Summary of URIGEN PHARMACEUTICALS, INC.

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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "intends," "projects," "will," and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" of 10-K reports filed with the Securities and Exchange Commission and those described from time to time in our future reports filed with the Securities and Exchange Commission.

CORPORATE OVERVIEW

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

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

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

BUSINESS

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

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

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

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

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

Urigen's two clinical stage products target significant unmet medical needs with meaningful market opportunities in urology:

· URG101, a bladder instillation for Painful Bladder Syndrome/Interstitial Cystitis

· URG301, a female urethral suppository for urethritis and nocturia

URG101 targets Painful Bladder Syndrome/Interstitial Cystitis (PBS) which affects approximately 10.5 million men and women in North America. URG101 is a unique, proprietary combination therapy of components that is locally delivered to the bladder for rapid relief of pain and urgency as demonstrated in Urigen's positive Phase II Pharmacodynamic Crossover study.

URG301 targets urethritis and nocturia, typically seen in overactive bladder patients. URG301 is a proprietary dosage form of an approved drug that is locally delivered to the female urethra. Urethritis pain commonly occurs with urinary tract infections (UTIs) which cause more than 8 million visits to the doctor annually. Nocturia, or nighttime urgency and frequency, is secondary to overactive bladder and can severely impact quality of life by disrupting the normal sleep pattern.

The novel urethral suppository platform presents excellent opportunities for effective product lifecycle management. As market penetration of URG301 deepens, line extensions will be available through alternate generic drugs as well as new chemical entities. To further expand the pipeline, the Company will identify and prioritize both marketed and development-stage products for acquisition. The commercial opportunity for such candidates will benefit significantly from the synergy provided by URG101 and URG301 in the urology marketplace.

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

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, except for the impact of FASB Staff Position (FSP) 157-2. FSP 157-2 deferred the adoption of SFAS 157 for non financial assets and liabilities until years beginning after November 15, 2008. We are still evaluating the impact this standard will have on our financial position and/or results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities" ("SFAS 159"). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in their statement of operations at each subsequent reporting date on items for which the fair value option has been elected. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires additional information that will help investors and other financial statement users to understand the effect of an entity's choice to use fair value on its results of operations. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently assessing the impact that the adoption of SFAS 159 may have on its financial position, results of operations and/or cash flows.

In June 2007, the FASB ratified a consensus opinion reached by the EITF on EITF Issue 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities" ("EITF 07-3"). The guidance in EITF 07-3 requires us to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, we would be required to expense the related capitalized advance payments. EITF 07-3 is effective for fiscal years beginning after December 15, 2007 and is to be applied prospectively to new contracts entered into on or after the commencement of that fiscal year. Early adoption is not permitted. Retrospective application of EITF 07-3 also is not permitted. We intend to adopt EITF 07-3 effective July 1, 2008 and do not expect the pronouncement to have a material effect on our consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC's views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of the expected life of stock options in accordance with SFAS 123R. SAB 110 is effective for us beginning in the first quarter of fiscal 2009. The adoption of SAB 110 is not expected to have a significant impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. This statement is effective for our fiscal year beginning July 1, 2009. We are currently evaluating the impact of adopting SFAS No. 141R on our consolidated financial statements, which is dependent upon the future acquisition activities.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 will change the accounting and reporting for minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity in the financial statements and separate from the parent's equity, and it eliminates "minority interest" accounting in results of operations with earnings/losses attributable to non-controlling interests reported as part of consolidated earnings/losses. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of non-controlling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. We are currently assessing the impact that SFAS 160 may have on our financial position, results of operations, and cash flows.

In December 2007, the FASB issued EITF Issue 07-1, "Accounting for Collaborative Arrangements" ("EITF 07-1"). Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. EITF 07-1 provides indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. EITF 07-1 also expanded disclosure requirements about collaborative arrangements. Conclusions within EITF 07-1 are to be applied retrospectively. EITF 07-1 is effective for fiscal years beginning on or after December 15, 2008. We are currently assessing the impact that EITF 07-1 may have on our financial position, results of operations, and cash flows.

Critical Accounting Policies

Clinical trial expenses

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

Intangible Assets

Intangible assets include the intellectual property and other patented rights acquired. Consideration paid in connection with acquisitions is required to be allocated to the acquired assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on the Company's estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, the Company is required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. The Company uses the straight-line method to expense long-lived assets (including identifiable intangibles). The intangible assets were recorded based on their estimated fair value and are being amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents.

Contractual Obligations and Notes Payable

In November 2007, the Company entered into an agreement with M & P Patent AG (Mattern) under which we licensed worldwide rights to Mattern's intra-nasal testosterone product for men. The Mattern patent and intellectual property rights were not placed in service and were not being amortized, nor included in future amortization estimates, as of December 31, 2007. At December 31 2007, the Company had recorded a license payment to Mattern of one million shares of Urigen common stock and accrued $1,500,000 in milestone payments. The Company terminated its license agreement with Mattern effective March 31, 2008. Accordingly, the accrued liability and intangible asset has been reversed and a general and administrative impairment expense of $99,750 has been recorded, which represents the fair value of the one million shares of restricted stock that were issued. The Company believes there will be no further payments to Mattern as a result of this transaction.

On January 31, 2008 the Company entered into an agreement with Redington Inc. to provide investor relations services. Under the terms of the agreement Redington received subscribed common stock in the amount of 380,000 shares with an initial estimated fair value of $39,710. The agreement provides warrants for Redington Inc. to purchase additional common stock at $0.15 per share. The number of warrants to be issued is contingent upon the increase in value of the Company's stock from an initial closing price of $0.12 per share on January 31, 2008 with a maximum number of approximately 1 million warrants issuable under the agreement.

On November 17, 2006, the Company entered into an unsecured promissory note with C. Lowell Parsons, a director of the Company, in the amount of $200,000. Under the terms of the note, the Company is to pay interest at a rate per annum computed on the basis of a 360-day year equal to 12% simple interest. The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of the Merger (as defined in the Agreement and Plan of Merger, dated as of October 5, 2006, between the Company and Valentis, Inc., or
(ii) two (2) calendar years from the note issuance date (in either case, the "Due Date"). All amounts due under the note agreement are still outstanding as of June 30, 2008. Also, the Company had issued 11,277 shares of Urigen N.A. Series B preferred stock, in connection with this note agreement, which was converted to common stock at the time of the Merger. Interest expense paid was $8,000 and $12,933 for the years ended June 30, 2008 and 2007, respectively. At June 30, 2008 and 2007, the Company owed accrued interest expense of $18,000 and $2,000, respectively.

On January 5, 2007, the Company entered into an unsecured promissory note with KTEC Holdings, Inc. in the amount of $100,000. Tracy Taylor who is the Company's Chairman of the Board of Directors, is President and Chief Executive Officer of the Kansas Technology Enterprise Corporation (KTEC). Under the terms of the note, the Company is to pay interest at a rate of 12% per annum until paid in full, with interest compounded as additional principal on a monthly basis if said interest is not paid in full by the end of each month. Interest shall be computed on the basis of a 360 day year. All amounts owed are due and payable by the Company at its option, without notice or demand, on the earlier of (i) ninety (90) days after consummation of the Merger as defined in the Agreement and Plan of Merger, dated as of October 5, 2006, between the Company and Valentis, Inc., or (ii) two (2) calendar years from the note issuance date (in either case, the "Due Date"). Also, the Company had issued 5,639 shares of Urigen N.A. Series B preferred stock in connection with this note agreement, which was converted to common stock at the time of the Merger. If this note is not paid when due, interest shall accrue thereafter at the rate of 18% per annum. All principal amounts due under the note agreement are still outstanding as of June 30, 2008. Interest paid was $4,088 and $4,945 for the years ended June 30, 2008 and 2007, respectively. At June 30, 2008 and 2007, the Company owed accrued interest expense of $9,536 and $1,000, respectively.

On June 25, 2007, Valentis, Inc., upon approval of its Board of Directors, issued Benjamin F. McGraw, III, Pharm.D., who was the Company's Chief Executive Officer, President and Treasurer prior to the Merger, a promissory note in the amount of $176,000 in lieu of accrued bonus compensation owed to Dr. McGraw This note was assumed by the Company pursuant to the Merger. The note bears interest at the rate of 5.0% per annum, may be prepaid by the Company in full or in part at anytime without premium or penalty and was due and payable in full on December 25, 2007. On December 25, 2007, the note was extended through June 25, 2008. On August 11, 2008, the note was extended through December 25, 2008. Dr. McGraw is currently a member of the Board of Directors. At June 30, 2008 and June 30, 2007, the Company owed accrued interest expense of $8,800 and $0, respectively.

Off Balance Sheet Arrangements

At June 30, 2008 and 2007, the only off balance sheet arrangements were the operating sublease payments of $3,211 and $2,683 per month, respectively, to EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, M.D. Chief Executive Officer of the Company. The fees are for rent, telephone and other office services which are based on estimated fair market value.

Results of Operations

Fiscal Years Ended June 30, 2008 and 2007

Revenue

There were no operating revenues for the years ended June 30, 2008 and 2007.

Research and Development Expenses

Research and development expenses were $684,304 and $758,081 for the years ended June 30, 2008 and 2007, respectively. The decrease was primarily due to decreases in clinical trial expenses overall in the year ended June 30, 2008. We expect research and development expenses to increase in future quarters as we continue our clinical studies of our two product lines and pursue our strategic opportunities.

General and Administrative Expenses

General and administrative expenses were $2,761,535 and $2,175,908 for the years ended June 30, 2008 and 2007, respectively. The increase was due to increased legal and accounting fees in connection with the Merger, convertible preferred stock transaction, and public company operating expenses. We expect general and administrative expenses to increase going forward, in the long term, as we proceed to move our technologies forward toward commercialization.

Sales and Marketing Expenses

Sales and marketing expenses were $264,269 and $295,655 for the years ended June 30, 2008 and 2007, respectively. The decrease is mainly due to decreased market research activities. We expect sales and marketing expenses to increase going forward as we proceed to move our technologies forward toward commercialization.

Interest and Other Income and Expenses, net

Interest income was $18,094 and $14,104 for the years ended June 30, 2008 and 2007, respectively. The increase in interest income is mainly due to the higher average cash balances during the year due to current year equity financing. We do not expect interest income to increase unless the Company is able to raise additional capital through an equity financing or a partnering arrangement.

Interest expense was $2,235,286 and $36,496 for the years ended June 30, 2008 and 2007, respectively. The increase is due primarily to the $2,100,000 of non-cash interest expense recorded in conjunction with the Series B convertible preferred stock which was classified as a liability at issuance. This level of interest expense is not expected to reoccur.

Other income and expenses net was $1,082,842 and $0 for the years ended June 30, 2008 and 2007, respectively. The increase is due to $200,000 in other income related to technology licensing and mark-to-market valuations on Series B preferred stock classified as a liability during the year and was offset by penalties on unpaid accrued payroll taxes and liquidated damages paid associated with Series B preferred stock registration rights agreement. This level of income and expense net is not expected to reoccur.

Liquidity and Capital Resources

As discussed elsewhere in this report, including further below, we have received a report from our independent registered public accounting firm regarding the consolidated financial statements for the fiscal year ended June 30, 2008 that includes an explanatory paragraph stating that the financial statements have been prepared assuming we will continue as a going concern. The explanatory paragraph and note 2 to our consolidated financial statements state the following conditions, which raise substantial doubt about our ability to continue as a going concern: we have incurred operating losses since inception, including a net loss of $4.84 million for the fiscal year ended June 30, 2008, negative cash flows from operations of $2.69 million for the fiscal year ended June 30, 2008, and our accumulated deficit was $9.64 million at June 30, 2008. We anticipate requiring additional financial resources to enable us to fund the completion of our development plan. These funds may be derived from the sale of a current license, licensing and distribution agreements outside the U.S., corporate partnerships, and/or additional financing.

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

The Company currently subleases office facilities on a month-to-month basis at a rate of $3,211 per month from EGB Advisors, LLC. EGB Advisors, LLC is owned solely by William J. Garner, President and Chief Executive Officer of Urigen Pharmaceuticals, Inc. The sublease is terminable upon 30 days' notice.

Net cash used in operating activities for the year ended June 30, 2008 was approximately $2.69 million, which primarily reflected the net loss of $4.84 million, adjusted for non-cash preferred Series B discount and imputed interest expense of $2.14 million, other non cash expenses of $234,560 and the net increase in operating assets and liabilities of approximately $705,000, offset by the change in the fair value of the Series B convertible preferred stock liability of $949,895. Net cash used in operating activities for the year ended June 30, 2007 was approximately $1.23 million, which primarily reflected the net loss of $3.25 million, adjusted for non-cash expenses of $1.04 million and the net increase in operating assets and liabilities of approximately $970,000.

Net cash used in used in investing activities was approximately $4,000 and $2,700 for the fiscal year ended June 30, 2008 and 2007, respectively, which primarily reflected the purchase of equipment.

Net cash provided by financing activities was approximately $2.64 million for the fiscal year ended June 30, 2008, which primarily reflected the $2.10 million receipt of proceeds from the issuance of Series B preferred stock and $318,000 in proceeds from common stock subscriptions. Net cash provided by financing activities was approximately $767,000 for the fiscal year ended June 30, 2007, which consisted primarily of net proceeds received from private placements of Urigen N.A. Series B preferred stock and notes payable.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Our consolidated financial statements and notes thereto appear on pages 53 to 87 . . .