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

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and the related footnotes thereto.

Forward-Looking Statements

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

The following discussion and analysis of our financial condition is as of September 30, 2008. Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2007.

Business Overview

Unless otherwise indicated, we use "Opexa," "the Company," "we," "our" and "us" in this annual report to refer to the businesses of Opexa Therapeutics, Inc.

We are a biopharmaceutical company developing autologous cellular therapies to treat several major illnesses, including multiple sclerosis (MS) and diabetes. These therapies are based on our proprietary T-cell and adult stem cell technologies. The information discussed related to our product candidates is preliminary and investigative. Our product candidates are not approved by the Food and Drug Administration (FDA).

Our lead product, Tovaxin®, is a T-cell based therapeutic vaccine for MS licensed from the Baylor College of Medicine, which offers a unique and personalized approach to treating the disease by inducing an immune response against the autoimmune myelin peptide-reactive T-cells (MRTCs), which are believed to be responsible for the initiation of the disease process.

T-Cell Therapy

We have an exclusive worldwide license from Baylor College of Medicine to an individualized T-cell therapeutic vaccine, Tovaxin, which has recently been studied in a United States (U.S.) FDA Phase IIb human clinical trial to evaluate its safety and effectiveness in treating MS.

MS is the result of a person's own T-cells attacking the myelin sheath that coats the nerve cells of the central nervous system. Tovaxin consists of attenuated patient-specific myelin reactive T-cells (MRTCs) against peptides from one or more of the primary proteins on the surface of the myelin sheath (myelin basic protein, proteolipid protein, and myelin oligodendrocyte glycoprotein). Patient-specific MRTCs are expanded in culture with specific peptides identified by our proprietary test of the patient's peripheral blood. The cells are then attenuated by gamma irradiation, and returned to the patient as a subcutaneous injection. Although further testing is necessary, results from our initial human trials appear to indicate that these attenuated T-cells cause an immune response directed at the autoreactive T-cells in the patient's body, resulting in a reduction in the level of harmful T-cells.

We believe that our initial human trials suggest that Tovaxin safely induces the depletion and regulation of MRTCs, possibly stabilizing the disease, reducing the annualized relapse rate, and potentially improving the disability scores of patients. Patients treated in a 10-subject, open-label Phase I/II dose escalation clinical trial with Tovaxin have experienced minimal side effects and the "per protocol" analysis of patients treated with Tovaxin achieved a 90% reduction (p=0.0039) in annualized relapse rate (ARR). The group treated with the mid dose (30-45 x 106 attenuated T-cells) achieved a 100% reduction in ARR. The Phase IIb trial was conducted with the mid dose.

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In a one-year, 8-subject extension clinical trial of relapsing remitting and secondary progressive multiple sclerosis subjects, the "per-protocol" analysis of Tovaxin therapy achieved a 92% (p=0.0078) reduction ARR in subjects who received two treatment doses of 30-45 x 106 attenuated T-cells eight weeks apart and were monitored for an additional 44 weeks. Subjects in the extension study had previously been treated an average of approximately 5 years earlier at Baylor College of Medicine under the direction of the inventor of Tovaxin Jingwu Zhang, M.D., Ph.D with an early version of the T-cell vaccine.

An analysis of the second year open-label clinical retreatment studies of the "intent to treat" population of 22 patients who participated in the Phase I/II studies showed that, as a group, 73% remained relapse free after two years and 86% demonstrated no worsening of disease (27% of these showed sustained improvement). Additionally, there was an overall decrease in the ARR of 82% (from 1.38 to 0.21 relapses/patient/year). Each of these endpoints was compared to the patient's own baseline reading, taken prior to enrollment in the trials.

We recently completed a Phase IIb study in 150 patients in a multi-center, randomized, double blind, and placebo-controlled study in patients with relapsing remitting multiple sclerosis or clinically isolated syndrome. Top-line results from the study demonstrated a positive trend in the reduction in annualized relapse rate (ARR) for patients treated with Tovaxin as compared to placebo. However, this finding did not achieve statistical significance. In addition, the study did not achieve statistical significance with its primary endpoint, the cumulative number of gadolinium-enhanced brain lesions.

Top-line results from the study showed that Tovaxin-treated patients experienced an ARR of 0.214 as compared to 0.339 for placebo-treated patients. Despite the low relapse rate in the placebo arm, this still represented a 37 percent decrease in ARR for Tovaxin as compared to placebo in the general population. Additionally, in the group of patients who had an ARR > 1 in the one year prior to study entry, Tovaxin demonstrated a 55 percent reduction in ARR compared to placebo.

The study also demonstrated that Tovaxin was safe and well tolerated with no serious adverse events related to treatment. The most common adverse event related to Tovaxin was mild injection site reaction. We believe that this favorable safety profile may be an important advantage as patient compliance represents a significant challenge due to serious side effects associated with many currently available MS treatments.

Stem Cell Therapy

We have developed a proprietary adult stem cell technology to produce monocyte-derived stem cells (MDSCs) from blood. These MDSCs can be derived from a patient's monocytes, expanded in our laboratories, and then administered to the same patient. We believe that because this is an autologous therapy, there should be no immunological problems. Normally, allogenic cells trigger host immune responses and require the use of anti-rejection drugs.

Our multi-potent stem cell is derived from peripheral blood monocytes which when cultured under defined conditions are able to further differentiate into several cellular lineages. Molecular biology and cellular analysis studies have shown that these MDSCs have specific markers that distinguish them from other stem cells. In addition these studies have also shown a time-dependence for the expression of these markers during the growth and differentiation of MDSCs. In vitro experiments with MDSCs have shown their capacity to differentiate as hematopoietic, epithelial, endothelial, endocrine and neuronal cells. Our main focus is the further development of this monocyte-derived stem cell technology as a platform for the in vitro generation of highly specialized cells for potential application in autologous cell therapy for patients with diseases such diabetes mellitus and cardiovascular disease.

Other Opportunities

We may conduct basic research to determine the potential use of stem cells and differentiated cells in other indications, such as macular degeneration, stroke, myocardial infarction, wound healing and Parkinson's disease. We will attempt to partner or sublicense some of these indications if they are not pursued for internal development. For those indications where we believe we can participate commercially, we also desire to partner in key commercial markets outside of the U.S.

Critical Accounting Policies

General

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's significant accounting policies are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. The Company has not materially changed its significant accounting policies.

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Results of Operations and Financial Condition

Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007

Net Sales. We recorded no sales for the three months ended September 30, 2008 and 2007.

Research and Development Expenses. Research and development expense was approximately $2.4 million for the three months ended September 30, 2008, compared to approximately $3.2 million for the three months ended September 30, 2007. The decrease in expenses was primarily due to a wind down of costs of conducting the Phase IIb clinical trial for Tovaxin recorded in 2008 offset in part by costs associated with enrollment of the one year Phase IIb extension study of Tovaxin. We have made and expect to continue to make substantial investments in research and development in order to develop and market our technology. We expense research and development costs as incurred. Acquired research and development that has no alternative future use is expensed when acquired. Property, plant and equipment for research and development that has an alternative future use is capitalized and the related depreciation is expensed. We expect our research and development expense to increase as we continue to invest in the development of our technology.

General and Administrative Expenses. Our general and administrative expense was approximately $0.7 million for the three months ended September 30, 2008, as compared to approximately $0.8 million, for the three months ended September 30, 2007. The decrease in expenses is primarily due to a decrease in stock compensation expense in the current period. We anticipate increases in general and administrative expenses as we continue to develop and expand our product platforms.

Interest Expense. Interest expense was $4,553 for the three months ended September 30, 2008, compared to $4,731 for the three months ended September 30, 2007

Interest Income. Interest income was $23,681 for the three months ended September 30, 2008 compared to $102,292 for the three months ended September 30, 2007. The decrease was due to the reduction in cash balances that were available for investment in cash equivalent investments and a reduction in interest rates.

Net loss. We had a net loss for the three months ended September 30, 2008, of approximately $3.1 million, or $0.28 per share (basic and diluted), compared with a net loss of approximately $2.4 million or $0.35 per share (basic and diluted), for the three months ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared with the Nine Months Ended September 30, 2007

Net Sales. We recorded no sales for the nine months ended September 30, 2008 and 2007.

Research and Development Expenses. Research and development expense was approximately $7.1 million for the nine months ended September 30, 2008, compared to approximately $10.1 million for the nine months ended September 30, 2007. The decrease in expenses was primarily due to a decrease in activities related to the Phase IIb clinical trial for Tovaxin in 2008 as compared to 2007 and a reduction in stock compensation expense recorded in 2008.

General and Administrative Expenses. Our general and administrative expense was approximately $2.7 million for the nine months ended September 30, 2008, as compared to approximately $2.6 million for the nine months ended September 30, 2007. The increase in expenses is primarily due to an increase in stock compensation expense during the current period.

Interest Expense. Interest expense was $15,573 for the nine months ended September 30, 2008, compared to $10,875 for the nine months ended September 30, 2007

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Interest Income. Interest income was $92,885 for the nine months ended September 30, 2008 compared to $423,086 for the nine months ended September 30, 2007. The decrease was due to the reduction in cash balances that were available for investment in cash equivalent investments and a reduction in interest rates.

Net loss. We had a net loss for the nine months ended September 30, 2008, of approximately $9.9 million or $0.99 per share (basic and diluted), compared with a net loss of approximately $10.8 million or 1.62 per share (basic and diluted), for the nine months ended September 30, 2007.

Liquidity and Capital Resources

Changes in cash flow. Cash used in operations for the nine month period ended September 30, 2008 was approximately $7.8 million as compared to cash used by operations of approximately $6.2 million for the nine months ended September 30, 2007. The increase in cash used in operations is primarily due to the maturity of approximately $2.9 million in marketable securities in 2007 and its reclassification to cash and cash equivalents. Cash used in investing activities for the nine month period ended September 30, 2008 was approximately $31,000, as compared to approximately $148,000 for the nine months ended September 30, 2007. The decrease was due to a decrease in equipment purchases. Cash provided from financing activities for the nine month period ended September 30, 2008 was approximately $9.2 million,, as compared to approximately $126,000 for the nine months ended September 30, 2007. The increase was due to the proceeds from the February 2008 public offering and the August 2008 private placement.

Liquidity. Historically, we have financed its operations primarily from the sale of its debt and equity securities. As of September 30, 2008, we had cash and cash equivalents of approximately $4.0 million.

Our financing activities generated approximately $9.3 million in net proceeds for the nine months ended September 30, 2008 and resulted from the a public offering in February 2008 of 3,500,000 shares of common stock at a price to the public of $2.00 per share and 4,025,000 Series E warrants to purchase shares of common stock exercisable at $2.00 per share at a price of $0.15 per warrant; and a private placement in August 2008 in which 2,003,874 shares of common stock and warrants to purchase 2,003,874 shares of common stock (the "Unit") at an initial exercise price of $1.78 per share were issued. The purchase price paid by non-affiliate investors was $1.48 for each Unit and affiliate investors paid $1.655 for each Unit.

Our current burn rate is approximately $900,000 per month. Our capital resources at September 30, 2008, will support our operations at current levels through the fourth quarter of 2008. We will need to raise additional capital in the fourth quarter of 2008 to fund our business plan and support our operations beyond the beginning of the first quarter of 2009. As our prospects for funding, if any, develop during the next quarter, we will assess our business plan and make adjustments accordingly. We are actively seeking strategic partnership or collaboration arrangements with companies for our technologies. While we have successfully funded our operations to date by attracting additional investors in our equity, there is no assurance that our capital raising efforts will be able to attract additional necessary capital for our operations. If we are unable to obtain additional funding for operations at any time now or in the future, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations.

Off-Balance Sheet Arrangements

As of September 30, 2008, we had no off-balance sheet arrangements.

Recent Accounting Pronouncements

For the period ended September 30, 2008, there were no other changes to our critical accounting policies as identified in our annual report of Form 10-K for the year ended December 31, 2007.