Results of Operations

Overview

From our inception through September 30, 2008, we have incurred ongoing losses from operations and have cumulative losses as of September 30, 2008 totaling $109,973,000. To date, our only revenue from the sale of products has been earned through our joint venture, Colloral LLC. The majority of revenues recorded from inception through September 30, 2008 were earned in connection with license rights, contract research and the granting of certain short-term rights. As a result, inflation has not materially affected our revenues and income from continuing operations.

In August 2002, we entered into our joint venture with Deseret by forming Colloral LLC to manufacture, market and sell Colloral® as a dietary supplement. Our interest in Colloral LLC was greater than 50% and we actively participated in its management, but we did not have voting control of Colloral LLC and our share of distributions and allocations of profits and losses did not exceed 50%. Therefore, the investment had historically been accounted for using the equity method. In August 2005, we amended the Colloral LLC operating agreement to increase our share of distributions and allocations of profits and losses in return for our commitment to fund 100% of the costs associated with the implementation of a marketing program for The Collagen Solution. As a result of the amendments to the operating agreement, we are required to consolidate Colloral LLC in accordance with FIN 46R, effective in the third quarter of 2005. Under FIN 46R, Colloral LLC is considered a variable interest entity, of which we are the primary beneficiary. In accordance with FIN 46R, we re-evaluate the provisions of FIN 46R when triggering events arise and, to date, no events have transpired which would require deconsolidation. Certain events may arise in the future, including additional modifications to the operating agreement, which may require us to re-evaluate the joint venture under FIN 46R. Such re-evaluation may result in a conclusion that the joint venture is no longer a variable interest entity requiring consolidation.

In accordance with the amendment to the Colloral LLC operating agreement, we made additional capital contributions of $1,020,000 to Colloral LLC from 2003 through 2006. We satisfied our funding commitment in 2006, but we made additional contributions of $12,000 during the year ended December 31, 2007 to support continuing marketing efforts. No capital contributions were made during the nine months ended September 30, 2008. We may make additional contributions to Colloral LLC in the future.

There can be no assurance that the sales and marketing initiatives that have been or, in the future, may be funded by our capital contributions will be successful. Accordingly, in the future we may again incur substantial losses. Our financial statements reflect transactions with Colloral LLC on a consolidated basis beginning in the third quarter of 2005.

The following table contains selected financial data for Colloral LLC. Shipping and handling costs have been classified as selling expenses. The balance sheet amounts as of December 31, 2007 and September 30, 2008 and Colloral LLC's operating results for the three and nine months ended September 30, 2007 and 2008 have been consolidated into our financial statements:

                                                     Three months ended          Nine months ended
                                                       September 30,               September 30,
                                                     2007           2008        2007           2008
Statement of Operations Data:
Revenue                                           $   14,000      $ 11,000    $  84,000      $ 89,000
Cost of goods sold                                $    9,000      $  1,000    $  20,000      $ 29,000
Selling, general and administrative expense       $   34,000      $  8,000    $  68,000      $ 46,000
Net income (loss)                                 $  (29,000 )    $  2,000    $  (4,000 )    $ 14,000




                                        December 31,     September 30,
                                            2007             2008
               Balance Sheet Data:
               Current assets          $      171,000   $       192,000
               Long term assets                    -                 -
               Current liabilities              5,000             3,000
               Long term liabilities               -                 -

In 2000, we completed a market analysis of Colloral as a dietary supplement and subsequently filed a "Notice of New Dietary Ingredient" with the FDA that was accepted without comment. On February 18, 2005, we received a letter from the FDA stating that the FDA reconsidered the information contained in our Notice of New Dietary Ingredient and concluded that Colloral is not a dietary supplement but appears to be a drug under the Federal Food, Drug, and Cosmetic Act, and thus subject to the regulatory requirements for drugs. On April 15, 2005, we submitted a response to the FDA's letter and hope to have demonstrated that the product meets the statutory definition of a dietary supplement. We cannot predict whether or not the FDA will agree with our position and what the effect of the FDA's letter will be. It is possible that Colloral LLC and its licensed distributors will be unable to market the product as a dietary supplement and that the products will be subject to the regulatory requirements for drugs. If the FDA makes a final determination that requires us to comply with the regulatory requirements for drugs, Colloral, The Collagen Solution and Vital 3 will be withdrawn from the market, which would eliminate the possibility of future distributions to us from Colloral LLC.

Three and Nine Months Ended September 30, 2007 and 2008

Revenue was $59,000 and $57,000 for the three months ended September 30, 2007 and 2008, respectively. Revenue was $219,000 and $225,000 for the nine months ended September 30, 2007 and 2008, respectively. The revenue in the three and nine months ended September 30, 2007 and 2008 was comprised of monthly license payments from BioMS for their use of our patents pertaining to an injectable therapy for the treatment of multiple sclerosis, and option fees and product revenues generated through our joint venture, Colloral LLC, the results of which are consolidated with our financial results. In 2006 and 2007, Colloral LLC executed a series of agreements with Futurebiotics, LLC and related companies whereby Futurebiotics began marketing Colloral's dietary supplement under the brand name, Vital 3, through several different channels, including the GNC chain of retail stores and both print and e-catalogs. Domestic retail store sales ceased in September 2007 and Futurebiotics is currently selling product through print and e-catalogs through its affiliate, Bronson Laboratories, while it works on both international and domestic selling opportunities. Option payments related to the execution of the Futurebiotics agreement are reflected as option fee revenue and are being amortized over the life of the agreement. Product shipped under these agreements generated no revenue during the three months ended September 30, 2007 and 2008, but generated revenue of $29,000 and $26,000 during the nine months ended September 30, 2007 and 2008, respectively. Colloral LLC also contracted with The Shopping Channel of Canada to market Vital 3 through televised segments and through their website. Product shipped under this agreement generated revenue of $0 and $3,000 during the three months ended September 30, 2007 and 2008, respectively, and revenue of $0 and $28,000 during the nine months ended September 30, 2007 and 2008, respectively. The remaining product revenue is generated through direct sales of Colloral and the Collagen Solution to Colloral LLC's customers through its website.

Cost of goods sold was $9,000 and $1,000 for the three months ended September 30, 2007 and 2008, respectively. Cost of goods sold was $20,000 and $29,000 for the nine months ended September 30, 2007 and 2008, respectively. Fluctuations in cost of good sold are related to the mix of product revenues to consumers versus distributors.

Research and development expenses were $7,000 and $3,000 for the three months ended September 30, 2007 and 2008, respectively. Research and development expenses were $95,000 and $93,000 for the nine months ended September 30, 2007 and 2008, respectively. Patent related maintenance fees and legal fees have remained consistent in support of our portfolio of intellectual property.

Selling, general and administrative expenses were $163,000 and $125,000 for the three months ended September 30, 2007 and 2008, respectively. The decrease is primarily a result of a decrease of $22,000 in advertising costs incurred by our consolidated joint venture, Colloral LLC. Selling, general and administrative expenses were $532,000 and $511,000 for the nine months ended September 30, 2007 and 2008, respectively. The decrease is a result of the aforementioned decrease of $22,000 in advertising costs incurred by our consolidated joint venture, Colloral LLC, a decline in our Directors and Officers insurance costs of $15,000 and our reduction of legal costs of $15,000. These decreases are partially offset by an increase in the stock compensation costs from $58,000 during the nine months ended September 30, 2007 to $94,000 during the nine months ended September 30, 2008.

Interest income was $112,000 and $51,000 for the three months ended September 30, 2007 and 2008, respectively. Interest income was $335,000 and $195,000 for the nine months ended September 30, 2007 and 2008, respectively. The decrease is due to a decline in money market and bond yields and a lower average balance of cash and marketable securities available for investment.

Other income was $25,000 for the nine months ended September 30, 2007. In February 2004, Enzo Biochem, Inc. acquired the assets of OraGen. In March 2007, the trustee received the final distribution of the proceeds in the amount of $25,000, which we have recorded as other income.

Liquidity and Capital Resources

Our needs for funds have historically fluctuated from period to period as we have increased or decreased the scope of our research and development activities. Since inception, we have funded these needs almost entirely through sales of our equity securities. Our current needs have been significantly reduced as a result of the termination of our direct research and development activities, all full-time employees and other sources of operating expenses in 1999.

We hold an interest in Colloral LLC, which is manufacturing, marketing and selling Colloral, The Collagen Solution and Vital 3 as dietary supplements, and manufacturing Vital 3 for sale by Futurebiotics LLC and related companies. While we are not contractually committed to make additional capital contributions to Colloral LLC, during the year ended December 31, 2007, we made additional contributions of $12,000 to support continuing marketing efforts related to potential sales through The Shopping Channel in Canada.

No capital contributions were made during the nine months ended September 30, 2008. We may make additional capital contributions to Colloral LLC. Despite any additional investment, there can be no assurance that these efforts will be successful. Accordingly, in the future we may again incur substantial losses.

Our working capital and capital requirements will depend on numerous factors, including the strategic direction that we and our shareholders choose, the level of resources that we devote to the development of our patented products, the extent to which we proceed by means of collaborative relationships with pharmaceutical or nutraceutical companies and our competitive environment. During the nine months ended September 30, 2008, we utilized $95,000 of cash to fund operations. The most significant use of cash for the nine months ended September 30, 2008 was legal and accounting expenses totaling $231,000. We expect to continue to use our current cash and marketable investments on hand to fund our operations and development efforts. Based upon our budget for calendar year 2008 and current expectations for future years, we believe that current cash and marketable securities, and the interest earned from the investment thereof, will be sufficient to meet our operating expenses and capital requirements for at least the next five years. At the appropriate time, we may seek additional funding through public or private equity or debt financing, from collaborative arrangements with pharmaceutical companies or from other sources. If additional funds are necessary but not available, we will have to reduce or not pursue certain activities, which could include areas of research, product development or marketing activity, or otherwise modify our business strategy. Such a reduction would have a material adverse effect on us.

In order to preserve principal and maintain liquidity, our funds are generally invested in U.S. Treasury obligations and money market instruments. As of September 30, 2008, our cash and cash equivalents and marketable securities totaled $8,591,000. Current liabilities at September 30, 2008 were $129,000.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. Effective for the third quarter of 2005, we are required to consolidate Colloral LLC, a joint venture for the development and marketing of dietary supplements.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations." SFAS No. 141R, among other aspects, requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose certain information to enable users to understand the nature and financial effect of the business combination. The statement requires that cash outflows such as transaction costs and post-acquisition restructuring be charged to expense instead of capitalized as a cost of the acquisition. Contingent purchase price will be recorded at its initial fair value and then re-measured as time passes through adjustments to net income. SFAS No. 141R is effective for us in 2009. We are currently evaluating the impact of adoption.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements." SFAS No. 160 will change the accounting for minority interests, which will be reclassified as noncontrolling interests and classified as a component of equity. SFAS No. 160 is effective for us in 2009. We are currently evaluating the impact of adoption.

In December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1, "Accounting for Collaborative Arrangements." The EITF established the definition of a collaborative arrangement and determined that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and the arrangements terms, the nature of the entity's business, and whether those payments are within the scope of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial- statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. EITF 07-1 is effective for us January 1, 2009 and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We do not expect the adoption of EITF 07-1 to have a material impact on our consolidated financial statements.

Forward-Looking Statements

Statements in this Quarterly Report that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements include statements about our future operating results, strategic relationships and product development. You can identify these forward-looking statements because they involve our expectations, beliefs, projections, anticipations or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause our actual results to differ significantly from results discussed in the forward-looking statements. These factors include, but are not limited to, our extremely limited operations, the uncertainties of clinical trial results and product development efforts, our dependence on third parties for licensing and other revenue, our dependence on determinations of regulatory authorities and risks of technological change and competition. These factors are more fully discussed in our most recent Annual Report on Form 10-KSB filed with the Securities and Exchange Commission in the section "Risk Factors." We have no plans, and disclaim any obligation, to update or revise any forward-looking statements whether as a result of new information, future events or other factors, except as required by law.