The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. See "Risk Factors" in Item 1A of this Annual Report.
OVERVIEW
Our primary focus is on the clinical development of ENMD-2076, a novel, orally-active, kinase inhibitor with potent activity towards Aurora A and multiple other kinases linked to angiogenesis and cellular proliferation. ENMD-2076 is currently in Phase 1 clinical trials for advanced solid tumors and multiple myeloma. We anticipate the initiation of additional trials this year, including studies in both solid and hematological malignancies, and the presentation of additional clinical data for ENMD-2076 in mid-2009.
In addition to ENMD-2076, multiple Phase 1 and 2 clinical trials are currently underway with MKC-1, a novel cell cycle inhibitor and ENMD-1198, a novel antimitotic agent, EntreMed also holds an active IND for the development of 2ME2 in rheumatoid arthritis. At the current time, no additional clinical activities are planned for these programs unless additional significant financing becomes available to us and we have completed the clinical data set from the current active studies. We are seeking a partnership for the 2ME2 program in rheumatoid arthritis, as this represents a novel therapeutic approach to the treatment of patients with RA.
Our prioritization of ENMD-2076 as our leading program was announced in December 2008 as part of the Company's overall plan to lower operating costs and preserve capital. After a review of all of the Company's pipeline candidates, it was determined that ENMD-2076 represented the most promising near-term product candidate to which the Company will devote the majority of its resources to. The focus on ENMD-2076 allowed the Company to restructure and reduce its workforce by approximately 60% across all areas of the business and to accelerate the Company's 2009 clinical objectives for ENMD-2076.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Our critical accounting policies, including the items in our financial statements requiring significant estimates and judgments, are as follows:
• Revenue Recognition - We recognize revenue in accordance with the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition, whereby revenue is not recognized until it is realized or realizable and earned. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectibility is reasonably assured.

• Royalty Revenue - Royalties from licenses are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collectibility is reasonably assured. The majority of our 2007 revenues were from royalties on the sale of Thalomid®, which we began to recognize in the third quarter. In 2004, certain provisions of a purchase agreement dated June 14, 2001 by and between Bioventure Investments kft ("Bioventure") and the Company were satisfied and, as a result, beginning in 2005 we became entitled to share in the royalty payments received by Royalty Pharma Finance Trust, successor to Bioventure, on annual Thalomid® sales above a certain threshold. Based on the licensing agreement royalty formula, annual royalty sharing commences with Thalomid® annual sales of approximately $225 million.

• The Company is also eligible to receive royalties from Oxford Biomedica, PLC from the net sales of products developed for the treatment of ophthalmic (eye) diseases. We did not receive royalties under this agreement in 2008. In the future, royalty payments, if any, will be recorded as revenue when received and/or when collectibility is reasonably assured.

• Research and Development - Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with preclinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Research and development costs are expensed as incurred.

• Expenses for Clinical Trials - Expenses for clinical trials are incurred from planning through patient enrollment to reporting of the underlying data. We estimate expenses incurred for clinical trials that are in process based on patient enrollment and based on clinical data collection and management. Costs that are associated with patient enrollment are recognized as each patient in the clinical trial completes enrollment. Estimated clinical trial costs related to enrollment can vary based on numerous factors, including expected number of patients in trials, the number of patients that do not complete participation in a trial, and when a patient drops out of a trial. Information about patient enrollment can become available significantly after we report our expenses for clinical trials, in which case we would change our estimate of the remaining cost of a trial. Costs that are based on clinical data collection and management are recognized based on estimates of unbilled goods and services received in the reporting period. In the event of early termination of a clinical trial, we would accrue an amount based on estimates of the remaining non-cancelable obligations associated with winding down the clinical trial.

• Stock-Based Compensation - We adopted the provisions of SFAS, No. 123R, "Share-Based Payment," ("SFAS 123R"), effective January 1, 2006, which requires that all share-based payment transactions be recognized in the financial statements at their fair values. We adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards and to awards modified, repurchased or cancelled after the adoption date. Using the straight-line expense attribution method, share-based compensation expense recognized in the years ended December 31, 2008, 2007 and 2006 totaled $1,090,000, $1,455,000 and $1,656,000, respectively.

The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected forfeiture rate and expected term of stock options and our expected stock price volatility over the term of the awards. Changes in the assumptions can materially affect the fair value estimates.

Any future changes to our share-based compensation strategy or programs would likely affect the amount of compensation expense recognized under SFAS 123R.

RESULTS OF OPERATIONS
Years Ended December 31, 2008, 2007 and 2006.
Revenues. Revenues increased slightly in 2008 to $7,477,000 from $7,396,000 in 2007 after increasing 7% in 2007 from $6,894,000 in 2006. The three years presented reflect royalty revenues. The increases in 2008 and 2007 revenues result from increased royalty revenue earned on sales of Thalomid®. Beginning in 2005, we became entitled to share in the royalty payments received by Royalty Pharma Finance Trust on annual Thalomid® sales above approximately $225 million. Thalomid® sales in 2008, 2007 and 2006 surpassed the sharing point in the third quarter and we recorded royalty revenues of $7,472,000, $7,393,000 and $6,882,000, respectively.
Research and Development Expenses. Our 2008 research and development expenses, which totaled $20,069,000, a 16% decrease from costs incurred in 2007. The 2008 amount reflects direct project costs for Panzem® oncology of $3,343,000, $3,298,000 for ENMD-1198, $3,716,000 for MKC-1 and $3,707,000 for ENMD-2076. In 2007, our research and development expenses totaled $23,739,000, reflecting direct project costs for Panzem® oncology of $7,673,000, $2,200,000 for ENMD-1198, $3,241,000 for MKC-1 and $3,958,000 for ENMD-2076. Research and development expenses totaled $21,671,000 in 2006, which included direct project costs of $7,814,000 for Panzem® oncology, $2,095,000 for ENMD-1198, $3,000,000 for MKC-1 and $1,457,000 for ENMD-2076. The decrease in 2008 research and development spending as compared to costs incurred in 2007, results primarily from lower Panzem® NCD project costs resulting from our decision in March 2008 to discontinue its development in oncology. This cost decrease was largely offset by increased expenditures during 2008 on MKC-1 clinical programs and ENMD-1198 manufacturing. The 2007 increase was attributable to the costs related to two IND filings, ENMD-2076 in oncology and Panzem® NCD in rheumatoid arthritis.

ENMD-2076, an oral, Aurora A and angiogenic kinase inhibitor is in a Phase 1b dose-escalation clinical trial in patients with refractory solid tumors and a Phase 1 study in patients with multiple myeloma. We are currently seeking a partner for ENMD-2076 to help accelerate its development. MKC-1 has been evaluated in four Phase 2 and two Phase 1 oncology trials. We have an exclusive worldwide license from Roche to develop and commercialize MKC-1. ENMD-1198, an antimitotic agent, is nearing completion of a Phase 1 dose-escalation clinical trial in patients with refractory solid tumors.
At December 31, 2008, accumulated direct project expenses for Panzem® oncology were $54,118,000; direct ENMD-1198 project expenses totaled $12,966,000; and, since acquired, accumulated direct project expenses for MKC-1 totaled $9,957,000 and for ENMD-2076, accumulated project expenses totaled $9,122,000. Our research and development expenses also include non-cash stock-based compensation, pursuant to the adoption of SFAS 123R, totaling $233,000, 353,000 and $352,000, respectively, for 2008, 2007 and 2006. The decrease in stock-based compensation expense is related to lower fair values on fewer stock options granted in 2008. The balance of our research and development expenditures includes facility costs and other departmental overhead, and expenditures related to the non-clinical support of our programs.
The expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. As of December 31, 2008, we have four proprietary product candidates in clinical development, which include three candidates in oncology and our candidate for the treatment of rheumatoid arthritis. We expect our research and development expenses in 2009 to decline, as research conducted within EntreMed through 2009 will be focused specifically on the support of the ENMD-2076 clinical development. We will continue to conduct research on ENMD-2076 in order to comply with stipulations made by the FDA, as well as to increase understanding of the mechanism of action and toxicity parameters of ENMD-2076 and its metabolites. Completion of clinical development may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.
We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

                                            ESTIMATED
                                            COMPLETION
                           CLINICAL PHASE     PERIOD
                           Phase I          1-2 Years
                           Phase II         2-3 Years
                           Phase III        2-4 Years

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trial protocol, including, among others, the following:
• the number of patients that ultimately participate in the trial;

• the duration of patient follow-up that seems appropriate in view of the results;

• the number of clinical sites included in the trials; and

• the length of time required to enroll suitable patient subjects.

We test our potential product candidates in numerous pre-clinical studies to identify indications for which they may be product candidates. We may conduct multiple clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for certain indications in order to focus our resources on more promising product candidates or indications.

Our proprietary drug candidates have also not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.
Our business strategy now includes entering into collaborative arrangements with third parties to complete the development and commercialization of our products. Specifically, we are seeking a partner for the development of ENMD-2076. In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such arrangements would affect our capital requirements.
As a result of the uncertainties discussed above, among others, we are unable to estimate the duration and completion costs of our research and development projects. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue with our business strategy. There can be no assurance that we will be able to successfully access external sources of financing in the future. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.
Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, research collaborations, costs associated with internal and contract preclinical testing and clinical trials of our product candidates, including the costs of manufacturing the product candidates, and facilities expenses. Overall research and development expenses decreased to $20,069,000 in 2008 from $23,739,000 in 2007, which increased from $21,671,000 in 2006. Research and development expenses were generally lower in 2008 due to decreased Panzem® expenses.
The fluctuations in research and development expenses were specifically impacted by the following:
• Outside Services - We utilize outsourcing to conduct our product development activities. Larger-scale small molecule synthesis, in vivo testing and data analysis are examples of the services that we outsource. We spent $1,170,000 in 2008, $2,871,000 in 2007 and $3,621,000 in 2006 on these activities. The decrease in 2008 as compared to 2007 reflects the absence in 2008 of certain IND-directed expenses associated with the IND submissions for Panzem® NCD for the treatment of rheumatoid arthritis and for ENMD-2076 in oncology during 2007.

• Clinical Trial Costs - Clinical trial costs increased to $5,194,000 in 2008, from $4,282,000 in 2007, which increased from $3,406,000 in 2006. The 2008 increase results primarily from the initiation of clinical trials for ENMD-2076 and also the expanded MKC-1 clinical program.. Our increase in 2007 clinical expense reflects the initiation of Phase 2 trials for Panzem® NCD and for MKC-1. Costs of such trials include the clinical site fees, monitoring costs and data management costs.

• Contract Manufacturing Costs - The costs of manufacturing the material used in clinical trials for our product candidates is reflected in contract manufacturing. These costs include bulk manufacturing, encapsulation and fill and finish services, and product release costs. Contract manufacturing costs decreased in 2008 to $3,418,000 from $5,681,000 in 2007, which was a slight increase from $5,595,000 in 2006. The most significant component of the 2008 decrease was our acquisition of bulk API (Active Pharmaceutical Ingredient) to support the Panzem® NCD trials in 2007. The absence of Panzem® NCD API costs in 2008 was partially offset by an increase in contract manufacturing activities for ENMD-1198. The 2007 contract manufacturing expenses reflect the costs of supplying finished drug product to support new and ongoing trials for three clinical drug candidates and also the cost of securing clinical material to support Phase 1 trials for ENMD-2076, which started in 2008. The 2006 expenses related primarily to the manufacture of MKC-1 and to supporting Phase 2 Panzem® NCD trials.

• Personnel Costs - Personnel costs increased to $5,751,000 in 2008 from $5,301,000 in 2007. The increase in 2008 is attributed primarily to severance costs related to the December reduction in force, offset by the decision not to pay bonuses in 2008. Personnel costs were $4,368,000 in 2006.

Also reflected in our 2008 research and development expenses are, patent costs of $767,000, facility and related expenses of $1,483,000, laboratory supplies and animal costs of $985,000, consulting fees of $451,000 and travel expenses of $193,000. In 2007, these expenses totaled $1,251,000, $1,500,000, $1,111,000, $627,000 and $243,000, respectively, and in 2006, these expenses totaled $766,000, $1,503,000, $1,062,000, $624,000 and $235,000, respectively.
General and Administrative Expenses. General and administrative expenses include compensation and other expenses related to finance, business development and administrative personnel, professional services and facilities.
General and administrative expenses increased to approximately $7,765,000 in 2008 from $7,387,000 in 2007, which decreased slightly from $7,394,000 in 2006. The net increase in 2008 is primarily related to accrued severance costs of approximately $1,000,000 associated with the termination of three corporate officers in December, offset by a decrease of approximately $346,000 due to no accrual of 2008 employee bonuses and also by a decrease in stock compensation expense of $246,000.
In-process R&D. In January 2006, we acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the merger agreement, based on the success of the acquired pre-clinical programs, we may be required to pay up to an additional $18 million upon the achievement of certain clinical and regulatory milestones. Such additional payments will be made in cash or shares of stock, at our option. The lead molecule in the Aurora Kinase Program, ENMD-2076, advanced into clinical development in 2008. ENMD-2076 is a selective kinase inhibitor with activity against Aurora A and angiogenic kinases linked to promoting cancer and inflammatory diseases. During the three-month period ending June 30, 2008, dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million. In June 2008, 2,564,104 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment. The additional payment of $2 million was recorded to expense as in-process research and development since the research and development project related to the Aurora Kinase Program had not reached technical feasibility and has no future alternative use. Under the terms of the merger agreement, the former Miikana stockholders may earn up to an additional $16 million of potential payments upon the satisfaction of additional clinical and regulatory milestones. We do not expect to incur any additional milestone payments in 2009, but may satisfy the terms triggering a $3 million milestone in 2010 with the commencement of Phase 2 clinical trials in ENMD-2076.
Interest expense. Interest expense for the year ended December 31, 2008 increased to approximately $2,216,000 (including $199,000 of non-cash interest) from approximately $793,000 in 2007. The increase results from a financing transaction with General Electric Capital Corporation (GECC) in September 2007 and the related interest expense. The 2007 and 2006 interest expense primarily related to debt with Venture Lending & Leasing IV, LLC, which was paid in full in September, 2007.
Investment income. Investment income decreased by 58% in 2008 to $882,000 as a result of lower yields on lower invested balances in interest-bearing cash accounts and investments. Investment income was $2,113,000 in 2007, an increase of 13% from $1,867,000 in 2006.
Dividends on Series A convertible preferred stock. The Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006 reflect accrued, but unpaid, dividends of $1,005,000 relating to Series A Convertible Preferred Stock held by Celgene pursuant to a Securities Purchase Agreement dated December 31, 2002. The holders of Series A Preferred Stock will accumulate dividends at a rate of 6% and will participate in dividends declared and paid on the common stock, if any. All accumulated dividends must be paid before any dividends may be declared or paid on the Common Stock. We have no plans to pay any dividends in the foreseeable future.

LIQUIDITY AND CAPITAL RESOURCES
To date, we have been engaged primarily in research and development activities. As a result, we have incurred operating losses for 2008 and expect to continue to incur operating losses in the foreseeable future before we commercialize any products. In January 2006, we acquired Miikana Therapeutics, a private biotechnology company. Pursuant to the merger agreement, we acquired all of the outstanding capital stock of Miikana Therapeutics, Inc. in exchange for 9.96 million shares of common stock and the assumption of certain obligations. The lead molecule in the Aurora Kinase Program, ENMD-2076, advanced into clinical development in 2008. ENMD-2076 is a kinase inhibitor with activity towards Aurora A and multiple other kinases linked to promoting cancer. The dosing of the first patient in ENMD-2076 trials triggered a milestone payment of $2 million. In June 2008, 2,564,105 shares of common stock were issued to the former Miikana stockholders as consideration for the satisfaction of the milestone payment. Under the terms of the merger agreement, the former Miikana stockholders may earn up to an additional $16 million of potential payments upon the satisfaction of additional clinical and regulatory milestones. If ENMD-2076 successfully completes Phase 1 clinical trials and advances to Phase 2, the dosing of the first patient will trigger an additional purchase price adjustment milestone of $3 million, which could occur and be paid (in cash or stock at our sole discretion) in 2010. Through the acquisition, we acquired rights to MKC-1, a Phase 2 clinical candidate licensed from Hoffman-LaRoche, Inc. ("Roche") by Miikana in April 2005. Under the terms of the agreement, Roche may be entitled to receive future payments upon successful attainment of certain clinical, regulatory and commercialization milestones; however, we do not expect to ever trigger any of these milestone payments.
FINANCING ACTIVITIES
On September 12, 2007, we entered into a Loan and Security Agreement with General Electric Capital Corporation ("GECC"), as agent, Merrill Lynch Capital and Oxford Finance Corporation (collectively with GECC, "the Lenders"). The Loan Agreement provided for a term loan issued by the Lenders to the Company in the aggregate amount of $20 million. In connection with the transaction, we issued warrants with an exercise price of $2.00 per share to the Lenders providing rights to purchase their respective pro rata share of 250,000 shares of common stock of the Company.
The loan accrues interest in arrears at a fixed annual interest rate of 10.47% until fully repaid. The loan is to be repaid by the Company to GECC, for the ratable benefit of the Lenders, as nine consecutive monthly payments of interest only, each in the amount of $174,500, which commenced on November 1, 2007, and thirty consecutive monthly payments of principal and interest, each in the amount of $760,606, which commenced on August 1, 2008. The unpaid balance of the loan at December 31, 2008 is approximately $17,018,000.
The Loan Agreement contains customary affirmative and negative covenants. We were in compliance with such covenants as of December 31, 2008.
At December 31, 2008, we had cash and short-term investments of $24,291,173 with working capital of $14,782,482. We invest our capital resources with the primary objective of capital preservation. As a result of historical trends in interest rates, we have invested in some securities with maturity dates of more than 90 days to enhance our investment yields. As such, some of our invested balances are classified as short-term investments rather than cash equivalents in our consolidated financial statements at December 31, 2008.

To accomplish our business plans, we will be required to continue to conduct substantial development activities for ENMD-2076 and remaining development activities for our other clinical product candidates. Under our operating plans for 2009 we expect to have ENMD-2076, our leading program, and two other compounds under clinical investigation and we expect our 2009 results of operations to reflect a net loss of approximately $7,000,000, including non-cash charges of approximately $1,500,000. These projections are subject to judgment and estimation and could significantly change. In early 2008, we reached the decision to curtail our development of Panzem® NCD in oncology, although we continue to evaluate the use of this compound for the treatment of rheumatoid arthritis. We plan to complete the open Panzem® NCD oncology trials without the enrollment of additional patients, and will not initiate new trials in oncology. In addition, we plan to continue to pursue the clinical development of ENMD-2076 in oncology and complete clinical activities currently underway for MKC-1 and ENMD-1198, although we may delay development beyond the current stage of one or more of these programs if financial market conditions remain uncertain.
We expect that the majority of our 2009 revenues will continue to be from royalties on the sales of Thalomid®. Thalomid® is sold by a third-party, and we have no control over such party's sales efforts or the resources devoted to Thalomid® sales. Based on historical trends and analyst consensus for Thalomid® sales, we expect to record royalty-sharing revenues of approximately $8.0 million in 2009; however, there can be no assurance in this regard. In addition, under our licensing agreement with Oxford Biomedica, PLC and Oxford . . .