The statements contained in this Quarterly Report on Form 10-Q that are not historical are 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, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. We intend that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as we "expect," "anticipate," "believe," and "intend" and similar expressions to identify forward-looking statements. A number of important factors could, individually or in the aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statement.

Overview

We are a development stage pharmaceutical company that seeks to acquire and develop innovative products for the treatment of a variety of human diseases. Our strategy is to develop technologies that address important unmet medical needs or offer improved, cost-effective alternatives to current methods of treatment. Specifically, we are developing prescription products for multiple autoimmune disorders including rheumatoid arthritis, psoriasis, inflammatory bowel disease and cancer along with our development of a novel therapeutic agent for the treatment of neurogenic orthostatic hypotension and related conditions and diseases.

We are currently focusing the majority of our drug development resources on two major research and development projects: droxidopa for symptomatic neurogenic orthostatic hypotension and other potential indications; and our antifolate compounds, including CH-1504, for rheumatoid arthritis. Droxidopa, our most advanced investigational product candidate, is currently being studied in double-blind pivotal Phase III trials under a Special Protocol Assessment, or SPA, with the FDA, designed to compare droxidopa to placebo at multiple sites in North America, Europe and Australia. Droxidopa is also being studied in a double-blind, placebo controlled Phase II clinical study for the treatment of intradialytic hypotension. In addition, a Phase II trial of droxidopa, alone and in combination with carbidopa, for the treatment of fibromyalgia is anticipated to begin in November 2008, under approval from the United Kingdom's Medicines and Healthcare Products Regulatory Agency. Our lead antifolate candidate, CH-1504, is being investigated for the treatment of rheumatoid arthritis in a Phase II head-to-head clinical trial to compare its efficacy and tolerability against methotrexate, currently the leading antifolate treatment and standard of care for a broad range of abnormal cell proliferation diseases. We also continue to review the potential development opportunities in our I-3D portfolio of therapeutics targeting immune-mediated inflammatory disorders and transplantation that is complementary to our antifolates program.

Since inception we have focused primarily on organizing and staffing our company, negotiating in-licensing agreements with our partners, acquiring, developing and securing our proprietary technology, participating in regulatory discussions with the FDA, the EMEA and other regulatory agencies and undertaking pre-clinical trials and clinical trials of our product candidates. We are a development stage company and have generated no revenue since inception. We do not anticipate generating any revenue until and unless we successfully obtain approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. However, developing pharmaceutical products is a lengthy and expensive process. Even if we do not encounter unforeseen safety issues or timing or other delays during the course of developing our currently licensed product candidates, we would not anticipate receiving regulatory approval to market such products until, at the earliest, 2010. Currently, development expenses are being funded with proceeds from equity financings completed in December 2004, February 2006, March 2007 and November 2007. To the extent we are successful in acquiring additional product candidates for our development pipeline and as we move our products into more extensive clinical trials, our need to finance research and development costs will continue to increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of the products.

Critical Accounting Policies

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1 to the financial statements. The following accounting policies are critical in fully understanding and evaluating our reported financial results.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments. Management bases estimates on historical experience and on various other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ from these estimates under different assumptions or conditions.

Research and Development Expense. Research and development expenditures are expensed as incurred. We often contract with third parties to facilitate, coordinate and perform agreed upon research and development activities. To ensure that research and development costs are expensed as incurred, we measure expense based on work performed for the underlying contract, typically utilizing a percentage-of-completion approach, and record prepaid assets or accrue expenses on a monthly basis for such activities based on the measurement of liability from expense recognition and the receipt of invoices.

These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that we prepay fees for future milestones, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most fees are incurred throughout the contract period and are expensed based on their percentage of completion at a particular date.

These contracts generally include pass-through fees. Pass-through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs including shipping and printing fees. Because these fees are incurred at various times during the contract term and they are used throughout the contract term, we record a monthly expense allocation to recognize the fees during the contract period. Fees incurred to set up the clinical trial are expensed during the setup period.

Costs related to the acquisition of technology rights and patents for which development work is still in process are expensed as incurred and considered a component of research and development costs.

Accounting for Stock-Based Compensation. We account for our stock options and warrants using the fair value method as prescribed in Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), Share-based Payment. SFAS 123R defines a fair value based method of accounting for stock options or similar equity instruments. In determining the fair value of the equity instrument, we consider, among other factors, (i) the risk-free interest rate, (ii) the expected life of the options granted, (iii) the anticipated dividend yield,
(iv) the estimated future volatility of the underlying shares and
(v) anticipated future forfeitures. To determine the risk-free interest rate, we utilize the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our awards. We estimate the expected life of the options granted based on anticipated exercises in future periods assuming the success of our business model as currently forecasted. The expected dividends reflect our current and expected future policy for dividends on our common stock. To determine the expected stock price volatility for our stock options, we examine historical volatilities for industry peers closely related to the current status of our business, but with sufficient trading history to be able to determine volatility. Utilizing a weighted average calculation to account for the limited price history of our stock, we analyze the historical volatility of our stock price in combination with the historical volatility of the industry peers selected to determine an appropriate volatility factor. We plan to continue to analyze the expected stock price volatility and expected term assumption at each grant date as more historical data for our common stock becomes available. Given the limited service period for our current employees and the senior nature of the roles for those employees, we had estimated that we would experience no forfeitures or that our rate of forfeiture would be immaterial to the recognition of compensation expense for those options currently outstanding. Our results of operations include non-cash compensation expense as a result of the issuance of stock option grants utilizing this method. We expect to record additional non-cash compensation expense in the future, which might be significant. Due to the limited amount of historical data available to us, particularly with respect to stock-price volatility, employee exercise patterns and forfeitures, actual results could differ from our assumptions.

Results of Operations

Three Months Ended September 30, 2008 and 2007

The table below sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations and other pertinent financial
and operating data.

(in thousands, except percentages)



                                         For the three        For the three
                                         months ended         months ended
                                         September 30,        September 30,           $               %
                                             2008                 2007             Increase         Change
Research and development expense        $         7,041      $         2,652      $    4,389           165 %
Sales and marketing expense                         295                  236              59            25 %
General and administrative expense                  941                  662             279            42 %
Interest income                                     306                  307              (1 )           0 %
Other expense                                     2,110                   -            2,110           n/a

Research and development expenses increased significantly in 2008 primarily related to the advancement of our drug candidates into more extensive clinical testing programs and compensation costs related to the addition of new personnel during 2008 and the latter part of 2007. As a percentage of operating expenses, research and development costs increased to 85% for the period ended September 30, 2008 from 75% for the third quarter of 2007. During 2008, we continued our development activities, including manufacturing, pre-clinical, Phase I and Phase II activities, for our portfolio of antifolates compounds. A component of our costs in 2008 is related to the ongoing clinical trial for CH-1504 in rheumatoid arthritis and investigational activities for follow-on molecules in our portfolio of antifolates. We also incurred significant costs during 2008 for our manufacturing, formulation, pre-clinical, Phase II and, particularly, Phase III activities for droxidopa. Related to these activities, we incurred a $0.2 million increase in compensation and related expenses.

From inception through September 30, 2008, cumulative research and development expenses related to our major research and development projects were approximately $46.4 million and are detailed as follows:

(in thousands)

                                     Through September 30,
                                              2008
                       Antifolates   $               21,916
                       Droxidopa                     22,024
                       I-3D                           2,500

                                     $               46,440

Droxidopa. From inception through September 30, 2008, we had spent approximately $22.0 million in research and development expenses on droxidopa. Assuming we do not enter into an out-license, development or other collaborative agreement with respect to this compound, we estimate that subsequent to that date we will need to incur approximately $22.0 million more to complete our Phase III clinical trials and other development work through to final approval of an NDA from the FDA. Assuming its approval for marketing, we currently estimate launch of this product and initial sales or royalty revenue from it no sooner than 2010. In addition to the spending requirements above, we plan spending of approximately $4.9 million in 2008 for clinical proof of concept studies in other indications, our once-daily formulation and other droxidopa related programs.

Antifolates. From inception through September 30, 2008, we had spent approximately $21.9 million in research and development expenses on CH-1504 and other antifolates. We currently intend to seek a partner to assist us in the development of this compound before or soon after the completion of Phase II proof-of-concept studies for rheumatoid arthritis. We estimate that, extending into early 2009, we will need to incur approximately $4.8 million more for the trials related to proof-of-concept and the development of other antifolate compounds. Assuming CH-1504 is approved for marketing, we currently estimate launch of this product and initial royalty revenue from it no sooner than 2012.

I-3D Portfolio. From inception through September 30, 2008, we had spent approximately $2.5 million in research and development expenses on the I-3D portfolio of compounds. We have been conducting compound discovery work on the portfolio to try and indentify one or more lead compounds, and have yet to estimate the amount of expenses it would take to move beyond this development stage to potential revenue generation. For 2008, our additional discovery costs are not expected to exceed $0.1 million.

Sales and marketing expenses. Although we had no formalized selling activities, in 2008 we incurred sales and marketing expenses primarily related to compensation and related costs, the costs of a pricing study for droxidopa and legal expenses related to our intellectual property. Similar expenses were incurred in 2007, except for the costs of the pricing study, and also included significant costs for market research, including a review of possible trademarks for droxidopa.

General and administrative expenses. The $0.3 million increase in general and administrative expenses primarily consists of a $0.1 million increase in compensation and related expenses. The remainder of the increase consists of increases in other categories of spending during the period including office rent and professional fees. Franchise tax expense also increased during 2008 due to our 2007 issuances of stock for financing purposes and the related increase in our stockholders' equity.

Interest income. During 2007, we raised approximately $57.2 million, net of expenses, through the sale of our common stock in two financing transactions. As such, our cash of approximately $19.6 million and short-term investments of approximately $26.1 million at par value at September 30, 2008 reflect our cash and short term investments at December 31, 2007 offset by approximately $16.9 million used to fund operating activities during the year. However, even with the increased cash and investment level, interest earned remained flat when compared to the same three-month period of last year. This reflects general reductions in interest rates and the shift of our non-ARS holdings into Treasury funds.

Other expense. During the three months ended September 30, 2008, we recorded an other-than-temporary impairment charge related to our investment in auction rate securities, or ARS, of approximately $2.1 million.

Nine Months Ended September 30, 2008 and 2007

The table below sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations and other pertinent financial
and operating data.

(in thousands, except percentages)



                                         For the nine         For the nine
                                         months ended         months ended
                                         September 30,        September 30,           $            %
                                             2008                 2007            Increase       Change
Research and development expense        $        19,915      $         7,975      $  11,940         150 %
Sales and marketing expense                       1,177                1,055            122          12 %
General and administrative expense                2,798                2,034            764          38 %
Interest income                                   1,493                  823            670          81 %
Other expense                                     3,676                   -           3,676         n/a

Research and development expenses increased in 2008 primarily related to the advancement of our drug candidates into more extensive clinical testing programs and compensation costs related to the addition of new personnel during 2008 and the latter part of 2007. As a percentage of operating expenses, research and development costs increased to 83% for the nine months ended September 30, 2008 from 72% for the same period of 2007. During 2008, we continued our development activities, including manufacturing, pre-clinical, Phase I and Phase II activities, for our portfolio of antifolates compounds. A component of our costs in 2008 is related to the ongoing clinical trial for CH-1504 in rheumatoid arthritis and investigational activities for follow-on molecules in our portfolio of antifolates. We also incurred significant costs during 2008 for our manufacturing, formulation, pre-clinical, Phase II and, particularly, Phase III activities for droxidopa. Related to these activities, during the nine months ended September 30, 2008, we incurred a $0.5 million increase in compensation and related expenses.

Sales and marketing expenses. Although we had no formalized selling activities, in 2008 we incurred sales and marketing expenses primarily related to compensation and related expenses, the printing of promotional materials, the costs of a pricing study for droxidopa and legal expenses related to our intellectual property. During 2007, we incurred expenses of a similar nature that included compensation and related costs, costs for market research, including a review of possible trademarks for droxidopa, legal costs and travel expenses.

General and administrative expenses. The $0.8 million increase in general and administrative expenses primarily consists of a $0.3 million increase in compensation and related expenses, an increase in professional fees for accounting and legal services of $0.1 million and an increase in rent of $0.1 million, along with moderate increases in other categories of spending. Franchise tax expense also increased during 2008 because of our 2007 issuances of stock for financing purposes and the related increase in our stockholders' equity.

Interest income. During 2007, we raised approximately $57.2 million, net of expenses, through the sale of our common stock in two financing transactions. As such, our cash of approximately $19.6 million and short-term investments of approximately $26.1 million at par value at September 30, 2008 reflect our cash and short term investments at December 31, 2007 offset by approximately $16.9 million used to fund operating activities during the year. Accordingly, interest earned on cash and short-term investments increased by approximately $0.7 million to $1.5 million for the nine months ended September 30, 2008.

Other expense. During the nine months ended September 30, 2008, we recorded an other-than-temporary impairment charge related to our investment in auction rate securities, or ARS, of approximately $3.7 million.

Liquidity and Capital Resources

From inception to September 30, 2008, we have incurred an aggregate net loss of approximately $60.8 million as a result of expenses similar in nature to those described above.

As of September 30, 2008, we had working capital of approximately $32.9 million, cash and cash equivalents of approximately $19.7 million and short-term investments with a fair value of approximately $22.4 million. We have financed our operations primarily through sales of our stock and, to a much lesser extent, through the issuance of our common stock pursuant to option or warrant exercises. Cash on hand results primarily from previous financing activities offset by funds utilized for operating and investing activities.

At September 30, 2008, the estimated fair value of our short-term investments of $22.4 million consisted of principal invested in certain ARS. The ARS held by us have long-term nominal maturities for which the interest rates are reset through a dutch auction on 28 or 35 day cycles. Although the monthly auctions had historically provided a liquid market for these securities, in early 2008, with the liquidity issues in the global credit and capital markets, auctions for these, and similar, securities began to fail and by March 2008, market activity had essentially ceased. Our investments in these securities represent interests in collateralized debt obligations supported by pools of structured credit instruments consisting of student loans. None of the collateral for the ARS held by us includes mortgage, credit card, preferred stock or insurance securitizations. Of the par value of these investments of $26.1 million, all but approximately $4.4 million were AAA/Aaa rated and fully backed by the Federal Family Education Loan Program (FFELP) and/or over-collateralized by more than 10%. Of the remaining $4.4 million, all were collateralized at 100% or greater and, consistent with our investment policy, $0.75 million carried an A rating, $1.15 million carried an Aa3/AAA rating and the remainder carried AAA/Aaa ratings.

Since early February 2008 we have experienced difficulty in liquidating our ARS as the amount of securities submitted for auction has exceeded the market demand and auctions began to fail. When the auctions for these securities fail, the investments are not readily convertible into cash until a future auction is successful, secondary markets emerge, the securities are redeemed by the issuer or they mature. Although we are experiencing a lack of liquidity for these securities at the present time, we anticipate, based on continuing discussions with our investment advisors, that liquidity for some of our holdings, particularly those held at Banc of America Securities, might be realized through secondary market transactions, particularly considering the high credit ratings, FFELP backing and/or the collateralization related to the underlying securities. While Banc of America Securities announced a settlement with various regulatory agencies in October 2008, such settlement had no specific commitments to assist us in achieving liquidity in our specific holdings. It did indicate that Banc of America would use its best efforts to provide liquidity to institutional investors and business customers with accounts valued at $15 million or more, though no specific guidance on how this was to be accomplished was given. Subsequently, in October 2008, we received notice that a tender offer, for redemption at 93.5% of par value, had been made by an issuer on

certain of our holdings. Such redemptions are based on an opportunity by the issuers to reduce their cost of capital through redemption and refinancing and we, along with others, believe that such redemptions make good economic sense and might accelerate over time. However, there continue to be significant uncertainties concerning the timing and the eventual outcome of this tender offer. As such, those factors were not taken into consideration in our valuation approach for these holdings at September 30, 2008.

Under the terms of the recent settlement between UBS Financial Services, Inc. and certain regulatory bodies as announced in October 2008, UBS has committed to provide liquidity for up to 75% of the UBS determined market value, for those investments held at UBS, through a line of credit arrangement and to acquire those holdings at 100% of par value in June 2010. The settlement, while gaining additional clarity during October, remains open and awaiting further guidance related to the appropriate path to liquidity for our holdings at UBS.

While taking into consideration valuation factors as set forth in the guidelines of SFAS 157, management has established estimated fair values for the ARS held at September 30, 2008 based on the potential cash realization that might be available from these assets. We have noted that sporadic trades have taken place recently in private secondary markets for ARS holdings similar to our own. There is evidence that some of the more favorable trades reflected re-purchases on the part of certain issuers, which we would be unable to influence or predict. Similarly, there continues to be evidence that many such transactions are of a distressed nature between opportunistic buyers and distressed sellers. Given our inability to hold these securities indefinitely and our determination to liquidate the holdings we have at Banc of America Securities over the next six months, we have set our valuations more conservatively than we might otherwise expect to realize through these markets. Additionally, we engaged the services of a third party valuation firm to assist in our determination of fair value at September 30, 2008, specifically related to our holdings at Banc of America Securities.

Accordingly, we believe that 75% to 94% of the face value of these assets reflects a range of realistic valuations. Based on these considerations, we estimated that an aggregate impairment of approximately 14.1% of par value of our ARS holdings was appropriate as of September 30, 2008 and recorded an additional impairment charge of $2.1 for the quarter ended September 30, 2008, bringing the cumulative charge to operations during the nine months ended . . .