Results of Operations

Overview

From our inception through March 31, 2009, we have incurred ongoing losses from operations and have cumulative losses as of March 31, 2009 totaling $110,272,000. 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 March 31, 2009 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 is greater than 50% and we actively participate in its management, but we do not have voting control of Colloral LLC. 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, Colloral LLC is now considered a variable interest entity, of which we are the primary beneficiary. We have consolidated Colloral LLC in accordance with FIN 46R, effective since the third quarter of 2005.

In accordance with the amendment to the Colloral LLC operating agreement, we made additional capital contributions of $1,032,000 to Colloral LLC from 2003 through 2007. We satisfied our funding commitment in 2006 and have made no capital contributions during the year ended December 31, 2008 or the three months ended March 31, 2009. 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.

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, 2008 and March 31, 2009 and Colloral LLC's operating results for the three months ended March 31, 2008 and 2009 have been consolidated into our financial statements:

                                                    Three months ended March 31,
                                                      2008                 2009
   Statement of Operations Data:
   Revenue                                       $       22,000       $       59,000
   Cost of goods sold                                    12,000               20,000
   Selling, general and administrative expense           27,000               24,000
   Net income (loss)                             $      (17,000 )     $       15,000

                                                  December 31,          March 31,
                                                      2008                 2009
   Balance Sheet Data:
   Current assets                                $      219,000       $      255,000
   Long term assets                                          -                    -
   Current liabilities                                    6,000               24,000
   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 Months Ended March 31, 2008 and 2009

Revenue was $67,000 and $104,000 for the three months ended March 31, 2008 and 2009, respectively. The revenue in the three months ended March 31, 2008 and 2009 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, whose results are consolidated with ours. From 2006 through January 2009, 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 revenue of $0 and $37,000 during the three months ended March 31, 2008 and 2009, 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 $11,000 and $15,000 during three months ended March 31, 2008 and 2009, 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 $12,000 and $20,000 for the three months ended March 31, 2008 and 2009, respectively. Fluctuations in cost of good sold are related to the mix of product revenues to consumers versus distributors. Cost of goods sold in three months ended March 31, 2008 was higher as percentage of product revenues due to the write-off of expired inventory.

Research and development expenses were $42,000 and $71,000 for the three months ended March 31, 2008 and 2009, respectively. The increase is due to an increase in the patent annuities and legal fees to acquire our international patents.

Selling, general and administrative expenses were $205,000 and $188,000 for the three months ended March 31, 2008 and 2009, respectively. The decrease is primarily the result of a decrease in the stock compensation costs from $31,000 during the three months ended March 31, 2008 to $24,000 during the three months ended March 31, 2009 and decrease in management compensation costs of $11,000.

Interest income was $84,000 and $9,000 for the three months ended March 31, 2008 and 2009, respectively. The decrease is due to a lower average return on investment and a lower average balance of cash and marketable securities available for investment.

Minority interest in joint venture was $1,000 and ($4,000) for the three months ended March 31, 2008 and 2009, respectively. The minority interest in joint venture reflects Deseret's share of Colloral LLC's profits or losses calculated in accordance with the amended terms of the Colloral LLC operating agreement.

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, we may elect to do so. 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 three months ended March 31, 2009, our cash deceased $12,000. The decrease in cash to fund operations. The most

significant uses of cash for the three months ended March 31, 2009 were legal and accounting expenses totaling $135,000. The most significant source of cash for the three months ended March 31, 2009 were product and license revenues of $104,000. 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 2009 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 March 31, 2009, our cash and cash equivalents totaled $8,463,000. Current liabilities at March 31, 2009 were $228,000.

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 April 2009, the FASB issued the following new accounting standards. These standards are effective for periods ending after June 15, 2009. We are evaluating the impact that these standards will have on our financial statements:

• FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4; FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures

• FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2, FAS 124-2, and EITF 99-20-2; and FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

• FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim 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-K 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.