles and requirements on how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, liabilities assumed, and any noncontrolling interest in the acquiree
      as well as the recognition and measurement of goodwill acquired in a business
      combination. SFAS No. 141R also requires certain disclosures to enable users
      of
      the financial statements to evaluate the nature and financial effects of the
      business combination. Acquisition costs associated with the business combination
      will generally be expensed as incurred. SFAS No. 141R is effective for business
      combinations occurring in fiscal years beginning after December 15, 2008. Early
      adoption of SFAS No. 141R is not permitted. The Company is currently evaluating
      the impact SFAS No. 141R will have on any future business
      combinations.





Other
      recent accounting pronouncements issued by the FASB (including the EITF) and
      the
      American Institute of Certified Public Accountants did not or are not believed
      by management to have a material impact on the Company’s present or future
      consolidated financial statements.


10


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**Note
      10. Commitments and Contingencies**





Indemnities
      and Guarantees





The
      Company has made certain indemnities and guarantees, under which it may be
      required to make payments to a guaranteed or indemnified party, in relation
      to
      certain actions or transactions. The Company indemnifies its directors,
      officers, employees and agents, as permitted under the laws of the State of
      Delaware. The duration of the guarantees and indemnities varies, and is
      generally tied to the life of the agreement. These guarantees and indemnities
      do
      not provide for any limitation of the maximum potential future payments the
      Company could be obligated to
      make.
      Historically, the Company has not been obligated nor incurred any payments
      for
      these obligations and, therefore, no liabilities have been recorded for these
      indemnities and guarantees in the accompanying unaudited condensed consolidated
      balance sheet as of September 30, 2008 .





Mediation
      Settlement





On
      February 5, 2008, as a result of mediation, the Company and a previously
      retained law firm reached an agreement related to certain alleged claims the
      Company had against the law firm. Although the law firm did not admit to any
      liability or wrongdoing, they desired to resolve the dispute and therefore,
      agreed to pay the Company $750,000. In exchange for the settlement, the Company,
      the law firm and any other parties involved in the mediation, released and
      waived any future claims against each other, whether known or unknown at the
      time of the settlement. The net amount received by the Company was $375,000
      after fees paid to the Company’s counsel and an executive and director of the
      Company. The fees paid to the executive and director, which were previously
      approved by the Board of Directors, are due to their monetary contributions
      and
      uncompensated time commitment over a period of approximately four years related
      to pursuing this matter and other amounts paid on the Company’s behalf prior to
      the Merger.




Cato
      Research Ltd. Agreement





In
      accordance with the Master Services Agreement, dated April 10, 2007, between
      the
      Company and Cato Research Ltd., a contract research and development organization
      (“Cato”), the Company entered into a clinical trial services agreement with Cato
      on June 10, 2008 (“Agreement”). Under the Agreement, Cato will serve as the
      Company’s strategic partner and contract research organization in conducting the
      Company’s Phase 3 clinical program for KetotransdelTM, the Company’s novel
      topical cream based non-steroidal anti-inflammatory drug for pain. Pursuant
      to
      the Agreement, the Company will make payments to Cato upon its completion of
      certain specified milestones. If all milestones under the Agreement are
      completed and the estimated pass-through costs are incurred, the Company’s total
      costs under the Agreement are estimated at $3.3 million. In addition, any
      changes to budget parameters identified in the Agreement may result in
      additional costs to the Company. There can be no assurance that Cato will
      complete its performance under the Agreement, and to the extent that such
      performance is completed that the clinical trial results for KetotransdelTM will
      be satisfactory.





Cosmetic
      Products Consulting Agreement





On
      August
      25, 2008, the Company entered into a consulting agreement with a firm to provide
      product and business development services for specific cosmetic products that
      would be developed by the Company. To the extent a specific cosmetic product,
      applicable to the consulting agreement, is successfully developed and a separate
      agreement is entered into between the Company and a third party for (including
      but not limited to) the out-license or distribution of a product, the firm
      will
      receive a percentage of the operating profits from the third party agreement
      as
      agreed upon in the consulting agreement.





**Note
      11. Subsequent Events**





Investor
      Relations Agreement





On
      October 27, 2008, the Company entered into an agreement with an investor
      relations firm (“IR FIRM”), pursuant to which the IR FIRM will provide certain
      investor relations and public relations services to the Company for a period
      of
      one year, beginning on November 1, 2008.  In exchange for such
      services, the Company issued 82,568 registered shares of its common
      stock, a portion of which is forfeitable, to the IR FIRM as a prepayment of
      services to be received and beginning on or about March 1, 2008, the Company
      has
      agreed to issue an additional 22,889 shares of unregistered common
      stock to the IR FIRM on a monthly basis thereafter for the term of the
      agreement.


11


**TRANSDEL
      PHARMACEUTICALS, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**





**Note
      11. Subsequent Events, continued**





Stock
      Option Grant





On
      November 5, 2008, the Company’s Board of Directors granted 10,000 stock options
      to an employee of the Company under the Company’s 2007 Incentive Stock and
      Awards Plan. The options were granted with an exercise price of $1.10 and have
      a
      ten year life. Also, the options vest one-twelfth per quarter commencing on
      the
      first full quarter after the initial grant date of November 5,
      2008.


12




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




**Overview**




We
      are a
      specialty pharmaceutical company focused on the development and
      commercialization of non-invasive topically delivered products. Our lead topical
      drug, KetotransdelTM, utilizes our proprietary TransdelTM cream formulation
      to facilitate the passage of ketoprofen, a non-steroidal anti-inflammatory
      drug
      (“NSAID”), through the skin barrier to reach targeted underlying tissues where
      the drug exerts its localized anti-inflammatory and analgesic effect.
      KetotransdelTM
      is currently being studied in a Phase 3 U.S. registration trial in acute soft
      tissue injuries..




**Plan
      of Operations**





For
      the next twelve months, our current operating plan is focused on the development
      of our lead drug, KetotransdelTM for the indication of acute musculoskeletal
      pain, co-development opportunities in other therapeutic areas and the
      development of our cosmetic products.





On
      June
      16, 2008, we announced that we initiated our Phase 3 clinical program for
      our novel analgesic and anti-inflammatory topical cream, KetotransdelTM, which
      contains ketoprofen and on September 22, 2008 we announced the enrollment of
      our
      first patient. The first Phase 3 study will consist of a randomized,
      double-blind, placebo controlled trial to evaluate the efficacy and safety
      of
      KetotransdelTM in acute soft tissue injuries of the upper and lower extremities
      over a one week treatment period with a one week post-treatment follow-up for
      safety. The multi-center trial will be conducted at approximately 25 to 35
      sites, mainly in the United States and potentially in Canada, and will enroll
      approximately 350 patients, randomized 1:1 ratio KetotransdelTM (active) versus
      placebo vehicle (identical to active without the drug ketoprofen). The primary
      efficacy endpoint is the difference in the change of baseline of pain during
      normal activity for the past 24 hours from measurement at the Day 3 clinical
      visit between active and placebo measured by using the Visual Analogue Scale
      (VAS), a well known and validated instrument for pain measurement. Secondary
      endpoints include safety assessments and other efficacy parameters measured
      by
      VAS. As of October 31, 2008, we have initiated three study sites for this Phase
      3 study. We would anticipate reporting top-line results in the second half
      of
      2009. In addition, as required by the FDA, we will be initiating a second Phase
      3 clinical study in acute musculoskeletal pain, potentially for the treatment
      of
      acute flare in osteoarthritis patients. We are currently assessing the design
      and timing of this additional study that will support the registration of
      KetotransdelTM in the United States.




If
      and
      when the FDA approves KetotransdelTM for treatment of acute pain, we intend
      to pursue FDA approval of KetotransdelTM for other indications, such as
      osteoarthritis. We believe that the clinical success of KetotransdelTM will
      facilitate the use of the TransdelTM delivery technology in other
      products. We are also investigating other drug candidates and
      treatments for transdermal delivery using the TransdelTM platform technology for
      products in pain management and other therapeutic areas. We have identified
      key
      therapeutic areas for co-development opportunities and are in the discussion
      phase with potential partners for these identified products. Furthermore, we
      are
      exploring potential partnerships with U.S. and foreign based companies that
      have
      sales and marketing infrastructures to support KetotransdelTM in the event that
      the product is approved and commercialized. We are also looking to out-license
      our TransdelTM drug delivery technology for the development and commercialization
      of additional innovative drug products. In addition, we have developed two
      cosmetic formulations using our patented delivery system.  One product will
      potentially improve the appearance of facial fine lines and wrinkles and
      other signs of aging on the face, while the other product will potentially
      treat
      cellulite on the thighs.  We anticipate continuing the expansion of our
      cosmetic product opportunities. There can be no assurance that any of these
      activities will lead to definitive agreements.





We
      believe that our current staff is sufficient to carry out our business plan
      in
      the coming twelve months, however, if our operations in the future require
      it, we will consider the employment of additional staff or the use of
      consultants




**Liquidity
      and Capital Resources**





Since
      July 24, 1998 (“Inception”) through September 30, 2008, we have
      incurred losses of approximately $9.4 million. These losses are primarily due
      to
      general and administrative and research and development expenses. Historically,
      our operations have been financed through capital contributions and debt and
      equity financings.





As
      of
      September 30, 2008, we had approximately $5.8 million in cash. On each of
      September 17, 2007, and October 10, 2007, we completed private placements
      to selected institutional and individual investors of our common stock and
      warrants. In connection with the private placements, we raised approximately
      $3.8 million (net of placement agent fees and other costs aggregating $342,105)
      from the issuance of 2,071,834 shares of common stock and detachable redeemable
      warrants to purchase 517,958 shares of our common stock at a cash exercise
      price
      of $4.00 per share and a cashless exercise price of $5.00 per share. In May
      2008, we completed another private placement to accredited investors, where
      we
      raised gross proceeds of $4.0 million from the issuance of 1,818,180 shares
      of
      common stock and detachable warrants to purchase 227,272 shares of our common
      stock at a cash exercise price of $4.40 per share and a cashless exercise price
      of $5.50 per share.


13


We
      are
      assessing our financing needs for the foreseeable future. In order to
      execute our operating plan over the next twelve months, which includes the
      conduct of the Phase 3 clinical program, we will be required to raise additional
      funds to support our operations. This funding requirement raises substantial
      doubt about our ability to continue as a going concern. The accompanying
      unaudited condensed consolidated financial statements have been prepared on
      a
      going-concern basis, which contemplates the realization of assets and the
      satisfaction of liabilities in the normal course of business.




Our
      continuation as a going concern is dependent on our ability to obtain additional
      financing to fund operations, implement our business model, and ultimately,
      to
      attain profitable operations. We intend to obtain additional financing to fund
      our operations through, and without limitation to, equity or debt
      financing, funding from a corporate partnership or licensing arrangement or
      any
      similar financing. There can be no assurance that such financing will be
      available on terms favorable to us or at all, particularly if the volatile
      conditions in the stock and financial markets, and more particularly the market
      for pharmaceutical company stocks, persist. If adequate financing is not
      available, we will have to delay, postpone or terminate the clinical
      program and curtail general and administrative operations, which would have
      a
      material adverse effect on us.





If
      we
      raise additional capital by issuing equity securities, our existing
      stockholders’ ownership will be diluted. In addition, if we raise additional
      funds through collaboration and licensing arrangements, we may be required
      to
      relinquish potentially valuable rights to our product candidates or proprietary
      technologies, or grant licenses on terms that are not favorable to us.





**Critical
      Accounting Policies**




We
      rely
      on the use of estimates and make assumptions that impact our financial
      condition and results. These estimates and assumptions are based on historical
      results and trends as well as our forecasts as to how results and trends
      might change in the future. Although we believe that the estimates we
      use are reasonable, actual results could differ from those
      estimates.




We
      believe that the accounting policies described below are critical to
      understanding our business, results of operations and financial condition
      because they involve more significant judgments and estimates used in the
      preparation of our unaudited condensed consolidated financial statements. An
      accounting policy is deemed to be critical if it requires an accounting estimate
      to be made based on assumptions about matters that are highly uncertain at
      the
      time the estimate is made, and any changes in the different estimates that
      could
      have been used in the accounting estimates that are reasonably likely to occur
      periodically could materially impact our unaudited condensed consolidated
      financial statements.




Our most
      critical accounting policies and estimates that may materially impact our
      results of operations include:





*Stock-Based
      Compensation.* Effective January 1, 2006, we adopted Statement of Financial
      Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based
      Payment* ,
      (“SFAS No. 123R”), which is a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* . SFAS
      No. 123R supersedes Accounting Principles Board No. 25, *Accounting
      for Stock Issued to Employees* , and
      amends SFAS No. 95, *Statement
      of Cash Flows* . SFAS
      No. 123R requires all share-based payments to employees, including grants of
      employee stock options and restricted stock grants, to be recognized in the
      financial statements based upon their fair values. We use the Black-Scholes
      option pricing model to estimate the grant-date fair value of share-based awards
      under SFAS No. 123R. Fair value is determined at the date of grant. In
      accordance with SFAS No. 123R, the financial statement effect of forfeitures
      is
      estimated at the time of grant and revised, if necessary, if the actual effect
      differs from those estimates. As of September 30, 2008, management estimates
      that the effect of forfeitures on the unaudited condensed financial statements
      will be insignificant.





Our
      accounting policy for equity instruments issued to consultants and vendors
      in
      exchange for goods and services follows the provisions of SFAS No. 123, Emerging
      Issues Task Force (“EITF”) No. 96-18, *Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* and EITF
      No. 00-18, *Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees.* As such,
      the value of the applicable stock-based compensation is periodically remeasured
      and income or expense is recognized during the vesting terms. The measurement
      date for the fair value of the equity instruments issued is determined at the
      earlier of (i) the date at which a commitment for performance by the consultant
      or vendor is reached or (ii) the date at which the consultant or vendor’s
      performance is complete. In the case of equity instruments issued to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement. In accordance with EITF No. 00-18, an asset
      acquired in exchange for the issuance of fully vested, nonforfeitable equity
      instruments should not be presented or classified as an offset to equity on
      the
      grantor’s balance sheet once the equity instrument is granted for accounting
      purposes. Accordingly, we recorded the fair value of nonforfeitable equity
      instruments issued for future consulting services as prepaid consulting fees
      in our condensed consolidated balance sheets.





*Beneficial
      Conversion Feature.* The
      convertible features of the convertible notes provided for a rate of conversion
      that was below market value (see Note 5). Such feature is normally characterized
      as a “beneficial conversion feature” (“BCF”). Pursuant to EITF No. 98-5 *Accounting
      For Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratio* and EITF
      No. 00-27, *Application
      of EITF Issue No. 98-5 To Certain Convertible Instruments,* the
      relative fair values of the BCFs have been recorded as a discount from the
      face
      amount of the respective debt instrument. We recorded the corresponding
      debt discount related to the BCF as interest expense, in fiscal year 2007,
      when
      the related instrument was converted into its common
      stock.


14


**Off-Balance
      Sheet Arrangements**




Since our
      inception, except for standard operating leases, we have not engaged
      in any off-balance sheet arrangements, including the use of structured finance,
      special purpose entities or variable interest entities.





**Recent
      Accounting Pronouncements**




In
      December 2007, the FASB issued SFAS No. 141R, *Business
      Combinations* . SFAS
      No. 141R provides companies with principles and requirements on how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, liabilities assumed, and any noncontrolling interest in the acquiree
      as well as the recognition and measurement of goodwill acquired in a business
      combination. SFAS No. 141R also requires certain disclosures to enable users
      of
      the financial statements to evaluate the nature and financial effects of the
      business combination. Acquisition costs associated with the business combination
      will generally be expensed as incurred. SFAS No. 141R is effective for business
      combinations occurring in fiscal years beginning after December 15, 2008. Early
      adoption of SFAS No. 141R is not permitted. We are currently evaluating the
      impact SFAS No. 141R will have on any future business combinations.





**Item
      4T. Controls and Procedures.**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Exchange Act
      is recorded, processed, summarized and reported within the time periods
      specified in the Commission’s rules and forms and that such information is
      accumulated and communicated to our management, including our Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow for
      timely decisions regarding required disclosure. In designing and evaluating
      the
      disclosure controls and procedures, management recognizes that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      is required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.




As
      required by Commission Rule 13a-15(b), we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and the Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures as of
      the end of the quarter covered by this quarterly report on Form 10-Q. Based
      on
      the foregoing, our Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures were effective at the
      reasonable assurance level.




There
      has
      been no change in our internal control over financial reporting
      during our most recent fiscal quarter that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.


15


**PART
      II**


**OTHER
      INFORMATION**





**Item
      1A. Risk Factors**




*You
      should consider carefully the following information about the risks described
      below, together with the other information contained in this quarterly report
      on
      Form 10-Q and in our other filings with the Securities and Exchange
      Commission, before you decide to buy or maintain an investment in our common
      stock. We believe the risks described below are the risks that are material
      to
      us as of the date of this quarterly report. If any of the following risks
      actually occur, our business financial condition, results of operations and
      future growth prospects would likely be materially and adversely
      affected. In these circumstances, the market price of our common stock
      could decline, and you may lose all or part of the money you paid to buy our
      common stock. The risk factors set forth below with an asterisk
      (*) next to the title are new risk factors or risk factors containing
      changes, including any material changes from the risk factors set forth in
      our
      annual report on Form 10-KSB for the fiscal year ended December 31, 2007,
      as filed with the Securities and Exchange Commission on March 26, 2008.*





**Risks
      Relating to Our Business**




****We
      have incurred losses in the research and development of KetotransdelTM and our
      TransdelTM technology since inception. No assurance can be given that we will
      ever generate revenue or become profitable.***




Since
      inception we have recorded operating losses. From Inception through September
      30, 2008, we have a deficit accumulated during the development stage of
      approximately $9.4 million, and for the three and nine months ended September
      30, 2008, we experienced a net loss of approximately $815,000 and $2.4 million,
      respectively. In addition, we expect to incur increasing operating losses for
      the foreseeable future as we continue to incur costs for research and
      development and clinical trials, and in other development activities. Our
      ability to generate revenue and achieve profitability depends upon our ability,
      alone or with others, to complete the development of our proposed products,
      obtain the required regulatory approvals and manufacture, market and sell our
      proposed products. Development is costly and requires significant investment.
      In
      addition, we may choose to license rights to particular drugs. The license
      fees
      for such drugs may increase our costs.




As
      we
      continue to engage in the development of KetotransdelTM and develop other
      products, there can be no assurance that we will ever be able to achieve or
      sustain market acceptance, profitability or positive cash flow. Our ultimate
      success will depend on many factors, including whether KetotransdelTM receives
      FDA approval. We cannot be certain that we will receive FDA approval for
      KetotransdelTM or other products, or that we will reach the level of sales and
      revenues necessary to achieve and sustain profitability. Further, there is
      no
      assurance our cosmetic products will lead to successful products.  Unless
      we raise additional capital, we may not be able to execute our business plan
      or
      fund business operations long enough to achieve positive cash flow. Furthermore,
      we may be forced to reduce our expenses and cash expenditures to a material
      extent, which would impair our ability to execute our business
      plan.




***Our
      independent registered public accounting firm expressed doubt about our ability
      to continue as a going concern.***




There
      can
      be no assurance that we will ever be able to achieve or sustain profitability
      or
      positive cash flow. Based on our history of losses, our independent registered
      public accounting firm has stated in their report accompanying their audit
      of
      our 2007 year-end consolidated financial statements that there was substantial
      doubt about our ability to continue as a going concern. If we are not able
      to
      generate revenue or raise additional capital, we may not be able to continue
      operating our business.




***We
      will need additional financing to execute our business plan and fund operations,
      which additional financing may not be available.***




We
      have
      very limited funds and we may not be able to execute our current business plan
      and fund business operations long enough to achieve profitability unless we
      are
      able to raise additional funds. Our ultimate success will depend upon our
      ability to raise additional capital. There can be no assurance that additional
      funds will be available when needed from any source or, if available, will
      be
      available on terms that are acceptable to us.




We
      may be
      required to pursue sources of additional capital through various means,
      including joint venture projects and debt or equity financings. Future
      financings through equity investments are likely to be dilutive to existing
      stockholders. Also, the terms of securities we may issue in future capital
      transactions may be more favorable for our new investors. Newly issued
      securities may include preferences, superior voting rights and the issuance
      of
      warrants or other derivative securities, which may have additional dilutive
      effects. Further, we may incur substantial costs in pursuing future capital
      and/or financing, including investment banking fees, legal fees, accounting
      fees, printing and distribution expenses and other costs. We may also be
      required to recognize non-cash expenses in connection with certain securities
      we
      may issue, such as convertible notes and warrants, which will adversely impact
      our financial condition.





Our
      ability to obtain needed financing may be impaired by such factors as the
      capital markets, both generally and specifically in the pharmaceutical industry,
      and the fact that we are not profitable, which could impact the availability
      or
      cost of future financings. If the amount of capital we are able to raise from
      financing activities, together with our revenues from operations, is not
      sufficient to satisfy our capital needs, even to the extent that we reduce
      our
      operations accordingly, we may be required to cease operations.


16


***Timing
      and results of clinical trials to demonstrate the safety and efficacy of
      products as well as FDA approval of products are
      uncertain.***




We
      are
      subject to extensive government regulations. The process of obtaining FDA
      approval is costly, time consuming, uncertain and subject to unanticipated
      delays. Before obtaining regulatory approvals for the sale of any of our
      products, we must demonstrate through preclinical studies and clinical trials
      that the product is safe and effective for each intended use. Preclinical and
      clinical studies may fail to demonstrate the safety and effectiveness of a
      product. Even promising results from preclinical and early clinical studies
      do
      not always accurately predict results in later, large scale trials. A failure
      to
      demonstrate safety and efficacy would result in our failure to obtain regulatory
      approvals. Moreover, if the FDA grants regulatory approval of a product, the
      approval may be limited to specific indications or limited with respect to
      its
      distribution, which could limit revenues.




We
      cannot
      assure you that the FDA or other regulatory agencies will approve any products
      developed by us, on a timely basis, if at all, or, if granted, that such
      approval will not subject the marketing of our products to certain limits on
      indicated use. Any limitation on use imposed by the FDA or delay in or failure
      to obtain FDA approvals of products developed by us would adversely affect
      the
      marketing of these products and our ability to generate product revenue, as
      well
      as adversely affect the price of our common stock.




***If
      we fail to comply with continuing federal, state and foreign regulations, we
      could lose our approvals to market drugs and our business would be seriously
      harmed.***




Following
      initial regulatory approval of any drugs we may develop, we will be subject
      to
      continuing regulatory review, including review of adverse drug experiences
      and
      clinical results that are reported after our drug products become commercially
      available. This would include results from any post-marketing tests or continued
      actions required as a condition of approval. The manufacturer and manufacturing
      facilities we use to make any of our drug candidates will be subject to periodic
      review and inspection by the FDA. If a previously unknown problem or problems
      with a product or a manufacturing and laboratory facility used by us is
      discovered, the FDA or foreign regulatory agency may impose restrictions on
      that
      product or on the manufacturing facility, including requiring us to withdraw
      the
      product from the market. Any changes to an approved product, including the
      way
      it is manufactured or promoted, often requires FDA approval before the product,
      as modified, can be marketed. In addition, we and our contract manufacturers
      will be subject to ongoing FDA requirements for submission of safety and other
      post-market information. If we or our contract manufacturers fail to comply
      with
      applicable regulatory requirements, a regulatory agency may:




·
            issue
                warning letters;




·
            impose
                civil or criminal penalties;





·
            suspend
                or withdraw our regulatory
                approval;




·
            suspend
                or terminate any of our ongoing clinical
                trials;




·
            refuse
                to approve pending applications or supplements to approved applications
                filed by us;




·
            impose
                restrictions on our operations;





·
            close
                the facilities of our contract manufacturers;
                or




·
            seize
                or detain products or require a product
                recall.




Additionally,
      regulatory review covers a company’s activities in the promotion of its drugs,
      with significant potential penalties and restrictions for promotion of drugs
      for
      an unapproved use. Sales and marketing programs are under scrutiny for
      compliance with various mandated requirements, such as illegal promotions to
      health care professionals. We are also required to submit information on our
      open and completed clinical trials to public registries and databases. Failure
      to comply with these requirements could expose us to negative publicity, fines
      and penalties that could harm our business.




If
      we
      violate regulatory requirements at any stage, whether before or after marketing
      approval is obtained, we may be fined, be forced to remove a product from the
      market or experience other adverse consequences, including delay, which would
      materially harm our financial results. Additionally, we may not be able to
      obtain the labeling claims necessary or desirable for product
      promotion.


17


***Delays
      in the conduct or completion of our clinical and non-clinical trials or the
      analysis of the data from our clinical or non-clinical trials may result in
      delays in our planned filings for regulatory approvals, and may adversely affect
      our business.***




We
      cannot
      predict whether we will encounter problems with any of our completed or planned
      clinical or non-clinical studies that will cause us or regulatory authorities
      to
      delay or suspend planned clinical and non-clinical studies. Any of the following
      could delay the completion of our planned clinical studies:




·
            failure
                of the FDA to approve the scope or design of our clinical or non-clinical
                trials or manufacturing plans;




·
            delays
                in enrolling volunteers in clinical
                trials;




·
            insufficient
                supply or deficient quality of materials necessary for the performance
                of
                clinical or non-clinical trials;




·
            negative
                results of clinical or non-clinical studies;
                and




·
            adverse
                side effects experienced by study participants in clinical trials
                relating
                to a specific product.




There
      may
      be other circumstances other than the ones described above, over which we may
      have no control that could materially delay the successful completion of our
      clinical and non-clinical studies.




***None
      of our product candidates, other than KetotransdelTM , have commenced clinical
      trials.***





None
      of
      our product candidates, other than KetotransdelTM, have commenced any clinical
      trials and there are a number of FDA requirements that we must satisfy in order
      to commence clinical trials. These requirements will require substantial time,
      effort and financial resources. We cannot assure you that we will ever satisfy
      these requirements. In addition, prior to commencing any trials of a drug
      candidate, we must evaluate whether a market exists for the drug candidate.
      This
      is costly and time consuming and no assurance can be given that our market
      studies will be accurate. We may expend significant capital and other resources
      on a drug candidate and find that no commercial market exists for the drug.
      Even
      if we do commence clinical trials of our other drug candidates, such drug
      candidates may never be approved by the FDA.





***Once
      approved, there is no guarantee that the market will accept our products, and
      regulatory requirements could limit the commercial usage of our
      products.***





Even
      if
      we obtain regulatory approvals, uncertainty exists as to whether the market
      will
      accept our products or if the market for our products is as large as we
      anticipate. A number of factors may limit the market acceptance of our products,
      including the timing of regulatory approvals and market entry relative to
      competitive products, the availability of alternative products, the price of
      our
      products relative to alternative products, the availability of third party
      reimbursement and the extent of marketing efforts by third party distributors
      or
      agents that we retain. We cannot assure you that our products will receive
      market acceptance in a commercially viable period of time, if at all. We cannot
      be certain that any investment made in developing products will be recovered,
      even if we are successful in commercialization. To the extent that we expend
      significant resources on research and development efforts and are not able,
      ultimately, to introduce successful new products as a result of those efforts,
      our business, financial position and results of operations may be materially
      adversely affected, and the market value of our common stock could
      decline.





****We
      may be subject to product liability claims.***





The
      development, manufacture, and sale of pharmaceutical products expose us to
      the
      risk of significant losses resulting from product liability claims. 
Although we have obtained and intend to maintain product liability insurance
      to
      offset some of this risk, we may be unable to maintain such insurance or it
      may
      not cover certain potential claims against us.





In
      the
      future, we may not be able to afford to obtain insurance due to rising costs
      in
      insurance premiums in recent years.  Currently we have been able to secure
      insurance coverage, however, we may be faced with a successful claim against
      us
      in excess of our product liability coverage that could result in a material
      adverse impact on our business.  If insurance coverage is too expensive or
      is unavailable to us in the future, we may be forced to self-insure against
      product-related claims.  Without insurance coverage, a successful claim
      against us and any defense costs incurred in defending ourselves may have a
      material adverse impact on our operations.


18


***If
      our patents are determined to be unenforceable, or if we are unable to obtain
      new patents based on current patent applications or for future inventions,
      we
      may not be able to prevent others from using our intellectual
      property.***





Our
      success will depend in part on our ability to obtain and expand patent
      protection for our specific products and technologies both in the United States
      and other countries. We cannot guarantee that any patents will be issued from
      any pending or future patent applications owned by or licensed to us.
      Alternatively, a third party may successfully circumvent our patents. Our rights
      under any issued patents may not provide us with sufficient protection against
      competitive products or otherwise cover commercially valuable products or
      processes. In addition, because patent applications in the United States are
      maintained in secrecy for eighteen months after the filing of the applications,
      and publication of discoveries in the scientific or patent literature often
      lag
      behind actual discoveries, we cannot be sure that the inventors of subject
      matter covered by our patents and patent applications were the first to invent
      or the first to file patent applications for these inventions. In the event
      that
      a third party has also filed a patent on a similar invention, we may have to
      participate in interference proceedings declared by the United States Patent
      and
      Trademark Office to determine priority of invention, which could result in
      a
      loss of our patent position. Furthermore, we may not have identified all United
      States and foreign patents that pose a risk of infringement.





***The
      use of our technologies could potentially conflict with the rights of
      others.***





The
      manufacture, use or sale of our proprietary products may infringe on the patent
      rights of others. If we are unable to avoid infringement of the patent rights
      of
      others, we may be required to seek a license, defend an infringement action
      or
      challenge the validity of the patents in court. Patent litigation is costly
      and
      time consuming and may divert management’s attention and our resources. We may
      not have sufficient resources to bring these actions to a successful conclusion.
      In such case, we may be required to alter our products, pay licensing fees
      or
      cease activities. If our products conflict with patent rights of others, third
      parties could bring legal actions against us claiming damages and seeking to
      enjoin manufacturing and marketing of affected products. If these legal actions
      are successful, in addition to any potential liability for damages, we could
      be
      required to obtain a license in order to continue to manufacture or market
      the
      affected products. We may not prevail in any legal action and a required license
      under the patent may not be available on acceptable terms, if at
      all.





***We
      will be dependent on outside manufacturers in the event that we successfully
      develop our product candidates into commercial drug products; therefore, we
      will
      have limited control of the manufacturing process, access to raw materials,
      timing for delivery of finished products and costs. One manufacturer may
      constitute the sole source of one or more of our
      products.***





Third
      party manufacturers will manufacture all of our products, in the event that
      we
      successfully develop our product candidates into commercial drug products.
      Currently, certain of our contract manufacturers constitute the sole source
      of
      one or more of our products. If any of our existing or future manufacturers
      cease to manufacture or are otherwise unable to deliver any of our products
      or
      any of the components of our products, we may need to engage additional
      manufacturing partners. Because of contractual restraints and the lead-time
      necessary to obtain FDA approval of a new manufacturer, replacement of any
      of
      these manufacturers may be expensive and time consuming and may disrupt or
      delay
      our ability to supply our products and reduce our revenues.





Because
      all of our products, in the event that we successfully develop our product
      candidates into commercial drug products, will be manufactured by third parties,
      we have a limited ability to control the manufacturing process, access to raw
      materials, the timing for delivery of finished products or costs related to
      this
      process. There can be assurance that our contract manufacturers will be able
      to
      produce finished products in quantities that are sufficient to meet demand
      or at
      all, in a timely manner, which could result in decreased revenues and loss
      of
      market share. There may be delays in the manufacturing process over which we
      will have no control, including shortages of raw materials, labor disputes,
      backlog and failure to meet FDA standards. Increases in the prices we pay our
      manufacturers, interruptions in our supply of products or lapses in quality
      could adversely impact our margins, profitability and cash flows. We are reliant
      on our third-party manufacturers to maintain their manufacturing facilities
      in
      compliance with FDA and other federal, state and/or local regulations including
      health, safety and environmental standards. If they fail to maintain compliance
      with FDA or other critical regulations, they could be ordered to curtail
      operations, which would have a material adverse impact on our business, results
      of operations and financial condition.





We
      also
      rely on our outside manufacturers to assist us in the acquisition of key
      documents such as drug master files and other relevant documents that are
      required by the FDA as part of the drug approval process and post-approval
      oversight. Failure by our outside manufacturers to properly prepare and retain
      these documents could cause delays in obtaining FDA approval of our drug
      candidates.




***We
      are dependent on third parties to conduct clinical trials and non-clinical
      studies of our drug candidates and to provide services for certain core aspects
      of our business. Any interruption or failure by these third parties to meet
      their obligations pursuant to various agreements with us could have a material
      adverse effect on our business, results of operations and financial
      condition.***




We
      rely
      on third parties to conduct clinical and non-clinical studies of our drug
      candidates and provide us with other services. Such third party contractors
      are
      subject to FDA requirements. Our business and financial viability are dependent
      on the regulatory compliance of these third parties, and on the strength,
      validity and terms of our various contracts with these third parties. Any
      interruption or failure by these third party contractors to meet their
      obligations pursuant to various agreements with us may be outside of our control
      and could have a material adverse effect on our business, financial condition
      and results of operations.


19


***We
      currently have no internal sales and marketing resources and may have to rely
      on
      third parties in the event that we successfully commercialize our
      product.***





In
      order
      to market any of our products in the United States or elsewhere, we must develop
      internally or obtain access to sales and marketing forces with technical
      expertise and with supporting distribution capability in the relevant geographic
      territory. We may not be able to enter into marketing and distribution
      arrangements or find a corporate partner to market our drug candidates, and
      we
      currently do not have the resources or expertise to market and distribute our
      products ourselves. If we are not able to enter into marketing or distribution
      arrangements or find a corporate partner who can provide support for
      commercialization of our products, we may not be able to successfully
      commercialize our products. Moreover, any new marketer or distributor or
      corporate partner for our specific combinations, with whom we choose to contract
      may not establish adequate sales and distribution capabilities or gain market
      acceptance for our products.





***If
      we are unable to retain our key personnel or attract additional professional
      staff, we may be unable to maintain or expand our
      business.***





Because
      of the specialized scientific nature of our business, our ability to develop
      products and to compete will remain highly dependent, in large part, upon our
      ability to attract and retain qualified scientific, technical and commercial
      personnel. The loss of key scientific, technical and commercial personnel,
      especially our Chief Executive Officer, Juliet Singh, Ph.D. or the failure
      to
      recruit additional key scientific, technical and commercial personnel could
      have
      a material adverse effect on our business. While we have consulting agreements
      with certain key institutions and have an employment agreement with our Chief
      Executive Officer, we cannot assure you that we will succeed in retaining
      personnel or their services under existing agreements. There is intense
      competition for qualified personnel in the pharmaceutical industry, and we
      cannot assure you that we will be able to continue to attract and retain the
      qualified personnel necessary for the development of our business.





**Risks
      Relating to Our Industry**





***If
      we are unable to compete with other companies that develop rival products to
      our
      products, then we may never gain market share or achieve
      profitability.***





The
      pharmaceutical industry is intensely competitive, and we face competition across
      the full range of our activities. If we fail to compete successfully, our
      business, results of operations and financial condition could be adversely
      affected. Our competitors include brand name and generic manufacturers of
      pharmaceuticals specializing in transdermal drug delivery, especially those
      doing business in the United States. In the market for pain management products,
      our competitors include manufacturers of over-the-counter and prescription
      pain
      relievers. Because we are smaller than many of our national competitors, we
      may
      lack the financial and other resources needed to compete for market share in
      the
      pain management sector. Our other potential drug candidates will also face
      intense competition from larger and more well established pharmaceutical and
      biotechnology companies. Many of these competitors have significantly greater
      financial, technical and scientific resources than we do. In addition to product
      safety, development and efficacy, other competitive factors in the
      pharmaceutical market include product quality and price, reputation, service
      and
      access to scientific and technical information. If our products are unable
      to
      compete with the products of our competitors, we may never gain market share
      or
      achieve profitability.





***We
      may not be able to keep up with the rapid technological change in the
      biotechnology and pharmaceutical industries, which could make our products
      obsolete and reduce our potential revenues.***





Biotechnology
      and related pharmaceutical technologies have undergone and continue to be
      subject to rapid and significant change. Our future will depend in large part
      on
      our ability to maintain a competitive position with respect to these
      technologies. It is possible that developments by our competitors will render
      our products and technologies obsolete or unable to compete. Any products that
      we develop may become obsolete before we recover expenses incurred in developing
      those products, which may require that we raise additional funds to continue
      our
      operations.





***Our
      ability to generate revenues will be diminished if we fail to obtain acceptable
      prices or an adequate level of reimbursement from third-party
      payors.***





If
      we
      succeed in bringing a specific product to market, we cannot be certain that
      the
      products will be considered cost effective and that reimbursement from insurance
      companies and other third-party payors will be available or, if available,
      will
      be sufficient to allow us to sell the products on a competitive
      basis.


20


Significant
      uncertainty exists as to the reimbursement status of newly approved health
      care
      products. Third-party payors, including Medicare, are challenging the prices
      charged for medical products and services. Government and other third-party
      payors increasingly are attempting to contain health care costs by limiting
      both
      coverage and the level of reimbursement for new drugs and by refusing, in some
      cases, to provide coverage for uses of approved products for disease indications
      for which the FDA has not granted labeling approval. Third-party insurance
      coverage may not be available to patients for any products we discover and
      develop, alone or with collaborators. If government and other third-party payors
      do not provide adequate coverage and reimbursement levels for our products,
      the
      market acceptance of these products may be reduced.





***Changes
      in the healthcare industry that are beyond our control may be detrimental to
      our
      business.***





The
      healthcare industry is changing rapidly as the public, governments, medical
      professionals and the pharmaceutical industry examine ways to broaden medical
      coverage while controlling the increase in healthcare costs. Potential changes
      could put pressure on the prices of prescription pharmaceutical products and
      reduce our business or prospects. We cannot predict when, if any, proposed
      healthcare reforms will be implemented or their affect on our
      business.





**Risks
      Relating to the Common Stock**





****We
      are subject to financial reporting and other requirements for which our
      accounting and other management systems and resources may not be adequately
      prepared.***





We
      are
      subject to reporting and other obligations under the Securities Exchange Act
      of
      1934, as amended, (the “Exchange Act”) including the requirements of Section 404
      of the Sarbanes-Oxley Act. Section 404 required us to conduct an annual
      management assessment of the effectiveness of our internal controls over
      financial reporting which commenced with the annual report on Form 10-KSB for
      the Fiscal Year 2007 and will be conducted for the Fiscal Year 2008. Also,
      we
      will be required to obtain a report by our independent registered public
      accounting firm addressing these assessments commencing with our annual report
      on Form 10-K for the fiscal year ended December 31, 2009. These reporting and
      other obligations will place significant demands on our management,
      administrative, operational, and accounting resources. We anticipate that we
      will need to upgrade our systems; implement additional financial and management
      controls, reporting systems and procedures; implement an internal audit
      function; and hire additional accounting, internal audit and finance staff.
      If
      we are unable to accomplish these objectives in a timely and effective fashion,
      our ability to comply with our financial reporting requirements and other rules
      that apply to reporting companies could be impaired and we may not be able
      to
      obtain the independent registered public accounting firm certifications required
      by Section 404. Any failure to maintain effective internal controls could have
      a
      negative impact on our ability to manage our business and on our stock
      price.





***If
      we fail to maintain an effective system of internal control, we may not be
      able
      to report our financial results accurately or to prevent fraud. Any inability
      to
      report and file our financial results accurately and timely could harm our
      business and adversely impact the trading price of our common
      stock.***





Effective
      internal control is necessary for us to provide reliable financial reports
      and
      prevent fraud. If we cannot provide reliable financial reports or prevent fraud,
      we will not be able to manage our business as effectively, and our business
      and
      reputation with investors would be harmed. Any such inabilities to establish
      effective controls or loss of confidence would have an adverse affect on our
      financial condition, results of operation and access to capital. We have not
      performed an in-depth analysis to determine if past failures of internal
      controls exist, and may in the future discover areas of our internal control
      that need improvement.





***Public
      company compliance may make it more difficult to attract and retain officers
      and
      directors.***





The
      Sarbanes-Oxley Act and new rules subsequently implemented by the Securities
      and
      Exchange Commission have required changes in corporate governance practices
      of
      public companies. As a public company, we expect these new rules and regulations
      to increase our compliance costs and to make certain activities more time
      consuming and costly. We also expect that these new rules and regulations may
      make it more difficult and expensive for us to obtain director and officer
      liability insurance in the future and we may be required to accept reduced
      policy limits and coverage or incur substantially higher costs to obtain the
      same or similar coverage. As a result, it may be more difficult for us to
      attract and retain qualified persons to serve on our board of directors or
      as
      executive officers.





***Our
      stock price may be volatile.***





The
      market price of our common stock is likely to be highly volatile and could
      fluctuate widely in price in response to various factors, many of which are
      beyond our control, including the following:





·
            changes
                in the pharmaceutical industry and
                markets;


21





·
            competitive
                pricing pressures;·
            our
                ability to obtain working capital financing;·
            new
                competitors in our market;·
            additions
                or departures of key personnel;·
            limited
                “public float” in the hands of a small number of persons whose sales or
                lack of sales could result in positive or negative pricing pressure
                on the
                market price for our common stock;·
            sales
                of our common stock;·
            our
                ability to execute our business plan;·
            operating
                results that fall below expectations;·
            loss
                of any strategic relationship with our contract manufacturers and
                clinical
                and non-clinical research organizations;·
            industry
                or regulatory developments;·
            economic
                and other external factors; and·
            period-to-period
                fluctuations in our financial
                results.




In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.





***We
      have not paid dividends in the past and do not expect to pay dividends in the
      future. Any return on investment may be limited to the value of our common
      stock.***





We
      have
      never paid cash dividends on our common stock and do not anticipate doing so
      in
      the foreseeable future. The payment of dividends on our common stock will depend
      on earnings, financial condition and other business and economic factors
      affecting us at such time as our board of directors may consider relevant.
      If we
      do not pay dividends, our common stock may be less valuable because a return
      on
      your investment will only occur if our stock price appreciates.





***Our
      common stock may be deemed a “penny stock”, which would make it more difficult
      for our investors to sell their shares.***





Our
      common stock may be subject to the “penny stock” rules adopted under Section
      15(g) of the Exchange Act. The penny stock rules apply to companies whose common
      stock is not listed on The Nasdaq Stock Market or other national securities
      exchange and trades at less than $4.00 per share or that have tangible net
      worth
      of less than $5,000,000 ($2,000,000 if the company has been operating for three
      or more years). These rules require, among other things, that brokers who trade
      penny stock to persons other than “established customers” complete certain
      documentation, make suitability inquiries of investors and provide investors
      with certain information concerning trading in the security, including a risk
      disclosure document and quote information under certain circumstances. Many
      brokers have decided not to trade penny stocks because of the requirements
      of
      the penny stock rules and, as a result, the number of broker-dealers willing
      to
      act as market makers in such securities is limited. If we remain subject to
      the
      penny stock rules for any significant period, it could have an adverse effect
      on
      the market, if any, for our securities. If our securities are subject to the
      penny stock rules, investors will find it more difficult to dispose of our
      securities.





Furthermore,
      for companies whose securities are traded in the OTC Bulletin Board, it is
      more
      difficult (1) to obtain accurate quotations, (2) to obtain coverage for
      significant news events because major wire services generally do not publish
      press releases about such companies and (3) to obtain needed
      capital.





***Offers
      or availability for sale of a substantial number of shares of our common stock
      may cause the price of our common stock to decline.***





The
      sale
      by our stockholders of substantial amounts of our common stock in the public
      market or upon the expiration of any statutory holding period, under Rule 144,
      or upon expiration of lock-up periods applicable to outstanding shares, or
      issued upon the exercise of outstanding options or warrants, could create a
      circumstance commonly referred to as an “overhang” and in anticipation of which
      the market price of our common stock could fall. The existence of an overhang,
      whether or not sales have occurred or are occurring, also could make more
      difficult our ability to raise additional financing through the sale of equity
      or equity-related securities in the future at a time and price that we deem
      reasonable or appropriate.





***Our
      directors and executive officers can exert significant control over our business
      and affairs and may have actual or potential interests that may depart from
      those of our other stockholders.***





Our
      directors and executive officers together beneficially own a significant
      percentage of our issued and outstanding common stock, which percentage may
      increase in the event that they exercise any options or warrants to purchase
      shares of our common stock that they may hold or in the future are granted
      to
      them. The interests of such persons may differ from the interests of other
      stockholders. Such persons will have significant influence over all corporate
      actions requiring stockholder approval, irrespective of how our other
      stockholders may vote, including the following actions:


22





·
            the
                election of our directors;·
            amendment
                of our Certificate of Incorporation or By-laws; and·
            mergers,
                sales of assets or other corporate
                transactions.





Concentration
      of stock ownership among a few stockholders may discourage a potential acquirer
      from making a tender offer or otherwise attempting to obtain control of our
      company, which in turn could reduce our stock price or prevent our stockholders
      from realizing a premium over our stock price.




****Raising
      additional funds by issuing securities or through collaboration and licensing
      arrangements may cause dilution to existing stockholders, restrict operations
      or
      require us to relinquish proprietary rights.***




We
      may
      raise additional funds through public or private equity offerings or corporate
      collaboration and licensing arrangements. To the extent that we raise additional
      capital by issuing equity securities, our existing stockholders’ ownership will
      be diluted. In addition, if we raise additional funds through collaboration
      and
      licensing arrangements, it may be necessary to relinquish potentially valuable
      rights to our potential products or proprietary technologies, or grant licenses
      on terms that are not favorable to us. Further, we may not be able to obtain
      additional funding, particularly if the volatile conditions in the stock and
      financial markets, and more particularly the market for pharmaceutical company
      stocks, persist. If we are unable to obtain additional funding, we may be
      required to delay, further reduce the scope of or discontinue one or more of
      our
      research and development projects, sell the company or certain of its assets
      or
      technologies, or dissolve and liquidate the company’s assets.





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




Since
      July 1, 2008, we have issued or agreed to issue the following shares of our
      common stock that have not been registered under the Securities Act of 1933,
      as
      amended:




On
      October 27, 2008, we entered into an agreement with an investor relations firm
      (“IR FIRM”), pursuant to which the IR FIRM will provide certain investor
      relations and public relations services to us for a period of one year,
      beginning on November 1, 2008.  In exchange for such services, we
      issued 82,568 registered shares of our common stock, a portion of which is
      forfeitable, to the IR FIRM as a prepayment of services to be received, and
      beginning on or about March 1, 2008, we have agreed to issue an additional
      22,889 shares of unregistered common stock to the IR FIRM on a
      monthly basis thereafter for the term of the agreement. The offer, sale and
      issuance of these securities was made in reliance upon the exemption from
      registration requirements of the Securities Act provided for by Section 4(2)
      thereof for transactions not involving a public offering.




On
      November 5, 2008, we granted a stock option to an employee, to
      purchase 10,000 shares of our common stock at an exercise price of $1.10 per
      share, which was the closing bid price of our common stock on the date of
      grant. The issuance of these securities is exempt from registration in
      reliance on Rule 701 of the under the Securities Act of 1933 pursuant to
      compensatory benefit plans approved by our board of directors.




**Item
      6.****Exhibits**




**Exhibit**
              **Number**
            
            **Description**31.1*
            
            Section
                302 Certification of Principal Executive Officer31.2*
            
            Section
                302 Certification of Principal Financial Officer32.1*
            
            Section
                906 Certification of Principal Executive Officer and Principal Financial
                Officer







*
            Filed
                herewith.


23




**SIGNATURES**




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




Transdel
                Pharmaceuticals, Inc.Dated:
                November 14, 2008
            By:
            /s/ Juliet
                SinghJuliet
                Singh, Ph.D.
              Chief
                Executive Officer
              (Principal
                Executive Officer)


24




**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Description**31.1*
            
            Section
                302 Certification of Principal Executive Officer31.2*
            
            Section
                302 Certification of Principal Financial Officer32.1*
            
            Section
                906 Certification of Principal Executive Officer and Principal Financial
                Officer









*
            Filed
                herewith.


25