Summary of SYNVISTA THERAPEUTICS, INC.

ITEM 2. Management's Discussion and Analysis of Financial Condition

Overview

We are a product-based biotechnology company developing diagnostic and therapeutic products to deliver personalized medicine. Our primary therapeutic interest is the cardiovascular complications of diabetes. Our diagnostic products under development are being designed to identify patients at risk for cardiovascular complications of diabetes such as stroke, heart attack and death, and may be used to guide medical therapy.

We are primarily focused on fund-raising activities and exploring strategic relationships to support our development programs. If we are unsuccessful in our efforts to raise additional funds through the sale of additional equity securities or the out-license of our technology, or if the level of cash and cash equivalents falls below anticipated levels, we may be required to significantly curtail the research, product development, preclinical testing and clinical trials of our product candidates or cease our operations altogether.

We are developing a diagnostic test to identify the subset of patients with diabetes who are at increased risk for cardiovascular disease. The technology underlying this test relates to a serum protein called haptoglobin, or Hp. A common variant of this protein, known as Hp2-2, which is found in 40% of the population, is associated with increased cardiovascular risk in diabetic patients. We own intellectual property relating to typing haptoglobin, which is a protein found in the blood. This diagnostic test may be useful in determining a patient's risk for adverse cardiovascular events. It may also be useful to identify a subset of diabetic patients in whom daily use of vitamin E could potentially reduce the rate of heart attack. We are evaluating arrangements that would allow our technology or intellectual property to be used by commercial enterprises for the aforementioned purposes and would be further developed and validated by a clinical laboratory that is certified under the Clinical Laboratory Improvement Amendments, or CLIA, and offered as a testing service. Further, we are developing a kit for use in determining cardiovascular disease risk in diabetic patients that will be submitted to the U.S. Food and Drug Administration for premarket clearance under the 510(k) pathway. Any successful commercialization of such a kit, if cleared, could generate revenues for us in future years and could help focus the development of one of our therapeutic product programs, known as glutathione peroxidase mimetics, described below.

We also own intellectual property relating to CML testing. CML, or carboxy-methyl-lysine, is a marker of cardiovascular aging that can predict adverse health outcomes in the general population and a subpopulation with heart failure in particular. A "Research Use Only" kit for quantifying CML levels was developed by MicroCoat GmbH of Bernried, Germany, using our proprietary reagents, and has been sold in the research community in recent years. Given the correlation of CML levels and cardiovascular outcomes that has been appearing in the scientific literature, the Company believes that a CML test may strategically complement the haptoglobin test in the clinical diagnostic setting.

Research and discovery relating to haptoglobin testing has revealed that some patients, identified using the haptoglobin test, exhibit dysfunction in their HDL, or high density lipoprotein. This HDL dysfunction may explain the increased atherosclerosis and adverse cardiovascular outcomes observed in this patient population. We have developed a family of new chemical entities that work by virtue of their ability to reduce oxidized lipids. Some of these compounds have been shown to reverse the HDL dysfunction seen in some diabetic patients. We are evaluating these personalized medicines in animal models designed to better characterize HDL function.

As previously reported, one of our GPx mimetics, SYI-2074, which was under development for the treatment of diabetic patients with Haptoglobin subtype 2-2, did not demonstrate a dose-related improvement in all oxidized lipids and all markers of oxidative stress after treatment with SYI-2074 for one month in Trial
201. In addition, in Trial 203, SYI-2074 did not provide evidence of protection against cardiac injury in diabetic patients who were undergoing angioplasty. The Company has therefore decided not to advance the development of SYI-2074 as a treatment for acute coronary syndrome, while it continues to review and analyze the results of these studies.

SYI-2074 has been formulated into an ointment that may permit topical application and the treatment of mild-moderate plaque psoriasis.

We are developing a compound relevant to the CML marker described above. Alagebrium chloride, or alagebrium (formerly ALT-711), is an Advanced Glycation End-product Crosslink Breaker being developed for diastolic heart failure and diabetic nephropathy. Alagebrium has demonstrated potential efficacy in two clinical trials in heart failure, as well as in animal models of heart failure, nephropathy, hypertension and erectile dysfunction. These diseases represent rapidly growing markets of unmet medical needs, particularly common among diabetic patients. The compound has been tested in approximately 1,000 patients, which represents a sizeable human safety database, in a number of Phase 2 clinical studies.

During the second quarter of 2008, we announced that we had dosed the first patient in a 160-patient Phase 2 study of alagebrium in patients with diastolic heart failure. BREAK (Beginning a Randomized Evaluation of the A.G.E. (Advanced Glycation End Product) Breaker Alagebrium in Diastolic Heart Failure) is a randomized, double-blind, placebo controlled study to assess the effect of six months of oral treatment with 400mg (200mg twice daily) alagebrium versus placebo in patients diagnosed with diastolic heart failure as verified by echocardiography. The trial is ultimately expected to enroll 80 patients per cohort and be conducted in as many as 25 centers in the United States. It had completed more than 50% enrollment at the end of the third quarter of 2008. Investigators intend that at least half of the study subjects will have diabetes mellitus. The primary efficacy measure of the study is improvement of exercise tolerance as assessed by the six-minute walk test, an accepted regulatory endpoint. In addition, there will be a number of secondary and tertiary measurements including the effect of alagebrium on CML levels. The Company has also surpassed 75% enrollment in the BENEFICIAL study. This trial, being conducted at the University of Gronigen, The Netherlands, is designed to test the efficacy of alagebrium in heart failure patients with low ejection fractions, by measuring their improvement in maxVO2 (maximum oxygen consumption), a measure of exercise tolerance.

Future Development Plans

We are also managing a discovery and development program aiming to produce small molecule drugs that mimic the enzyme glutathione peroxidase, or GPx. We believe that GPx is one of the only enzymes in the human body that reduces oxidized lipids. By recreating the activity of this enzyme in a small molecule we may be able to treat diseases in which oxidized lipids are thought to play a significant role.

In January 2008, we announced the signing of an agreement with privately-held Novel Therapeutic Technologies Inc. to provide us with formulation work for a topical cream formulation of one of our GPx mimetics, SYI-2074, for the treatment of psoriasis. This work will be performed at a major clinical institution in Israel. SYI-2074 may have potential in the treatment of plaque psoriasis because SYI-2074 can block TNF-? activated expression of cell adhesion molecules, I-CAM and V-CAM, which may be essential for cellular migration. TNF-? is an established target for drug development in psoriasis and other autoimmune diseases. We have identified sites in Israel to perform a planned Phase 2 clinical trial which began in the third quarter of 2008.

As previously reported, we also expect that alagebrium will be studied in a clinical trial of patients with Type I diabetes and microalbuminuria (protein in the urine), funded by the Juvenile Diabetes Research Foundation. This study has already dosed its first patient, but as observers of the trial without responsibility for its performance, we cannot project the date or likelihood of this trial's completion.

We continue to evaluate potential pre-clinical and clinical studies in other therapeutic indications in which alagebrium and SYI-2074 may address significant unmet needs. For alagebrium, in addition to our anticipated clinical studies in heart failure, we have conducted preclinical studies focusing on atherosclerosis; Alzheimer's disease; photoaging of the skin; eye diseases, including age-related macular degeneration, and glaucoma; and other diabetic complications, including renal diseases.

Since our formation in October 1986, we have devoted substantially all of our resources to research, drug discovery and development programs. To date, we have not generated any revenues from the sale of products and do not expect to generate any such revenues for a number of years, if at all. We have incurred an accumulated deficit of $278,099,794 as of September 30, 2008, and expect to incur net losses, potentially greater than losses in prior years, for a number of years.

We have financed our operations through proceeds from public offerings of common stock, private placements of common and preferred equity and debt securities, revenue from former collaborative relationships, reimbursement of certain of our research and development expenses by our collaborative partners, investment income earned on cash and cash equivalent balances and short-term investments and the sale of a portion of our New Jersey State net operating loss carryforwards and research and development tax credit carryforwards.

Our business is subject to significant risks including, but not limited to, (1) our ability to obtain and maintain sufficient financial resources to continue as a going concern and to conduct and continue enrollment in our clinical studies of SYI-2074 and alagebrium, (2) the risks associated with our development of a diagnostic kit, (3) the risks inherent in our research and development efforts, including clinical trials and the length, expense and uncertainty of the process of seeking regulatory approvals for our product candidates, (4) uncertainties associated with obtaining and enforcing our patents and with the patent rights of others, (5) uncertainties regarding government healthcare reforms and product pricing and reimbursement levels, (6) technological change and competition, (7) manufacturing uncertainties, and (8) dependence on collaborative partners and other third parties. Even if our product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. These reasons include the possibilities that the products will prove ineffective or unsafe during preclinical or clinical studies, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties, or that we will be unable to develop and commercialize our proposed diagnostic kit. These risks and others are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 that we filed with the Securities and Exchange Commission on March 31, 2008 under the heading "Item 1A - Risk Factors" and in this report under the heading "Part II - Item 1A - Risk Factors."

Results of Operations

Three Months ended September 30, 2008 and 2007

License and Other Revenue

Total license and other revenue for the three months ended September 30, 2008 and 2007, was $1,000 and $1,000, respectively, attributable to royalty revenue received from ARUP Laboratories as a result of a royalty agreement entered into in September 2004.

Other Income/Expense

Investment income for the three months ended September 30, 2008 and 2007, was $53,000 and $195,000, respectively. Income was derived from interest earned on cash and cash equivalents and short-term investments. The decrease in investment income was due to lower cash balances during the current year. In 2007, there was a higher cash balance as a result of our preferred stock financing in July 2007.

Our interest expense was $2,000 for the three months ended September 30, 2008, compared to $1,403,000 for the period ended September 30, 2007. The decrease was the result of interest expense relating to our private debt financing completed in January 2007.

Operating Expenses

Total operating expenses were $2,929,000 for the three months ended September 30, 2008, compared to $3,159,000 for the three months ended September 30, 2007, and consisted primarily of research and development expenses and general and administrative expenses in 2008 and 2007. Research and development expenses normally include third-party expenses associated with pre-clinical, clinical, and diagnostic studies, manufacturing costs, including the development and preparation of clinical supplies, personnel and personnel-related expenses, and facility expenses.

Research and Development

Research and development expenses were $1,718,000 for the three months ended September 30, 2008, as compared to $2,265,000 for the same period in 2007, a decrease of $547,000, or 24%. This decrease was due to lower research study costs resulting from the discontinuation of SYI-2074 Trials 201 and 203 in June 2008. In addition, research study costs were higher in 2007 due to the increased spending on clinical trials after the July 2007 financing. The lower study costs were partially offset by higher personnel-related costs.

For the three months ended September 30, 2008, personnel-related research and development costs totaled $226,000, compared to $78,000 for the same period in 2007, an increase of $148,000, or 190%. This increase was primarily driven by the hiring of additional personnel within the Clinical, Pre-Clinical, and Diagnostic departments.

For the three months ended September 30, 2008, the total amount spent on research study costs was $1,467,000, inclusive of $858,000 of clinical trial costs, $195,000 of manufacturing and storage expenses, $119,000 of third party consulting costs, $111,000 of patent expenses, $100,000 of license fees, $49,000 of product liability insurance, and $11,000 of regulatory costs. For the same period in 2007, we incurred $1,794,000 of clinical trial expenses, $181,000 of third party consulting expenses, $157,000 of patent expenses, and $41,000 of product liability insurance.

General and Administrative

General and administrative expenses were $990,000 for the three months ended September 30, 2008, as compared to $894,000 for the same period in 2007, for an increase of $96,000 or 11%. The increase in 2008 was related to the following:
higher Board of Directors expense of $37,000 due to the addition of a new Board member, an increase in administrative expenses of $37,000, an increase in investor relations costs of $31,000, higher legal costs of $27,000, and an increase in repairs and maintenance expense of $13,000. These increases were partially offset by lower consulting expenses of $24,000 and lower facilities costs of $17,000.

Selling and Marketing

In the second quarter of 2008, we began commercial planning efforts surrounding our haptoglobin diagnostic kits. Selling and marketing expenses for the three months ended September 30, 2008, were $221,000, inclusive of $62,000 of medical education expenses, $59,000 of personnel-related expenses, $38,000 of market research, $20,000 of expenses relating to conferences and tradeshows, and $12,000 of advertising and promotion expenses. There were no such expenses during the comparable period in 2007.

Net Loss

We had net losses of $2,873,000, and $4,366,000 in the three months ended September 30, 2008 and 2007, respectively. We had net losses applicable to common stockholders for the three months ended September 30, 2008 and 2007, of $5,075,000 and $5,986,000, respectively, inclusive of preferred stock dividends and deemed dividends to Series B preferred stockholders of $2,202,000 and $1,620,000 for the three months ended September 30, 2008 and 2007, respectively.

Nine Months ended September 30, 2008 and 2007

License and Other Revenue

Total license and other revenue for the nine months ended September 30, 2008 and 2007, was $55,000 and $51,000, respectively, inclusive of $50,000 received from a licensing agreement with Avon Products, Inc., which we entered into in September 2005. In 2008, we also received $3,000 from a royalty agreement with ARUP Laboratories, which was entered into in September 2004. We received $1,000 in royalty payments from ARUP Laboratories in 2007.

Other Income/Expense

Investment income for the nine months ended September 30, 2008 and 2007, was $263,000 and $258,000, respectively. Income was derived from interest earned on cash and cash equivalents and short-term investments. There were slightly higher cash balances during the current year as a result of our preferred stock financing in July 2007.

Our interest expense was $5,000 for the nine months ended September 30, 2008, compared to $6,638,000 for the period ended September 30, 2007. The decrease was the result of interest expense relating to our private debt financing completed in January 2007.

We recognized $400,000 of other expense in June 2008, as a result of the write-off of our investment in Oxis International common stock.

Operating Expenses

Total operating expenses were $8,318,000 for the nine months ended September 30, 2008, compared to $7,200,000 for the nine months ended September 30, 2007, and consisted primarily of research and development expenses and general and administrative expenses in 2008 and 2007. Research and development expenses normally include third-party expenses associated with pre-clinical, clinical, and diagnostic studies, manufacturing costs, including the development and preparation of clinical supplies, personnel and personnel-related expenses, and facility expenses.

Research and Development

Research and development expenses were $5,108,000 for the nine months ended September 30, 2008, as compared to $4,666,000 for the same period in 2007, an increase of $442,000 or 9%. This increase was attributed to higher personnel-related costs, partially offset by slightly lower research study costs. Research study costs were higher in 2007 due to the increased spending on clinical trials after the July 2007 financing. In addition, we discontinued SYI-2074 Trials 201 and 203 in June 2008, resulting in lower costs for the 2008 period.

For the nine months ended September 30, 2008, personnel-related research and development costs totaled $679,000 compared to $234,000 for the same period in 2007, an increase of $445,000, or 190%. This increase was primarily driven by the hiring of additional personnel within the Clinical, Pre-Clinical, and Diagnostic departments.

For the nine months ended September 30, 2008, research study costs totaled $4,343,000, compared to $4,378,000 for the same period in 2007, a decrease of $35,000, or 1%. In 2008, research study costs included $2,314,000 of clinical trial costs, $599,000 of manufacturing and storage expenses, $513,000 of third party consulting costs, $326,000 of patent expenses, $140,000 of license fees, $124,000 of product liability insurance, $118,000 of research funding costs, $95,000 of sponsored research costs, and $63,000 of regulatory costs. Comparatively, in 2007, research study costs consisted of $2,604,000 of clinical trial costs, $800,000 of license fees, $524,000 of patent expenses, $361,000 of third party consulting costs, and $104,000 of product liability insurance expenses.

General and Administrative

General and administrative expenses were $2,847,000 for the nine months ended September 30, 2008, as compared to $2,535,000 for the same period in 2007, for an increase of $312,000, or 12%. The increase in 2008 was related to the following: higher personnel-related expenses of $289,000, an increase in investor relations costs of $121,000, higher franchise taxes of $64,000, higher repairs and maintenance expense of $40,000, and higher Board of Directors expense of $38,000 due to the addition of a new Board member. These increases were partially offset by lower consulting and administrative expenses of $102,000 and $83,000, respectively, as well as lower facility costs of $41,000 and lower insurance costs of $17,000.

Selling and Marketing

In the second quarter of 2008, we began commercial planning surrounding our haptoglobin diagnostic kits. Selling and marketing expenses for the nine months ended September 30, 2008, were $363,000, inclusive of $148,000 of personnel-related expenses, $90,000 of medical education related expenses, $38,000 of market research, $33,000 of conferences and tradeshows, and $12,000 of advertising and promotion. There were no such expenses during the comparable period in 2007.

Net Loss

We had net losses of $8,401,000 and $13,529,000 in the nine months ended September 30, 2008 and 2007, respectively. We had net losses applicable to common stockholders for the nine months ended September 30, 2008 and 2007, of $15,007,000 and $15,149,000, inclusive of preferred stock dividends and deemed dividends to Series B preferred stockholders of $6,606,000 and $1,620,000 for the nine months ended September 30, 2008 and 2007, respectively.

Liquidity and Capital Resources

We had cash and cash equivalents at September 30, 2008, of $7,957,000, compared to $15,646,000 at December 31, 2007. The decrease is primarily attributable to $7,671,000 of net cash used in operating activities. At September 30, 2008, we had working capital of $4,227,000.

We do not have any approved products and currently derive cash from sales of our securities and interest on cash and cash equivalents. We are highly susceptible to conditions in the global financial markets and in the pharmaceutical industry. Positive and negative movement in those markets will continue to pose opportunities and challenges to us. Previous downturns in the market valuations of biotechnology companies and of the equity markets more generally have restricted our ability to raise additional capital on favorable terms.

We expect to utilize cash and cash equivalents to fund our operating activities, including continued development of SYI-2074, alagebrium and development of our diagnostic test kit. Based on the projected spending levels for the Company, we do not currently have adequate cash and cash equivalents to complete our clinical trials and/or the development of our diagnostic test kits and, therefore, will require additional funding urgently in order to continue operations. The Company is actively pursuing fund-raising possibilities through the sale of its equity securities. If the Company is unsuccessful in its efforts to raise additional funds through the sale of additional equity securities or if the level of cash and cash equivalents falls below anticipated levels, we will not have the ability to continue as a going concern after the first quarter of 2009. As a result, the Company will continue to monitor its liquidity position and the status of its diagnostic development and clinical trials. If we are unsuccessful in our efforts to raise additional funds through the sale of additional equity securities, we will be required to significantly reduce or curtail our research and product development activities, to sell or out-license our assets, and may be required to curtail our other operations significantly. We have the intent and ability to quickly and significantly reduce the cash expenditure rate, if necessary, as we have limited fixed commitments, which include executed, but cancelable, agreements with outside organizations.

We may be required to pay accrued dividends on our preferred stock, totaling $2,375,000 as of September 30, 2008 in cash, rather than in stock, at the request of the Preferred Stock holders. While this would reduce the Company's liquidity, the Company believes that its ability to adjust spending levels quickly in a number of programs will permit its continued operations into the first quarter of 2009, regardless of the form of dividend payment elected by the holders of our Series B Preferred stock investors.

We will require substantial new funding in early 2009 in order to continue the development and commercialization of its product candidates and to continue our operations. The Company believes that satisfying these capital requirements over the long term will require successful commercialization of our product candidates and/or our diagnostic test kits. However, it is uncertain whether any of our products or diagnostic test kits will be approved or will be commercially successful. The amount and timing of the Company's future capital requirements will depend on numerous factors, including the progress of our research and development programs, the exercise by the holders of the Series B preferred stock of their right to receive accrued dividends in the form of cash, number and characteristics of product candidates that the Company pursues, the conduct of preclinical tests and clinical studies, the status and timelines of regulatory submissions, the costs associated with protecting patents and other proprietary rights, the ability to complete strategic collaborations and the availability of third-party funding, if any.

In August 2007, we entered into a share purchase agreement for the purchase of $500,000 of newly issued shares of Oxis International Limited ("Oxis") common stock at a premium over the then current market price. It is our understanding that Oxis held some value as of June 30, 2008, but it is our position that we will not recoup our investment in Oxis. On June 19, 2008, Oxis received a Notice of Disposition of Collateral from certain debenture holders. Our investment in Oxis was written off as of June 30, 2008. This security was restricted for sale until the early part of February 2009.

On July 25, 2007, institutional investors purchased $25,000,000 of newly created Series B Preferred Stock and warrants to purchase shares of Series B Preferred Stock. At the closing of the financing, we issued 10,000,000 shares of our Series B Preferred Stock and warrants to purchase 2,500,000 shares of Series B Preferred Stock. The Series B Preferred Stock accrues dividends at a rate of 8% per year on the original issue price of $2.50 per share for a period of five years from the date on which the shares of Series B Preferred Stock were issued. The warrants are exercisable for a period of five years commencing on July 25, 2007 at an exercise price of $2.50 per share.

We will require, in the next few months, substantial additional funding to continue our operations, including the development and commercialization of SYI-2074, alagebrium and our other product candidates. In order to continue funding our capital requirements over the longer term, we will require successful commercialization of our product candidates. However, it is uncertain whether any of our product candidates will be approved or will be commercially successful.

Selling securities to satisfy our capital requirements may have the effect of materially diluting the current holders of our outstanding stock. We may also seek additional funding through corporate collaborations and other financing vehicles. There can be no assurances that such funding will be available at all . . .