OVERVIEW AND KEY DEVELOPMENTS IN FISCAL 2009

We are a biopharmaceutical company historically focused on developing investigational drugs for central nervous system conditions. In January 2009, we terminated development of our most advanced product candidate, Viprinextm, which was studied in Phase 3 clinical trials as a potential new drug to treat acute ischemic stroke. The decision to terminate development of Viprinex followed an interim analysis of the Phase 3 clinical trials which indicated that the drug did not meet pre-established efficacy criteria. In June 2009, we terminated our collaboration and license agreements with the Buck Institute. In June 2009, we also terminated our obligations to provide on-going drug development support services for XERECEPT® to Celtic Pharma. In August 2009, we terminated our license and cooperation agreement with Merz and CMCC, which entitled us to receive certain royalties on the U.S. product sales of memantine, in return for Merz' agreement to make a final payment to us. Remaining in our drug development portfolio are rights to receive payments if XERECEPT, a phase 3 investigational drug for brain

edema associated with cerebral tumors, is successfully developed and commercialized by Celtic Pharma or sold to a third party.

In March 2009, our Board of Directors hired RBC as our financial advisor to assist in the evaluation of various options to enhance stockholder value, including a potential sale of the Company or its major assets. To date, no transactions have been identified which the Board of Directors believes would return a greater value to stockholders than a liquidation. Subsequent to our fiscal year end, in August 2009, our Board of Directors approved a Plan of Complete Liquidation and Dissolution of the Company, subject to stockholder approval.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates that affect the amounts reported and the disclosures made. Actual results could differ materially from those estimates. The following are critical accounting policies and estimates that we believe are the most important and/or subjective items used in determining our financial condition and results of operations as presented in the consolidated financial statements.

Revenue recognition

Revenue from nonrefundable up-front fees where we continue involvement through a service agreement or other obligation is initially classified as "deferred revenue," a liability on our consolidated balance sheet. We subsequently amortize the deferred revenue into "collaboration service revenue" in the consolidated statement of operations over the period of our service obligations. Technology and collaboration service revenue is recognized according to the terms of the contractual agreements to which we are a party, when our performance requirements have been fulfilled, the amount is fixed and determinable, and collection is reasonably assured. Revenue from license fees with non-cancelable, non-refundable terms and no future performance obligations is recognized when collection is assured. Milestone payments are recognized when we have fulfilled development milestones and collection is also assured. Revenue from services performed for other parties is recorded during the period in which the expenses are incurred. In fiscal 2009, we terminated the collaboration and services agreement with Celtic Pharma effective June 30, 2009, and accordingly recognized the remaining deferred revenue related to this agreement. As of June 30, 2009, we no longer had any deferred revenue on our balance sheet.

Royalty revenue is generally recorded when payments are received, which is often one to two quarters after the period in which the products sales have occurred, because there is no information available to us on the product sales until the time we receive the royalty payment.

Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their relative fair values, and the applicable revenue recognition criteria are identified and applied to each of the units.

Research and development expenses

Our research and development costs are expensed as incurred. Research and development includes clinical trial costs, development and manufacturing costs for investigational drugs, payments to clinical and contract research organizations, compensation expenses for drug development personnel, consulting and advisor costs, preclinical studies and other costs related to development of our product candidates. Research and development expenses include expenses that are incurred over multiple reporting periods, such as fees for contractors and consultants, patient treatment costs related to clinical trials and investigational drug manufacturing costs. We assess the level and related costs of the services provided during each reporting period, including the percentage of work completed through each reporting period, to determine the portion to expense in each period. The assessment of the percentage of work completed that determines the amount of research and development expense that should be recognized in a given period sometimes requires significant judgment. We apply our judgment and base our estimates on historical experience and the information available at the time of reporting.

Estimates Involved in Determining Fair Value of Investments

We estimate the fair value of our investments in Auction Rate Securities, or ARS, based on models of discounted cash flow and assumptions regarding future interest rates. The Company's investments in ARS were initially structured to provide liquidity via an auction process that reset the applicable interest rate at predetermined calendar intervals. Beginning in February 2008, failed auctions occurred throughout the ARS market, and since then all auctions for our ARS have been unsuccessful. While the credit rating of these securities remains high and the ARS are paying interest according to their terms, as a result of the potentially long maturity and lack of liquidity for ARS, we believe that the value of the ARS in our portfolio has been impaired and we have recorded impairment charges to reflect our judgment that the decline in value is other-than-temporary. Models estimating the value of ARS are complex and require estimates that can significantly change their value.

Equity Financing Warrants

We have issued warrants in connection with sales of our common stock to raise capital. We generally account for warrants we issue as a component of stockholders' equity when permitted under accounting rules. However, when the terms of the warrants require registered shares to be delivered to the investors, or require potential cash payments to be made under specified circumstances, we account for the estimated fair value of the warrants as a liability under the terms of Emerging Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. This standard specifies that our ability to deliver registered shares upon an exercise of the warrants and our potential obligation to cash-settle the warrants are deemed to be beyond our control, and therefore the value of the warrants must be accounted for as a liability. As with stock-based compensation, there is a high degree of subjectivity involved in determining the input values needed to estimate the fair value of the warrants. Changes in these assumptions, particularly the estimated volatility, can materially affect the resulting estimates of the fair values of the warrants on our consolidated balance sheet.

Stock-based compensation

We account for stock options granted to employees using an estimate of the fair value of the stock option on the date that it is granted. This estimated fair value is recognized as an expense in the consolidated statement of operations on a straight-line basis over the vesting period of the underlying stock option, generally four years for employees and one to three years for directors. There is a high degree of subjectivity involved in estimating the input values needed to estimate the fair value of stock options. Changes in these assumptions, particularly the estimated volatility and the estimated term of the options, can materially affect the resulting estimates of the fair values of the options that are granted. The expenses recorded for stock-based compensation in our financial statements may differ significantly from the actual value realized by the recipients of the stock options. Due to the declines in our stock price over the past several years, stock options that we have issued have resulted in little or no value to the recipients. Under accounting requirements, the expenses recorded in the consolidated financial statements are not adjusted to the actual amounts, if any, realized by stock option recipients. Users of the financial statements should understand that the expenses we recognize for stock-based compensation do not result in any payments of cash by us.

Recent Accounting Pronouncements

In October 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP SFAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active and the use of market quotes when assessing the relevance of observable and unobservable data. The guidance in FSP SFAS 157-3 was effective immediately upon adoption and did not have a significant impact on our consolidated financial position or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures About Fair Value of Financial Instruments, to require disclosures regarding fair value of financial instruments. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require certain disclosures in summarized financial information at interim reporting

periods. This FSP is effective for reporting periods ending after June 15, 2009. On June 30, 2009, we adopted this FSP, which did not have a material effect on the determination or reporting of our financial results.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. This FSP is effective for reporting periods ending after June 15, 2009. On June 30, 2009, we adopted this FSP, which did not have a material effect on the determination or reporting of our financial results.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Among other things, SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS 165 effective June 30, 2009 did not have a material effect on our consolidated financial statements.

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 source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 will be effective for our interim financial statements for the quarter ending September 30, 2009. SFAS 168 does not change GAAP and therefore will not have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS

Overview

We reported net income for the fiscal year ended June 30, 2009 primarily due to our terminating an agreement for which we were required to provide on-going services to a corporate collaborator, resulting in the recognition of approximately $18.8 million in revenue that had previously been deferred. In addition, for the fiscal year ended June 30, 2009, we received approximately $7.1 million in royalties which were also recognized as revenue. Our operating expenses totaled approximately $22.9 million, substantially all of which resulted in an outflow of cash. Because we recognized revenue into the statement of operations for which the cash was previously received, in addition to the revenue for which cash was received in 2009, there was a significant difference between our net income and our cash flows. For the fiscal year ended June 30, 2009, net income was approximately $3.1 million, and cash used in operations was approximately $16.4 million. More detailed descriptions of key components of the fiscal 2009 results of operations follows, along with comparisons to the results of operations for fiscal years 2008 and 2007.

Revenues

The major components of our revenue are as follows (in thousands):


                                                                                            Increase (Decrease)
                                                  Fiscal Year Ended June 30,                  from Prior Year
                                               2009           2008          2007         2009/2008        2008/2007

XERECEPT sale                                $  18,792      $  5,500      $  5,500      $    13,292      $         -
Collaboration services                             493         1,007         5,320             (514 )         (4,313 )

Technology sale and collaboration services      19,285         6,507        10,820           12,778           (4,313 )
Royalty                                          7,065         8,253         6,853           (1,188 )          1,400

                                             $  26,350      $ 14,760      $ 17,673      $    11,590      $    (2,913 )

Total revenues of $26,350,000 for fiscal year ended June 30, 2009 increased by $11,590,000 from revenues of $14,760,000 in fiscal 2008. Our fiscal 2009 revenues included $18,792,000 deferred earlier from the sale of XERECEPT, which we recognized in fiscal 2009 because we terminated our obligation to provide on-going services to Celtic Pharma. In addition, we recognized and received $7,065,000 from royalties on the commercial sales of memantine by Merz and its marketing partners and $493,000 from the reimbursement of the direct expenses incurred for services provided to Celtic Pharma for the development of XERECEPT in the United States. Revenue from the sale of XERECEPT was higher in fiscal 2009 than in fiscal 2008 because we terminated our services agreement with Celtic Pharma in fiscal 2009, requiring us to recognize additional revenue previously deferred. Royalties were lower in fiscal year 2009 compared to fiscal 2008 because of scheduled reductions in the royalty rate we receive following a 2008 amendment to the Merz agreement. Revenues from collaboration services declined by $514,000, or 51%, because we completed the transition of all remaining XERECEPT drug development work to Celtic Pharma during fiscal 2009.

Total revenues of $14,760,000 for fiscal year ended June 30, 2008 decreased by $2,913,000 from revenues of $17,673,000 in fiscal 2007. Our fiscal 2008 revenues consisted of $8,253,000 from royalties on the commercial sales of memantine by Merz and its marketing partners, $5,500,000 recognized from the fiscal 2006 sale of our rights and interests in XERECEPT to Celtic Pharma, and $1,007,000 from the reimbursement of the direct expenses incurred for services provided to Celtic Pharma for administering the Phase 3 clinical trials and manufacturing of XERECEPT in the United States. Royalties were higher for fiscal year 2008 compared to fiscal 2007 because of higher sales of memantine by Merz and its marketing partners. Revenues from the sale of XERECEPT were the same for fiscal 2008 and 2007 because we recognized the up-front payment of $33 million we received in November 2005 on a straight-line basis over the contractual and estimated term of our obligations, which extended to November 2011 prior to the amendment in June 2009. Revenues from collaboration services declined by $4,313,000, or 81%, to $1,007,000 for fiscal 2008 compared to fiscal 2007 because we transitioned most of the XERECEPT drug development work to Celtic Pharma.

In future periods, we do not expect to record any further revenue from our sale of XERECEPT to Celtic Pharma, or from the provision of collaboration services to Celtic Pharma for XERECEPT. We expect royalty revenue to increase in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 following receipt of a final payment from Merz resulting from our agreement with Merz and CMCC to terminate the license under which we previously received royalties. After the first quarter of fiscal 2010, we do not expect to record any additional royalty revenue from the sales of memantine in the United States or elsewhere.

Research and Development Expenses

Because we have been in the business of drug development and our drug candidates have not been approved for sale, our research and development costs have been expensed as incurred. Research and development includes clinical trial costs, development and manufacturing costs for investigational drugs, payments to clinical and contract research organizations, compensation expenses for drug development personnel, consulting and advisor

costs, preclinical studies and other costs related to development of our product candidates. The following table shows our research and development costs by product under development (in thousands):

                                                                                          Increase/(Decrease)
                                                Fiscal Year Ended June 30,                  from Prior Year
                                             2009           2008          2007         2009/2008        2008/2007

Viprinex for stroke                        $  16,247      $ 22,071      $ 21,208      $    (5,824 )    $       863
XERECEPT                                         487         1,061         5,529             (574 )         (4,468 )
Preclinical programs for Alzheimer's and
Huntington's diseases                            850         1,449             -             (599 )          1,449

                                           $  17,584      $ 24,581      $ 26,737      $    (6,997 )    $    (2,156 )

In fiscal 2009, 2008 and 2007, the majority of our research and development efforts were focused on Viprinex, an investigational drug for the treatment of acute ischemic stroke, to which we acquired rights in July 2004. Following a December 16, 2008 interim analysis of the Viprinex Phase 3 trials, we learned that the efficacy of the drug did not meet predetermined criteria for continued development, and we terminated the program.

During the fiscal year ended June 30, 2009, we incurred expenses of $16,247,000 related to the development of Viprinex for acute ischemic stroke, a decrease of $5,824,000, or 26% from the expenses for the fiscal year ended June 30, 2008. Costs for the Viprinex program decreased because we terminated the clinical trial following receipt of the interim analysis in December 2008, significantly reducing clinical trial costs by almost $10.0 million. Partially offsetting the reduction in Viprinex clinical trial costs were expenses of approximately $3.7 million incurred to terminate our agreements for the snake farm and dedicated facility for the supply and purification of the venom used as an active ingredient in Viprinex. Expenses incurred for the development of XERECEPT declined $574,000 in fiscal 2009 compared to fiscal 2008 as we completed transition of all XERECEPT development work to Celtic Pharma during the year ended June 30, 2009. The decrease in our research and development costs for XERECEPT is comparable to the decrease in revenue for reimbursement of these costs by Celtic Pharma. Expenses for our preclinical programs declined by $599,000 during the year ended June 30, 2009, as compared to the year ended June 30, 2008, because we terminated these programs following the termination of the further development of Viprinex.

During the fiscal year ended June 30, 2008, our expenditures on Viprinex aggregated $22,071,000, an increase of 4% from expenses of $21,208,000 for fiscal 2007. The Viprinex clinical trial expenses increased in fiscal year 2008 due to additional patient enrollment into our clinical trials. The increased clinical trial costs were partially offset by lower manufacturing expenses following the completion of certain development work on the snake farm and purification facility. In fiscal 2008, our expenditures for XERECEPT of decreased by $4,468,000 from the level in fiscal 2007 as we transitioned substantially all drug development activities to Celtic Pharma. The decrease in our research and development costs for XERECEPT was comparable to the decrease in revenue for reimbursement of these costs by Celtic Pharma. During the fiscal year ended June 30, 2008, we entered into two collaboration and license agreements with Buck for the development of proteins in preclinical development for the treatment of Alzheimer's and Huntington's diseases. Under these agreements, we funded specified preclinical research work as performed by Buck in return for development rights to the proteins that were the subject of their research, and there were no comparable costs for fiscal 2007.

If stockholders approve the Plan, we do not expect to incur significant research and development costs in any future periods.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs for executive management, finance, business development and human resources, as well as professional expenses, such as legal and audit, and facilities costs such as rent and insurance. General and administrative expenses were as follows (in thousands):

(Decrease) Increase Fiscal Year Ended June 30, from Prior Year 2009 2008 2007 2009/2008 2008/2007

$ 5,082 $ 6,876 $ 6,537 $ (1,794 ) $ 339

General and administrative expenses decreased $1,794,000, or 26%, for the fiscal year ended June 30, 2009 compared to the fiscal year ended June 30, 2008. The lower expenses were primarily the result of a reduction in the number of employees following the failure of our Viprinex program, partially offset by severance payments to the terminated employees. In addition, we terminated substantially all investor relation activities and closed our office in New Jersey, further reducing costs in fiscal 2009.

General and administrative expenses increased $339,000, or 5%, for the fiscal year ended June 30, 2008 compared to the fiscal year ended June 30, 2007. The increase was primarily due to an increase in compensation and benefits after we hired additional personnel to address earlier material weaknesses in our internal control and an increase in legal and consulting fees related to new contracts, which was partially offset by a reduction in audit and consulting fees following our hiring of the additional administrative personnel.

As a result of the winding-down of our activities to date, we expect cash general and administrative expenses to be less than $1.0 million during each of the quarters ending September 30 and December 31, 2009, including additional employee termination costs. These costs are expected to be reduced further if the Plan is approved.

Impairment Charge for Property and Equipment

We recorded a charge of $193,000 for specialized equipment utilized in the purification of snake venom used as the active ingredient in our investigational drug Viprinex. Following the termination of the clinical trial program, we determined that the carrying costs for the asset were no longer recoverable and recorded the impairment charge during the fiscal year ended June 30, 2009. There were no comparable charges for the fiscal years ended June 30, 2008 or 2007.

Impairment Charge for Decrease in Fair Value of Investments

We recorded charges of $1,013,000 and $1,778,000 for the fiscal years ended June 30, 2009 and 2008, respectively, for the decrease in value of our investments in ARS. ARS were structured to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals. Beginning in February 2008, auctions failed to settle for the ARS held in our investment portfolio and we believe the value of these investments have been impaired. The write-down of the values of the ARS held in our portfolio is based on a model of discounted cash flows. Further charges were recorded in fiscal 2009 in addition to the charges in fiscal 2008 due to further deterioration of the credit markets in fiscal 2009. There were no comparable charges for fiscal 2007.

Interest Income

Interest income decreased to $748,000 for the fiscal year ended June 30, 2009 from $1,254,000 for the fiscal year ended June 30, 2008, a reduction of $506,000, or 40%. The lower interest income in fiscal 2009 was the result of both lower interest rates and lower balances in our cash and investments accounts. Interest income increased to $1,254,000 for the fiscal year ended June 30, 2008 from $493,000 for the fiscal year ended June 30, 2007 due to substantially higher cash and investments balances following an underwritten public offering in November 2007, more than offsetting the decline in interest rates between the periods.

Interest Expense

. . .