The following discussion and analysis should be read in conjunction with the financial statements and notes included elsewhere in this report. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. This discussion represents our current judgment on the future direction of our business and our actual results may differ materially from those discussed here due to risks and factors including the timing, success and cost of preclinical research and clinical studies, the timing, acceptability and review periods for regulatory filings, the ability to obtain regulatory approval of products, our ability to obtain additional funding and the development of competitive products by others as well as the risks and factors set forth below under the caption "Risk Factors." Additional factors that could cause or contribute to such differences can be found in the financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2008.

Overview

We are a development-stage pharmaceutical company engaged in the discovery, development and commercialization of products for the treatment of diseases and disorders in which the body is unable to mount an appropriate immune or metabolic response due to disease or the process of aging. Our current technology development efforts are primarily focused on a series of adrenal steroid hormones and hormone analogs that are derived from our Hormonal Signaling Technology Platform.

We have been unprofitable since our 1994 inception. As of June 30, 2009, we had an accumulated deficit of approximately $245.8 million. We expect to incur substantial additional operating losses and capital expenditures for the foreseeable future on clinical testing and other activities in support of the development of our drug candidates. In addition, in the future, we may have to meet the substantial new challenge of developing the capability to market products if we are successful in obtaining regulatory approval for any of our current or future drug candidates. Accordingly, our activities to date are not as broad in depth or scope as the activities we may undertake in the future, and our historical operations and financial information are not indicative of the future operating results or financial condition or ability to operate profitably as a commercial enterprise when and if we succeed in bringing any drug candidates to market.

Results of Operations

We have devoted substantially all of our resources to the payment of research and development expenses and general and administrative expenses. From inception through June 30, 2009, we have incurred approximately $166.8 million in research and development expenses, $86.3 million in general and administrative expenses, and $3.0 million in the settlement of a dispute.

From inception through June 30, 2009, we have generated approximately $1.2 million in revenues (which resulted from providing research and development services under our Study Funding Agreement with CFFT). We have earned $9.2 million in net, other income, as our $17.3 million of interest income has been partly offset by $7.6 million in deemed discount expense, $0.4 million in interest expense and $0.2 million loss on disposal of assets. The combination of these resulted in a net loss of $245.8 million for the period from inception until June 30, 2009.

Research and development expenses were $2.8 million and $6.2 million for the three-month and six-month periods ended June 30, 2009, respectively, compared to $4.4 million and $8.8 million for the same periods in 2008. The research and development expenses relate primarily to the ongoing development, preclinical testing and clinical trials for our drug candidates. Research and development expenses decreased by $1.7 million and $2.6 million for the three-month and six-month periods ended June 30, 2009, respectively, compared to the same periods in 2008, primarily due to a decrease in general and preclinical research and development projects; stock option compensation expense also declined. These decreases were partly offset by an increase in clinical trial expenditures, including expenditures for a follow-on study of TRIOLEX ™ (HE3286) in drug-naive inflamed, obese insulin resistant type 2 diabetic patients.

General and administrative expenses were $1.5 million and $3.5 million for the three-month and six-month periods ended June 30, 2009, respectively, and $1.8 million and $3.6 million for the same periods in 2008. General and administrative expenses relate primarily to salaries and benefits, facilities, legal, accounting/auditing, investor relations, consultants, insurance and travel. General and administrative expenses decreased by $0.3 million and $0.1 million for the three-month and six-month periods ended June 30, 2009, respectively, compared to the same period in 2008. The decrease was due mainly to a decrease in salaries expense, investor communications and stock option compensation expense, offset by an increase in legal fees related primarily to the termination of our former chief executive officer Richard Hollis.

Other income, net was $35,000 and $104,000 for the three-month and six-month periods ended June 30, 2009, respectively, compared to $0.3 million and $0.7 million for the same periods in 2008. The decrease in interest income was due to lower interest rates and cash balances.

Please refer to critical accounting policies included in the Form 10K filed on March 31, 2009.

Liquidity and Capital Resources

A summary of our current contractual obligations is as follows (in thousands):



                                                                   Payments Due by Period
                                                    Less than one      One to three        Three to        More than
Contractual Obligations                 Total           year               years          five years       five years
Operating Leases                       $   570     $           562     $           8     $         -      $         -

We may also be required to make substantial milestone or royalty payments in cash based on the terms of some of our agreements.

Our operations to date have consumed substantial capital without generating any revenues other than the amount received under the CFFT collaboration. We will continue to require substantial and increasing amounts of funds to conduct necessary research and development and preclinical and clinical testing of our drug candidates, and to market any drug candidates that receive regulatory approval. We do not expect to generate revenue from operations for the foreseeable future, and our ability to meet our cash obligations as they become due and payable may depend for at least the next several years on our ability to sell securities,

borrow funds or some combination thereof. Based upon our current plans, we believe that our existing capital resources, together with interest thereon, will be sufficient to meet our operating expenses and capital requirements for at least the next 12 months. The first six months cash usage of approximately $9 million is not representative going forward due to staff reductions, winding down laboratory operations and the completion of some clinical trial activities. However, changes in our research and development plans or other events affecting our operating expenses may result in the expenditure of such cash before that time. We may not be successful in raising necessary funds. As of June 30, 2009, our cash and cash equivalents totaled approximately $15.2 million.

Our future capital requirements will depend upon many factors, including progress with preclinical testing and clinical trials, the number and breadth of our programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, and our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We may incur increasing negative cash flows and net losses for the foreseeable future. We may seek additional funding through public or private financing or through collaborative arrangements with strategic partners.

Staffing and Strategy

During February 2009, we announced an aggressive cost-cutting plan to preserve capital and to focus on the advancement of our clinical development programs of TRIOLEX™ (HE3286) and APOPTONE™ (HE3235). As a result, we reduced our workforce by 20 employees (approximately 33%) and had 42 FTEs (full-time equivalents) at the end of the first quarter, March 2009. We continue to focus the company's efforts on the clinical programs and reassess the staffing requirements on a regular basis. During the second quarter, there was some attrition and several employees switched from full-time to a part time basis, bringing our FTEs to 36.5 at the end of the June. We anticipate the FTEs to be approximately 29 by the end of September with the completion of the remaining pre-clinical projects and some clinical activities.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the "Risk Factors" section below and in our other filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2008. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this quarterly report on Form 10-Q. Our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.