You should read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our 2009 Financial Statements and accompanying Notes. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain certain forward-looking statements involving risks and uncertainties.

Overview

We are a development stage company engaged in developing a class of biopharmaceutical drugs for treating autoimmune and inflammatory diseases. Our lead product, PRTX-100, has demonstrated effectiveness in pre-clinical studies in regulating the immune system with persisting effects. However, the effectiveness of PRTX-100 shown in pre-clinical studies using animal models may not be predictive of the results that we will see in our clinical trials. We currently have no product on the market. The Company's initial business model initially targeted the autoimmune diseases idiopathic thrombocytopenic purpura, or ITP, and Rheumatoid Arthritis, or RA.

As of the date of this Report, the Company has no employees and it has insufficient funds to cover future clinical trials and Chemistry, Manufacturing and Control or CMC related expenses beyond the third calendar quarter of 2009. If the Company is unable to raise sufficient additional funds, it will likely be required to suspend or cease further operations on or about the end of the third calendar quarter of 2009 until such financing is obtained, if ever. These matters raise substantial doubt about the ability of the Company to continue as a going concern.

Favorable pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid the foundation for the Investigational New Drug Application or IND, for treating RA. We submitted the IND to the United States Food and Drug Administration or FDA in March 2005 and later in March 2005 the FDA verbally disclosed to us that it had placed our IND on clinical hold, pending additional product characterization. In August 2005, we formally replied to the FDA and in September 2005, the FDA notified us that it had lifted the clinical hold on our IND and that our proposed study could proceed. We commenced with our first Phase I clinical trial in December 2005 and completed the Phase I clinical trial in March 2006. This Phase I clinical trial was performed in healthy volunteers, and was designed primarily to assess the safety and tolerability of PRTX-100. The basic safety data demonstrated that PRTX-100 was safe and well tolerated. There were no deaths or serious adverse events. The pharmacokinetic (PK) profile was favorable and the pre-clinical PK data were confirmed by the data in this Phase I clinical trial. In May 2007, we filed an amendment to the IND with the FDA. This amendment included the final Phase I safety study report, CMC update, and a protocol for another Phase I clinical trial.

RA is an autoimmune disease that causes the inflammation of the membrane lining multiple joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed joint lining, the synovium, can invade and damage bone and cartilage. Inflammatory cells release enzymes and cytokines that may damage bone and cartilage. The involved joint can lose its shape and alignment, resulting in pain and loss of movement. In July 2007, we commenced with an additional Phase I clinical trial designed to gain more detailed information on biomarkers, including gene expression profiling and platelet functional assessments which will allow for more optimized patient selection and targeting in the upcoming clinical trials. This second Phase I clinical trial extended the clinical investigation of PRTX-100 tolerability, PK, and pharmacodynamics, or PD, at higher dose ranges. Dosing was completed in July 2007 and final results indicated that the drug was safe and well tolerated. A Phase Ib randomized, double-blind, placebo-controlled, multiple dose, dose escalation safety and tolerability study of PRTX-100 in combination with methotrexate in patients with active RA in South Africa has been approved and subject to adequate additional financing, we anticipate starting this clinical trial.

ITP is an uncommon autoimmune bleeding disorder characterized by too few platelets in the blood. Affected individuals may have bruising, small purple marks on the skin called petechiae, bleeding from the gums after having dental work, nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual bleeding. Although bleeding in the brain is rare, it can be life threatening if it occurs. The affected individuals make antibodies against their own platelets leading to the platelets' destruction, which in turn leads to the abnormal bleeding. In ITP, we contracted Trident Clinical Research Pty Ltd, a leading Australian clinical research organization, to manage and monitor our first-in-patient ITP clinical trial. This clinical trial is designed to provide initial multiple dose safety and PK data as well as preliminary efficacy information. We have been approved for six sites in Australia and one in New Zealand, all regional referral centers for treatment of chronic ITP, to conduct a repeated dose study of PRTX-100 in chronic ITP patients. This clinical trial began enrolling patients in the second calendar quarter of 2008. In calendar 2008, we enrolled nine patients of which five completed the trial and final results indicated that the drug was safe and well tolerated, although no efficacy data was obtained. Subsequently, the company obtained approval of the protocol to increase the dose range and continues to actively solicit patients in calendar 2009; however no patients have been enrolled as of the date of this report.

As of the date of this Report, the Company has suspended the further recruitment of patients for its ITP clinical trials pending the raising of additional funding, the retention of additional clinical personnel and an evaluation of the Company's clinical trial programs.

In the area of intellectual property and derivative drug development, our patent application was filed in April 2002 and in May 2007 the PTO issued patent #7,211,258 titled "Protein A Compositions and Methods of Use." Additionally, patent applications relating to the manufacturing process of PRTX-100 and new compounds are currently in process.

Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note 2 to the financial statements describes the significant accounting policies and methods used in the preparation of our financial statements.

We have identified the policies below as some of the more critical to our business and the understanding of our financial position and results of operations. These policies may involve a high degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. Although we believe our judgments and estimates are appropriate and correct, actual future results may differ from estimates. If different assumptions or conditions were to prevail, the results could be materially different from these reported results. The impact and any associated risks related to these policies on our business operations are discussed throughout this report where such policies affect our reported and expected financial results.

The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. These estimates have a material impact on our financial statements and are discussed in detail throughout this report.

As part of the process of preparing our financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would increase income in the period such determination was made.

Significant management judgment is required in determining the valuation allowance recorded against net deferred tax assets, which primarily consist of net operating loss carry-forwards. We have recorded a full valuation allowance of $18,842,000 as of May 31, 2009, due to uncertainties related to our ability to utilize such net operating loss carry-forwards before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable, if at all.

We account for our stock option grants under the provisions of SFAS No. 123R, Share-Based Payments ("SFAS 123R"). SFAS 123R requires the recognition of the fair value of share-based compensation in the statements of operations. The fair value of our stock option awards was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections in adopting and implementing SFAS 123R, including expected stock price volatility and the estimated life of each award. The fair value of share-based awards is amortized over the vesting period of the award and we have elected to use the straight-line method for awards granted after the adoption of SFAS 123R. Prior to the adoption of SFAS 123R, we accounted for our stock option grants under the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB25") and made pro forma footnote disclosures as required by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation.

Results of Operations

Fiscal year ended May 31, 2009 compared to fiscal year ended May 31, 2008

Research and Development Expenses - Research and Development expenses decreased from $7,657,127 in 2008 to $3,490,956 in 2009. The decrease of $4,166,171, or 54%, was primarily the result of fewer personnel along with lower manufacturing and regulatory consulting related expenses. Also, included in Research & Development expenses in 2009 was $223,961 compared to $334,228 in 2008 for stock option compensation expense subsequent to the adoption of SFAS No. 123R.

Administrative Expenses - Administrative expenses increased from $2,759,463 in 2008 to $3,505,259 in 2009. The increase of $745,796, or 27%, was primarily due to the impact of accruing for the severance which totaled $1,185,638, along with $529,307 compared to $676,797 in 2008 for stock option compensation expense subsequent to the adoption of SFAS No. 123R.

Professional Fees - Professional fees decreased from $619,314 in 2007 to $365,670 in 2009. The decrease of $253,644, or 41%, was due to a decrease in business development activities pertaining to potential strategic partnerships and investor relations activity as compared to the same period last year.

Interest income - Interest income decreased from $549,292 in 2008 to $57,651 in 2009. The decrease of $491,641 or 90% was attributed to a decrease in interest bearing cash balances resulting from the use of cash for operations and lower interest rates as compared to the same period last year.

Fiscal year ended May 31, 2008 compared to fiscal year ended May 31, 2007

Research and Development Expenses - Research and Development expenses increased from $5,562,485 in 2007 to $7,657,127 in 2008. The increase of $2,094,642, or 38%, was primarily the result of conducting and planning clinical trials including regulatory consulting along with product manufacturing, formulation and qualification related costs. On January 2, 2007, the Company terminated the employment of Victor S. Sloan, MD, former Senior Vice President and Chief Medical Officer, under the terms of his employment agreement, which resulted in an expense related to severance of approximately $290,000. Also, included in Research & Development expenses in 2008 was $334,228 compared to $395,625 in 2007 for stock option compensation expense subsequent to the adoption of SFAS No. 123R.

Administrative Expenses - Administrative expenses decreased from $3,360,252 in 2007 to $2,759,463 in 2008. The decrease of $600,789, or 18%, was primarily due to stock option compensation expense. Included in Administrative expenses in 2008 was $676,797 for stock option compensation expense compared to $1,431,255 in 2007.

Professional Fees - Professional fees increased from $544,903 in 2007 to $619,314 in 2008. The increase of $74,411, or 14%, was due to an increase in business development activities pertaining to potential strategic partnerships as compared to the same period last year.

Interest income - Interest income decreased from $1,020,820 in 2007 to $549,292 in 2008. The decrease of $471,528, or 46% was attributed to a decrease in interest bearing cash balances resulting from the use of cash in operations and lower interest rates as compared to the same period last year.

Liquidity and Capital Resources

Since 1999, we have incurred significant losses, and we expect to experience operating losses and negative operating cash flow for the foreseeable future. Our primary source of cash to meet short-term and long-term liquidity needs is the sale of shares of our common stock. If the Company is unable to raise sufficient additional funds, it will likely be required to suspend or cease further operations on or about the end of the third calendar quarter of 2009 until such financing is obtained, if ever. These matters raise substantial doubt about the ability of the Company to continue as a going concern. We issue shares in private placements at a discount to the current market price, as such the resale of privately-placed shares are restricted under the Securities Act, which reduces their liquidity and, accordingly, their value as compared to freely-tradable shares on the open market.

On September 18, 2003, we raised $12,657,599 through the sale of 7,445,646 shares of our common stock at $1.70 per share, with warrants to purchase an additional 3,164,395 shares of our common stock, at an exercise price of $2.40 per share. The warrants expired on September 19, 2008. Net of transaction costs of $1,301,536, our proceeds were $11,356,063.

On May 25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our common stock at $1.95 per share, with warrants to purchase an additional 920,121 shares of our common stock, at an exercise price of $2.25 per share. The warrants expire on May 25, 2010. As part of this transaction, the exercise price for the warrants from the September 2003 transaction were lowered from $2.40 per share to $2.25 per share. Net of transaction costs of $206,717, our proceeds were $4,851,168.

On December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares of our common stock at $2.25 per share, with warrants to purchase an additional 648,784 shares of our common stock, at an exercise price of $2.99 per share. We also issued warrants to purchase 227,074 shares of our common stock, at an exercise price of $2.99 per share, to the placement agent. All the warrants expire on December 30, 2010. Net of transaction costs of approximately $328,118, our proceeds were $5,510,941.

In the fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants which resulted in $786,538 in cash proceeds.

On July 7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through the sale of 6,071,013 shares of our common stock at $2.50 per share, with warrants to purchase an additional 1,517,753 shares of our common stock, at an exercise price of $3.85 per share. We also issued warrants to purchase 531,214 shares of our common stock, at an exercise price of $3.85 per share, to the placement agent. All the warrants expire on July 7, 2011.

In the first fiscal quarter of 2007, existing investors and option holders exercised 133,500 warrants and 6,000 options which resulted in $315,574 in cash proceeds.

To the extent any further warrants are exercised, we intend to use the proceeds for general working capital and corporate purposes. If all warrants are exercised in cash, our proceeds would be approximately $18.9 million.

The following is a summary of selected cash flow information for the fiscal years ended May 31, 2009, 2008 and 2007:

                                                      Year Ended        Year Ended        Year Ended
                                                     May 31, 2009      May 31, 2008      May 31, 2007
Net loss                                             $  (7,230,206 )   $ (10,490,758 )   $  (8,451,942 )
Adjustments for non-cash operating items                   803,067         1,188,064         1,996,715
Net cash operating loss                              $  (6,427,139 )   $  (9,302,694 )   $  (6,455,227 )
Net change in assets and liabilities                       421,622           199,349          (120,785 )
Net cash used in operating activities                $  (6,005,517 )   $  (9,103,345 )   $  (6,576,012 )
Net cash provided/(used) in investing activities     $     200,000     $           -     $    (403,674 )
Net cash provided by financing activities            $           -     $           -     $  14,533,295

Net Cash Used In Operating Activities and Operating Cash Flow Requirements Outlook

Our operating cash outflows for the fiscal years ended May 31, 2009, 2008 and 2007 were primarily for research and development expenditures for PRTX-100 and administrative operations. We expect to continue to use cash resources to fund operating losses and/or the wind-down of our operations if additional financing is not obtained . Even with additional financing, we would expect to continue to incur operating losses in fiscal 2010 and beyond due to continuing research and development activities.

Net Cash Used In Investing Activities and Investing Requirements Outlook

Net cash provided by investing activities for the fiscal year ended May 31, 2009 resulted from the sale of capital equipment and net cash used by investing activities for fiscal year ended May 31, 2007 relates primarily to the acquisition of capital equipment. Subject to adequate additional financing, we expect to continue to require investments in information technology, laboratory and office equipment to support our research and development activities.

Net Cash Provided by Financing Activities and Financing Requirements Outlook

Net cash inflows provided by financing activities for the fiscal years ended May 31, 2007 resulted primarily from the sale of shares of common stock and the exercise of warrants and stock options.

We may never receive regulatory approval for any of our product candidates, generate product sales revenues, achieve profitable operations or generate positive cash flows from operations, and even if profitable operations are achieved, these may not be sustained on a continuing basis. We have invested a significant portion of our time and financial resources since our inception in the development of PRTX-100, and our potential to achieve revenues from product sales in the foreseeable future is dependent largely upon obtaining regulatory approval for and successfully commercializing PRTX-100, especially in the United States.

We expect to continue to use our cash and investments resources to fund operating and investing activities. Our existing cash and cash equivalents of $2,637,292 as of May 31, 2009 will be sufficient to fund operations into the third calendar quarter of 2009. We will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our products to market and to establish commercial manufacturing, marketing and sales capabilities. In order to raise additional capital, we expect to seek financing through the private or public sales of our securities, which may include common stock, debt and/or warrants to purchase common stock.

Off Balance Sheet Arrangements and Contractual Obligations

We have entered into the following contractual obligations:

· Employee Agreements-Officers. As previously disclosed in our Form 10-Q filed on April 14, 2009, Messers. Kane and Rose voluntarily terminated their employment. Messers. Kane and Rose remain the CEO and CFO, respectively, of the Company. As of the date of this report, while Mr. Rose has not accepted full time employment elsewhere, Mr. Kane is now currently also the Chairman and CEO of Patient Safety Technologies, Inc.

· Directors Agreements. To attract and retain qualified candidates to serve on the board of directors, we have previously entered into agreements with G. Kirk Raab, Chairman of the Board, Carleton A. Holstrom, Chairman of the Audit Committee, Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro under which Messrs. Raab, Holstrom, Dr. Bauer, Mr. Tombros, Mr. Dougherty and Mr. Stagnaro receive aggregate annual cash payments aggregating $150,000, $20,000, $20,000, $20,000, $20,000 and $20,000 respectively, as directors' fees. Pursuant to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each of the outside Directors of the Company, G. Kirk Raab, Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro who are currently entitled to a Director's cash fee agreed to waive all such accrued and unpaid Director cash fees and terminate any rights for further cash fees. For Mr. Raab, those cash fees ceased as of April 1, 2009. For the other Directors, those cash fees ceased as of February 1, 2009. In addition, each of these Directors agreed to terminate immediately all of their existing stock options in the Company (vested and unvested).

· Operating Lease - Office Space. We have entered into a three-year operating lease in New Hope, PA for 3,795 square feet of office and laboratory space. The lease commenced on January 9, 2004 and was originally to expire on February 28, 2007. On November 18, 2005, we modified the existing lease which added an additional 2,147 square feet and extended the lease term to January 31, 2008 and on April 30, 2007, we modified the existing lease and extended the lease term to January 31, 2010.

· Operating Lease - Copier. We entered into a sixty-three month operating lease for a multi-function copier. The lease commenced on December 16, 2004 and will expire on March 16, 2010.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No.162 ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification as the single source of authoritative US generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 will not have an impact on the Company's financial position, results of operations or cash flow. The Company will update the disclosures for the appropriate FASB codification reference after adoption in the second quarter of fiscal 2010.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company has evaluated subsequent events after the balance sheet date of May 31, 2009 through the date this annual report is filed on August 28, 2009.

In December 2007, the FASB issued SFAS No. 141R (revised 2007) Business Combinations ("SFAS 141R"). SFAS 141R states that all business combinations (whether full, partial or step acquisitions) will result in all assets and liabilities of an acquired business being recorded at their fair values. Certain forms of contingent considerations and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141R also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. We are currently evaluating the impact, if any, of SFAS 141R upon adoption on our financial statements.

In December 2007, the FASB ratified the Emerging Issue Task Force ("EITF") Issue 07-01, Accounting for Collaborative Arrangements ("EITF 07-01"). EITF 07-01 clarifies the accounting for contractual arrangements wherein two or more parties come together to participate in a joint operating activity which is conducted based on provisions of a contract. EITF 07-01 provides guidance on income statement classification of revenues and expenses related to such activities, and specifies disclosures that should be made with respect to such activities. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of EITF 07-01 on its financial statements.

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. The impact of adopting FIN 48 was not material as of the date of adoption or in subsequent periods. As a result of the implementation of Interpretation 48, the Company did not recognize any change in the liability for unrecognized tax benefits and there was no change to the June 1, 2007 balance of retained earnings.

The Company is subject to US federal income tax as well as income taxes of state jurisdiction. The Company is not currently under examination by any Federal or state jurisdiction. The federal statute of limitations and state are opened from inception forward. Management believes that the accrual for tax liabilities is . . .