ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

You should read the following summary together with the more detailed information and consolidated financial statements and notes thereto and schedules appearing elsewhere in this report. Throughout this report when we refer to the "Company," "Proteonomix," "we," "our" or "us," we mean Proteonomix, Inc.

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Except for historical information, the material contained in this Management's Discussion and Analysis is forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties. These risks and uncertainties include the rate of market development and acceptance of our products, the unpredictability of our sales cycle, the limited revenues and significant operating losses generated to date, and the possibility of significant ongoing capital requirements.

Our independent registered public accounting firm's report on the consolidated financial statements included herein for the year ended December 31, 2011 and 2010 contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become our stockholder.

General Business Overview

We are a biotechnology company engaged in the discovery and development of cell therapeutics, tissue banking services and cosmeceutical products. Our technologies are embodied in patent applications including but not limited to: a medium and scaffolding for enhancing the growth of cells, a growth platform for cells, a device to eliminate malformed cells via filtration. We have developed products utilizing our intellectual property including but not limited to an anti-aging cosmeceutical based on our NC138 protein matrix UMK 121 and the StromaCel™ cardiac treatment. We have utilized our management and advisory team in conjunction with third party universities and research centers to develop these products and technologies.

Company Overview

Cosmeceuticals - We have developed a range of anti-aging products, which we intend to manufacture, market and sell through our Proteoderm subsidiary based on a stem cell secreted matrix of proteins that stimulate collagen.

Cell Therapies - We are developing a diverse array of therapies for major diseases such as cardiac arrest and diabetes. Our first product, StromaCel™ cellular material for post-myocardial infarction patients that we intend to bring to FDA trials in 2012 in conjunction with our new cellular expansion technology. As of December 31, 2011 the Company has not filed an IND with the FDA for its StromaCel treatment. The Company intends to raise sufficient funds over the next twelve months (please see "Risk Factors" associated with FDA trials at Page 25) in order to file such application with the FDA and to contract with third party to conduct such study and to retain the services of an IRB for such trial. Pre-clinical studies evidenced sufficient efficacy of similar cells used in StromaCel therapy to continue to pursue the utilization of the cells in a human clinical trial. The benefit of using the cells to treat post-myocardial infarction is the anti-inflammatory effect of StromaCel on damaged cardiac tissue.

Business Model - We are seeking to establish an international network of laboratories through which we intend to reach market early for treatments still in FDA trials while simultaneously expediting the FDA trials with the data collected from the treatment. As of December 31, 2012, we have not established any network of laboratories either domestic or international.

Pharmacological - Our first pharmacological product, currently named UMK 121, provides for the in vivo mobilization of specific bone marrow cells. The pre-clinical studies were conducted in rodents and a large animal model to confirm the potential of the UMK-121 technology to mobilize Stromal Stem Cells ("SSCs") into the peripheral blood of animals, thereby making the SSCs available for therapeutic uses. The Company has created a wholly owned subsidiary, Thor Biopharma Inc. ("THOR") to develop and commercialize the UMK 121. THOR had negotiated an agreement with the University of Miami on a human clinical trial of UMK-121, but this trial was terminated by the University in April, 2012. The Company is continuing to seek a new facility to conduct the trial.

Technology Overview

We have worked together with independent outside laboratories and national universities to develop a portfolio of complementary and synergistic technologies covering all steps in the Regenerative Therapy process. These steps include:

Cell Identification - Stem cells occur in various organs in the body, identifying the desired cells from all other cells is the first step towards a treatment. We have filed patent applications for biomarkers specifically identifying Islet Cells in the pancreas for diabetes treatment and Stromal Cells in bone marrow for cardiac treatment, marketed under the brand name StromaCel™.

Cell Isolation - Once the cells are identified, the desired cells must be isolated from all others to create a pure material to increase efficiency and reduce rejection. This is the second step towards a treatment. We have filed patents on a method of stem cell isolation for various applications.

Cell Conversion - For some treatments, the Stem Cells must be converted from one type to another. We have filed a patent for conversion of pancreatic stem cells into insulin producing beta cells as part of our diabetes research.

Cell Expansion - Once the desired cells have been identified, isolated, and converted for the desired result, the quantity must be dramatically increased in number. Current technology is generally limited to a five-generation increase in cells before differentiation (replication errors). We have developed a unique growth medium and matrix that currently shows many additional generations without differentiation. We have filed a patent application together with John Hopkins University and are currently prosecuting same. This technology is distinguished from other technologies in the manner in which the cells are replicated. The technology involves the utilization of a cellular platform rather than other technologies that involve a device, such as Pluristem Therapeutics PluriX™ three-dimensional process.

Cryopreservation - The final step in treatment is the preservation of the material for storage and transport. We have developed a technology that decreases the numbers of cells lost during the cryopreservation and thawing process and further reduces the chances of contamination.

Proteoderm, Inc.

We have developed cosmeceutical products based on patent applications of our stem cell derived proteins Matrix NC-138™ ("NC138") technology, which we have assigned to our subsidiary, Proteoderm. "Cosmeceutical" is a word blended from "cosmetic" and "pharmaceutical" and is defined as a cosmetic with active pharmaceutical ingredients. Proteoderm introduced our cosmeceutical at the Anti-Aging Conference sponsored by the American Academy of Anti-Aging Medicine held in National Harbor, Maryland in August, 2008 by manning a kiosk and providing samples of our cosmeceutical kits to participants, primarily physicians and industry leaders.

Proteoderm has developed an anti-aging kit consisting of a day cream, night cream, cleanser, exfoliator and under eye cream under the brand name "Matrix NC-138."

We anticipate that the cosmeceutical kits will be ready for shipment to customers as soon as the production process is complete, estimated, in the fourth quarter 2012. This launch was delayed due to inability to manufactureNC-138 due to lack of funds. We also recognized that we needed to have a INCI nomenclature, discussed herein below. Further, The Company also failed to complete a manufacturing agreement to produce the containers and packaging for its cosmeceutical line due to lack of sufficient funds. These impediments have been removed in large part and we anticipate signing the agreements to manufacture both the NC-138 and the packaging materials in the fourth quarter of 2012.

Proteoderm designs, produces and synthesizes proteins, and polypeptides (chains of linked amino acids which when folded in a particular three-dimensional configuration, become protein) secreted by stem cells and incorporate them into uniquely formulated personal care products. Its business concept is to develop and commercialize products based upon sophisticated, high performance biomaterials exclusively for use in the cosmetics and personal care markets. Our marketing and promotional efforts will feature the anti-aging and anti-wrinkle properties of our products formulated with NC-138. We believe that cosmeceuticals containing our Matrix NC 138 can be topically applied to consumers' skin and can be taken up into the outer skin layers to enhance the natural formation of collagen.

In ex vivo studies using an emulsion containing 3% Matrix NC-138™ on where volunteers against a placebo in a half-face double blind study were reviewed. Six volunteers from New York, New Jersey and Connecticut were asked to apply the cream twice daily for six weeks on the crow's feet area. Several parameters were analyzed after six weeks: skin profile, skin hydration and a self-assessment on the product given by panelists through a questionnaire. The studies were conducted during 2008 and 2009.

On the basis of the ex vivo studies, we believe that our cosmeceutical refines skin texture and gives suppleness to the skin thus contributing to a youthful look. We believe this from a totally subjective consideration of the aesthetic appearance of the subjects. However, the research, data and conclusions regarding our cosmeceutical have not been independently verified and the merits of our claims have not been subject to independent evaluation by experts in the cosmeceutical field. The results of our efficacy tests have based on observations of and have not yet been replicated. In addition, there are no established standards for test procedures, methodology or documentation by which companies marketing cosmeceuticals must adhere before making claims about their products' efficacy.

The Personal Care Products Council ("PCPC"), formerly known as the "Cosmetic, Toiletry and Fragrance Association," is a leading national trade association for the cosmetic and personal care products industry. It is a trusted source of information for and about the industry and a vocal advocate for consumer safety and continued access to new, innovative products. The PCPC has adopted a Consumer Commitment Code to formalize many existing product safety practices and to demonstrate its members' commitment to safety. The PCPC does not regulate but provides information on national and international regulation. We have applied to the PCPC. We presently adhere to the Personal Care Products Council Consumer Commitment Code, including filing timely reports with the FDA regarding manufacturing and ingredient usage, and will continue to do so after our membership application is accepted. However there is no penalty for failure to follow the code.

The following principles summarize the code: A company should market cosmetic products only after ensuring that every ingredient and finished product has been substantiated for safety and concentrating whether through the CIR or other appropriate data and information, including adverse events, should be available for inspection by the FDA and should maintain a safety information summary of ingredient and product safety information.

The Cosmetic Ingredient Review ("CIR") Expert Panel is an independent, nonprofit panel of scientists and physicians established in 1976 to assess the safety of ingredients used in cosmetics in the U.S. with the support of the U.S. Food and Drug Administration and the Consumer Federation of America in an open, unbiased, and expert manner, and to publish the results in the peer-reviewed scientific literature. The CIR is now an independent organization, the mission of which is to review and assess the safety of ingredients used in cosmetics in an open, unbiased, and expert manner, and to publish the results in the peer-reviewed scientific literature. Although funded by the PCPC, CIR and the review process are independent from the Council and the cosmetics industry. General policy and direction are given by a six member Steering Committee chaired by the President and CEO of the PCPC, with a dermatologist representing the American Academy of Dermatology, a toxicologist representing the Society of Toxicology, a consumer representative representing the Consumer Federation of America, an industry scientist (the current chair of the PCPC CIR Committee), and the PCPC Executive Vice President for Science

We filed an application to the CIR for our proprietary Matrix NC-138 and it was recently approved. All other ingredients are on the approved list. These ingredients include water, a sun block, oils, thickening agents, moisturizers and fragrances. The approved list of cosmetic ingredients may be found at http://www.cir-safety.org/staff_files/pdf4.pdf.

The CIR Procedures established an Expert Panel to set priorities and review and assess ingredient safety data. The seven CIR Expert Panel voting members are physicians and scientists who have been publicly nominated by consumer, scientific, and medical groups; government agencies; and industry. Expert Panel members must meet the same conflict of interest requirements as individuals serving on FDA advisory committees. Three liaison members serve as nonvoting members representing government, consumers, and industry. With participation of these liaison representatives from FDA, CFA, and the Council, the CIR Expert Panel creates a unique forum for open discussions on issues affecting public safety.

CIR staff members conduct extensive literature searches, compile data, and prepare draft reports on high-priority ingredients. They organize the literature into several categories: chemistry (including physical properties and manufacture), use (cosmetic and non-cosmetic), general biology (with absorption, distribution, metabolism, and excretion data), and animal toxicology (acute, short-term, subchronic, and chronic studies, as well as dermal irritation and sensitization data).

The staff also prepares a clinical assessment of the ingredients that may include epidemiologic studies, along with classic repeated insult patch tests. In vitro test data are also gathered and incorporated into the review.

At each stage of the process, CIR seeks the input of all interested parties during a formal 60-day comment period.

If the open scientific literature contains insufficient information, the Expert Panel will call on industry or other interested parties to provide unpublished data or to undertake specific studies. After multiple opportunities for public comment and open, public discussion, a final safety assessment is issued.

The Panel may make one of four basic decisions regarding an ingredient:

·

Safe ingredients . Ingredients safe in the practices of use (product categories) and concentrations of use for each product category as documented in the safety assessment.

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Unsafe ingredients These are ingredients with specific adverse effects that make them unsuitable for use in cosmetics.

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Safe ingredients, with qualifications. The Panel may reach the conclusion that an ingredient can be used safely, but only under certain conditions. Qualifications frequently relate to maximum concentration, but may also address rinse-off versus leave-on uses and other restrictions.

·

Ingredients for which the data are insufficient. If the Panel reaches an insufficient data conclusion, it does not state whether the ingredient is safe or unsafe. The Panel is, however, describing a situation in which the available data do not support safety. The specific data that would allow the Panel to complete its assessment always are identified.

CIR safety assessments are made available as monographs and are published in the International Journal of Toxicology. Each year, CIR publishes the CIR Compendium, a comprehensive collection of findings from all CIR reports.

Recognizing that new information may be available on safety assessments completed years ago, the Expert Panel may re-review of assessments that are more than 15 years old or for which there is some new information known to the Panel. If there are relevant new data, the Panel will consider the need for an amended safety assessment. If the search for newly available data fails to uncover information relevant to ingredient safety, or if the new data duplicate information already in the safety assessment, the Expert Panel will not reopen the safety assessment.

Although we believe that the results of our preliminary ex vivo studies are determinative of the efficacy of our cosmeceutical, we plan to perform a more formal and more extensive study for marketing purpose. The multi-center efficacy study is on a larger scale than previous tests we have conducted of the effects of the Proteoderm skin care line on aged skin, particularly wrinkles. The study is designed as a split-face study (i.e. one half the face using our cosmeceutical and the other the creams or lotions presently used by the participants in the study), conducted over the course of a twelve-week period for 150 patients. We anticipate that the study will commence as soon as shipment of product begins as we anticipate having a sufficient number of cosmeceutical kits and other materials for the test. We plan to ship our kits to customers prior to the completion of the study.

The study participants will be photographed immediately prior to commencement of the study, and every two weeks thereafter. Study Materials are expected to total 30-40 pages, including, but not limited to:

·

patient and Investigator questionnaires;

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patient consents (subject to approval of the Company's counsel);

·

instructions to patients and to investigators;

·

written agreements of the Investigators to participate in the Study;

·

study protocol (design of the Study);

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patient logs; and

·

patient assessment forms.

Competition

While we are unaware of any companies that have cosmeceutical technologies similar to the ones we have developed, there are a substantial number of companies are offering anti-aging cosmetics. Many physicians offer Botox and laser therapies. Pending the outcome of further testing of our cosmeceutical, we are not claiming that our cosmeceutical has more advantageous anti-aging properties than other products. Many companies claim to offer "stem-cell related" products but none that we are aware of have obtained CIR INCI name as a new compound.

The University of Miami had entered into an exclusive agreement with us to manufacture Matrix NC-138TM as a product for our subsidiary Proteoderm.. The agreement with University of Miami has expired and we were negotiating an extension. However, the relationship with the University of Miami ended in April 2012 and the Company is now seeking other manufacturing facilities. There can be no assurance that a manufacturing agreement will be executed, or if executed, performed.

Thor Biopharma, Inc.

On January 3, 2011 the Company formed a new subsidiary, Thor BioPharma, Inc., in order to provide an entry into the pharmaceutical market. On March 2, 2011, The Company entered into an agreement with The McNiece Cohen Foundation, Inc. (the "Foundation"), a Florida not-for-profit corporation, to exclusively develop and license the Foundation's UMK-121 Mobilization of Bone marrow Stem Cell technology ("UMK-121") which is a proprietary technology based upon existing FDA approved drugs. The License imposes no upfront costs on the Issuer, which will sublicense UMK-121 to its wholly owned subsidiary Thor BioPharma. The Issuer is required to make milestone payments to the Foundation upon 1) the issuance of a patent requiring payment to the Foundation of 50,000 shares of the Company's common or $100,000 at the option of the Foundation, 2) completion of Phase III trials requiring payment of $200,000 to the Foundation and 3) commercialization which will require the payment of a 3% royalty on net sales. This License may be terminated for any of the following: Foundation has the right to terminate the License, upon written notice, in the event the Company breaches the obligation to pay the above described payments due upon issuance of a patent or the $200,000 due upon completion of a Phase III trial, but the Company has thirty
(30) days to cure a breach of non-payment upon notice; or in the event of breach by the Company of any obligation to pay the 3% royalties or if assigned 3% of all payments received by the Company from the assignee; or in the event of any other breach by either Party, the Parties shall have all ordinary recourse to the legal system to enforce this agreement; or the Company has the right to terminate this Agreement by providing ninety (90) days written notice of its intent to terminate this Agreement to Foundation with or without cause. In the event of termination, such termination shall be without prejudice to Foundation's right to recover all amounts accruing to the Foundation prior to such termination and cancellation. Except as otherwise provided, should this Agreement be terminated for any reason, the Company shall have no rights, express or implied, under any patent property which is the subject matter of this Agreement, nor have the right to recover any royalties paid to the Foundation.. Upon termination, the Company shall have the right to dispose of Licensed Products then in its possession and to complete existing contracts for such products, so long as contracts are completed within six (6) months from the date of termination, subject to the payment of royalties to the Foundation. The term of the License commences upon the Effective Date of the Agreement and continue until the expiration, worldwide, of all of the Patent Rights.

On April 7, 2011, the Company announced that it filed a provisional patent application in anticipation of commencement of its initial clinical trial of a drug combination thought to extend life expectancy for a class of terminally ill patients awaiting liver transplants. The Company, based upon its exclusive license agreement to develop Mobilization of Bone Marrow Stem Cells Technology (UMK-121), filed a patent application in April 2011, covering mobilization of non-hematopoietic stem cells for applications in regenerative medicine.

The Company and the University of Miami entered into a contract toward the end of 2011 to conduct a human clinical trial of UMK-121 on End Stage Liver Disease patients. The Company expected this trial to commence in February, 2012. This trial was terminated by the University in April, 2012. The Company is continuing to seek a new facility to conduct the trial. We received notice of FDA permission to commence trial of our UMK-121 on or about August 7, 2012 and we hope to begin our trials within the next sixty (60) days. The Company believes that the technology has applications in treating kidney, cardiac and lung diseases as well although very little work has been done in those areas.

StromaCel, Inc.

In an effort to place different technologies and therapies in different subsidiaries, Stromacel, Inc. ("StromaCel") was registered as a Florida corporation on December 24, 2009 by our President and CEO, Michael Cohen, for $168. In February, 2010 we acquired all of StromaCel's authorized shares at cost for $168 and StromaCel became a subsidiary of the Company.

StromaCel intends to develop therapies using stromal cells, which are key components of tissues and provide critical cytokines and growth factors as well as the cellular microenvironment for normal homeostasis. A cytokine is a small protein released by cells that affects the interactions and communications between cells and the behavior of cells. A growth factor is a naturally occurring substance capable of stimulating cellular growth, proliferation and differentiation. Homeostasis is a self-regulating process by which a biological system maintains stability while adjusting to changing conditions. Stromal cells provide a niche proliferation environment for stem cells. StromaCel's goal is to study the basic cellular properties of stromal cells and to identify the utility of cellular and protein derivatives in disease repair.

With the above in mind, on May 4, 2010, Proteonomix licensed from the McNiece Cohen Foundation the Stromal Cell technology ("Technology") for potential therapeutic use in the regrowth of damaged cardiac cells after a heart attack.
The McNiece Cohen Foundation was formed by Proteonomix President, Michael Cohen, and its Chief Scientific Officer and Vice-President, Ian McNiece, PhD to develop cellular technology for patients who have suffered infarctions. The term of this License commenced May 4, 2010 and, unless sooner terminated, terminates as to individual patent rights in each jurisdiction where such rights may exist upon the expiration of the patent rights in each individual country. Upon expiration in a given jurisdiction, Proteonomix shall continue to have a license on the same terms as prior to patent expiration, except that such license shall be fully paid, perpetual, irrevocable and nonexclusive. To date no payments have been made to the Foundation pursuant to this License.

The Technology was licensed in exchange for a 2% royalty on gross revenue derived from use of the Technology and 1,000,000 five year, immediately vested stock options at $3.55 per share to Michael Cohen, the Company's president and 50% owner of the Foundation. The 2% royalty will be used by the Foundation to do further research into stem cell applications. Proteonomix received a right of first refusal to license any technology developed by the Foundation. Proteonomix has sub-licensed the Technology to StromaCel for a 2% royalty, but Proteonomix will remain responsible for all costs associated with patent prosecution for the Technology. Otherwise, there are no milestone payments contemplated in the License Agreement ("License" or "License Agreement"). Each Party shall has the right to terminate this Agreement upon thirty (30) days' written notice to the other upon the occurrence of any of the following:

(a)

Upon or after bankruptcy, insolvency, dissolution or winding up or assignment for the benefit of creditors of the other Party (other than a dissolution or winding up for the purpose of reconstruction or amalgamation) or a petition is filed for any of the foregoing and is not removed within ninety (90) days; or

(b)

Upon or after the breach of any material provision of this Agreement by the other Party, including, with respect to Proteonomix if the breaching Party has not cured such breach within the thirty (30) day period following written notice of termination by the non-breaching Party.

In addition, the License also provides for dispute resolution so that to the extent Proteonomix reasonably and in good faith disagrees with any assertion by the Licensor that there has been a material breach or material default of this Agreement by Proteonomix, and Proteonomix provides written notice to the . . .