NTIID Neurobiological Technologies (MM)

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RISK FACTORS

Any investment in our stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below and all information contained in this prospectus before you decide whether to purchase our common stock. The trading price of our common stock could decline due to any of these risks or uncertainties, and you might lose part or all of your investment.

Risks Related to Our Financial Condition

We have a history of losses, we expect to generate losses in the near future, and we may never achieve or maintain profitability.

We have experienced operating losses in every year since inception, except fiscal 2001. These operating losses resulted primarily from funding the development and clinical testing of our product candidates. As of June 30, 2007, our accumulated deficit was approximately $109 million. We expect to continue to incur operating losses for at least the next several years as we continue our clinical trials for Viprinex and pursue potential acquisitions of new product candidates. To achieve profitability, we will need to successfully develop, obtain regulatory approval for, manufacture, market and sell our products, or generate significant additional revenues from other sources, such as licensing collaborations.

Although we expect that our royalty revenues from sales of memantine will increase in future periods, these increases may not occur and, even if they do increase in line with our expectations, we do not expect that these revenues will be sufficient to allow us to operate profitably at any time in the foreseeable future. Merz or CMCC may seek to terminate our collaboration agreement, which would end our royalty revenues from memantine sales. As a result, we may never generate sufficient revenues to become profitable or sustain profitability.

We will need to raise additional capital beyond the amounts to be raised in this offering to reach profitability. If we succeed in raising additional capital through a financing transaction, it may adversely affect our stock price. If we are unable to raise additional capital, we may be forced to curtail operations.

Because we do not expect to operate profitably for several years, if at all, we will need to obtain substantial additional funds to sustain our operations and may need more capital than anticipated if we acquire and develop other product candidates.

Our future capital requirements will depend on a number of factors, including:

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If we raise capital by issuing additional shares of common stock at a price per share less than the then-current market price per share, the value of the shares of our common stock then outstanding may be reduced. Even if we were to sell shares of common stock at prices equal to or higher than the current market price, the issuance of additional shares may depress the market price of our common stock and dilute voting rights. If we obtain funds through the issuance of debt securities or borrowing, the terms of that indebtedness may restrict our operations. If we instead raise capital through a licensing or partnering agreement for Viprinex, then we would be surrendering certain economic rights to the product, which could diminish our long-term potential return.

We may not be able to raise capital on terms that we find acceptable, or at all. If we are unable to raise additional capital to fund future operations, we may be forced to reduce the scope of our operations or defer or abandon one or more of our clinical or preclinical research programs. Any of these actions could have an adverse effect on our stock price and could significantly impair our prospects. See note 1 of the notes to our audited consolidated financial statements in which we discuss our need to obtain additional capital to continue as a going concern for the next 12 months.

Risks Related to Our Business

Viprinex has failed in one of two Phase 3 clinical trials conducted by Knoll for the treatment of acute ischemic stroke, and it may not prove to be safe and effective in our current Phase 3 trials. Because Viprinex is our only product candidate, any negative or inconclusive results in the ongoing trials would significantly harm our prospects and depress our stock price.

Viprinex previously failed in a large multi-center Phase 3 clinical trial in Europe conducted by Knoll, where an interim analysis concluded that Viprinex was unlikely to reach its primary efficacy endpoint, and Viprinex-treated patients suffered from higher symptomatic intracranial hemorrhaging and mortality rates than patients receiving the placebo treatment. Although we are seeking to address these problems by changing the dosing strategy for Viprinex in our ongoing trials, we may not be able to demonstrate that Viprinex is a safe and effective treatment for acute ischemic stroke to the satisfaction of the FDA or other regulatory agencies. There is only one approved treatment for acute ischemic stroke, and many other drug candidates for this indication have failed in late-stage clinical trials. If we are unable to demonstrate that Viprinex is a safe and effective treatment for acute ischemic stroke to the satisfaction of the FDA or other regulatory agencies, we will not receive regulatory approval and our business would be materially harmed.

The earlier failure of Viprinex illustrates the risks of clinical development of new drugs, including the possibility that drug candidates may be found to be unsafe, ineffective or toxic, or fail to receive necessary regulatory clearances. If any of these risks of failure should materialize, we may be forced to make additional significant expenditures for further clinical trials or cease further development of the drug candidate. Additionally, because Viprinex is our only product candidate, the failure of Viprinex in the ongoing trials would greatly diminish our prospects and would cause our stock price to decline significantly.

If our clinical trials for Viprinex are delayed because of patient enrollment or other problems, we would incur additional cost and experience delays in the potential receipt of revenues.

We have experienced slow patient enrollment to date in our clinical trials for Viprinex. These delays have already caused us to revise our estimated completion dates for these trials, and any additional delays would further impede the timely development of Viprinex and would further increase our development costs and risks. Because we are currently conducting much of the clinical development work ourselves for the Viprinex clinical trials, and have only limited resources in these areas, we may be unable to successfully enroll sites and encourage patient enrollment. Delays in planned patient enrollment in our current or future clinical trials may result in increased costs, program delays or both, and the loss of

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potential revenues. Further, if we experience significant delays, our long-term prospects will be negatively affected as the remaining patent life for Viprinex will be shorter by the time commercial sales can commence. In any such case, our prospects would be harmed and our stock price could decline.

We have only limited rights under our license and cooperation agreement with Merz and CMCC, and either of our partners can terminate the agreement upon six months’ notice, which would result in the loss of our memantine royalty revenues.

We are party to a license and cooperation agreement with Merz and CMCC, pursuant to which we have rights to share in revenues from worldwide sales of memantine for the treatment of Alzheimer’s disease and other indications covered by certain of CMCC’s patents, including AIDS-related dementia and neuropathic pain. However, we are not entitled to royalties on Merz’s sales of memantine for dementia or Alzheimer’s disease in certain jurisdictions where Merz had pre-existing marketing or other commercial arrangements, including Japan, Korea, China, Germany, Italy, Spain and several other smaller European markets, and much of Latin America, excluding Brazil. Under our agreement with Merz and CMCC, we are entitled to receive marketing payments and royalties from sales of memantine for the treatment of Alzheimer’s disease by Merz and its marketing partners, Forest Laboratories, Inc., or Forest, and H. Lundbeck A/S, or Lundbeck. Our receipt of these payments depends, among other things, on the continuation of our license and cooperation agreement with Merz and CMCC and the successful development and commercialization of memantine by Merz and its marketing partners for indications and in jurisdictions for which we are entitled to receive royalty payments. We have no direct control over the development or commercialization of memantine and have only limited, if any, input on the direction of development and commercialization efforts. Forest and Merz have informed us that they do not plan to pursue further development of memantine for neuropathic pain or other indications covered by the CMCC patents. As a result, we, Merz and CMCC are discussing options for the development of memantine for the indications covered by the CMCC patents and other possible changes to our agreement, including reducing the royalties we are paid.

With respect to the patents licensed from CMCC to Merz pursuant to the license and cooperation agreement, either CMCC or Merz (including its marketing partners) could take actions, or fail to take actions, with respect to these patents that could harm our interests. Once any FDA-granted exclusivity periods for marketed drugs end, pharmaceutical companies must rely on patents to exclude competitors from introducing generic versions of the same drug. Because patent protection for a marketed drug becomes increasingly important at that time, companies with approved drugs will typically reassess their patent strategy as FDA exclusivity periods terminate. In the case of Namenda/Ebixa, clinical data exclusivity expires in October 2007 and generic drug manufacturers may begin to challenge patents covering the drug after that date. Merz and Forest have decided not to pursue a patent term extension of the CMCC patent covering certain uses of memantine, and Merz has recently informed CMCC that Merz and Forest have decided to delist this CMCC patent from the FDA’s Orange Book. The Orange Book is a listing of approved drugs and the related patents that may provide protection from generic competition. Merz or CMCC can terminate our license and cooperation agreement upon six months’ notice. At present, we do not know whether Merz or CMCC intends to terminate the agreement. The termination of our agreement with Merz or any failure by Merz or its partners to successfully commercialize memantine or defend memantine against generic competition could reduce or eliminate our future royalties under the agreement and would have a material adverse effect on our business, financial condition and results of operations.

The approval of Viprinex or any future product candidate by the FDA or other regulatory authorities is uncertain and will involve the commitment of substantial time and resources.

We have not obtained regulatory approval for any product. We may not receive regulatory approval from the FDA or any other regulatory body required for the commercial sale of Viprinex, or any future products, in the United States or any other jurisdiction. The FDA or comparable foreign regulatory

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authorities might decide that our data are insufficient for approval and require additional clinical trials or other studies. In addition, even if we do obtain approval to market Viprinex, the process of obtaining FDA approval may take longer and require the expenditure of more resources than we anticipate. The regulatory approval of a new drug typically takes many years and varies substantially based on the type, complexity and novelty of the drug for which approval is sought, and the outcome is uncertain. Promising results from early clinical trials may not be replicated in later clinical trials. Interim results of a clinical trial do not necessarily predict final results. A number of pharmaceutical and biotechnology companies have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. If we fail to obtain regulatory approval for Viprinex, or any future product candidates, we will be unable to market and sell any products and therefore will be unable to generate any revenues from product sales or to become profitable.

As part of the regulatory approval process, we must conduct, at our own expense, preclinical research and clinical trials for each product candidate sufficient to demonstrate its safety and efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and other countries where the product candidate will be marketed if approved. The number of preclinical studies and clinical trials that will be required varies depending on the product, the disease or condition for which the product is in development and the regulations applicable to any particular product. The regulatory process typically also includes a review of the manufacturing process to ensure compliance with applicable regulations and standards, including the FDA’s current Good Manufacturing Practice, or cGMP, regulations. The FDA can delay, limit or decline to grant approval for many reasons, including:

Regulatory authorities may not approve Viprinex or any of our product candidates even if the product candidates meet safety and efficacy endpoints in clinical trials, or the approvals may be too limited for us to earn sufficient revenues.

The FDA and other foreign regulatory agencies can delay approval of or refuse to approve our product candidates for a variety of reasons, including failure to meet safety and efficacy endpoints in our clinical trials. Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, have substantial discretion in the approval process and may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Even if a product candidate is approved, it may be approved for fewer or more limited indications than requested or the approval may be subject to the performance of significant postmarket studies and postmarket surveillance. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, it is possible that the FDA could impose labeling restrictions on Viprinex requiring it to be administered only to patients whose blood pressure is within an acceptable range. Any such limitation, condition or denial of approval would have an adverse effect on our business, reputation and results of operations.

Even if we are granted FDA approval for any of our product candidates, we may not be able to maintain that approval, which would reduce our revenues.

Even if we are granted regulatory approval for a product candidate, the FDA and similar foreign regulatory agencies can limit or withdraw product approvals for a variety of reasons, including failure to

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comply with regulatory requirements, changes in regulatory requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen problems, such as the discovery of previously unknown side effects. If we are able to obtain any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance with regulatory requirements. Both before and after approval, we, our manufacturers and our products are subject to a number of additional requirements. For example, certain changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling claims are subject to additional FDA review and approval. Advertising and other promotional materials must comply with FDA requirements, and we must comply with established requirements applicable to drug samples. We and our manufacturers will be subject to continuing review and periodic inspections by the FDA and other authorities, where applicable, and must comply with ongoing requirements, including cGMP regulations. Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy information, submit copies of promotional materials to the FDA and make certain other required reports. Any failure by us or our third-party manufacturers to comply with FDA and other applicable U.S. or foreign regulations may subject us to administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production and refusal to approve new drug or biologic license applications. Product approvals may be withdrawn if regulatory requirements are not complied with or if problems concerning safety or efficacy of the product occur following approval. Any enforcement action or limitation or withdrawal of approval of any of our products could delay or prevent sales of our products, which would adversely affect our revenues. Further, continuing regulatory requirements involve expensive ongoing monitoring and testing requirements.

We do not have our own manufacturing facilities and are dependent on contract manufacturers and suppliers for the development and production of Viprinex.

We must procure from third parties our supplies of Viprinex for our clinical trials. We are party to agreements with Nordmark to house and maintain our colony of Malayan pit vipers, to purify the snake venom that is used to produce the active pharmaceutical ingredient of Viprinex and to supply us with this active pharmaceutical ingredient in finished form for our clinical trials. We also have an agreement with Baxter Pharmaceutical Solutions LLC, or Baxter, pursuant to which Baxter is responsible for certain aspects of the development, supply and packaging of Viprinex. Any difficulties in obtaining raw Malayan pit viper venom in necessary quantities and potencies or failure of our manufacturers and suppliers could delay our clinical trials and impede the development and commercialization of Viprinex. We may not be able to maintain or extend these arrangements on satisfactory terms, if at all, and we may not be able to find suitable replacements for Nordmark and/or Baxter if these arrangements are terminated.

Further, although we perform audits on Nordmark and Baxter to assess their compliance with the FDA’s cGMP regulations, there can be no assurance that our contractors will meet cGMP standards or be able to synthesize and deliver Viprinex in a timely fashion. Although alternative cGMP suppliers of the bulk drugs and of finished dosage form products are available to us, Viprinex is difficult and costly to produce, and we believe that there is only a limited number of manufacturers that are capable of producing the compound. The loss of our current supply arrangement could significantly delay our clinical trials for Viprinex and could impact the commercialization of the drug if it is approved by the FDA. As a result of our reliance on manufacturers, we face the following outsourcing risks:

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Because of these risks, our dependence on third parties for the development, manufacture and supply of Viprinex and any future products may adversely affect our ability to develop and deliver products on a timely and competitive basis and harm our results of operations.

We have relied, and will continue to rely, on third parties to conduct our clinical trials for Viprinex, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates.

We have periodically entered into various contractual arrangements with clinical research organizations, or CROs, consultants and others, and we are dependent upon the level of commitment and subsequent success of these outside parties in performing their responsibilities. Certain of these agreements may place significant responsibility on the collaborator or contractor for pre-clinical testing and human clinical trials and for preparing and submitting submissions for regulatory approval for potential products. We have previously experienced delays and other problems with CRO performance, and we recently replaced the CRO overseeing our clinical trials in Europe and certain other locations. The difficulties that we experienced with our prior CRO have caused delays in our ongoing clinical trials and, if our new CRO or any of our clinical research associates or any other collaborator, licensor or contractor fails to perform, the clinical development of Viprinex could be further delayed and our business, financial condition and results could be adversely affected.

We have also relied on scientific, clinical, commercial and other data supplied and disclosed by others in entering into these agreements. We have relied on these data in support of applications for human clinical trials for Viprinex. Although we have no reason to believe that this information contains errors or omissions of fact, it is possible that there are errors or omissions of fact that would change materially our view of the future likelihood of FDA approval or commercial viability of Viprinex.

Even if Viprinex is approved for commercialization, it may not be successfully commercialized or generate meaningful product revenues for us.

If Viprinex is approved for commercialization, we would be required either to market the drug directly, which would require the recruitment and training of a direct sales force, or to enter into a collaborative arrangement with a larger biotechnology or pharmaceutical company with an existing sales force to sell, market and distribute our products. Our current strategy is to retain some portion of the commercial rights to Viprinex in the United States, which would require us to build an internal sales force. However, we may not succeed in directly marketing Viprinex because the building of a direct sales force is costly, and we have no experience in sales, marketing and distribution. If we elect to license Viprinex to a larger company with an existing sales force, we would be required to share the revenues from commercialization and would lose a significant degree of control over the commercialization and further development of the drug. In addition, any licenses or collaborative arrangements into which we may enter may not be effective in generating meaningful product royalties or other revenues to us.

If Viprinex does not attain adequate market acceptance by health care professionals and patients, our business prospects and results of operations will suffer.

Even if Viprinex receives regulatory approval for commercial sale, our revenues from sales of the product may not be significant and will depend on many factors that are outside of our control. Factors that may affect our revenues from Viprinex, if and when approved, include:

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Our product revenues will be adversely affected if, due to these or other factors, Viprinex does not gain significant market acceptance.

If government and third-party payors fail to provide coverage and adequate payment rates for Viprinex, if approved, our revenues and prospects for profitability will suffer.

In the United States and other countries, our sales of Viprinex will depend in part on the availability of reimbursement from third-party payors. These third party-payors include government health programs such as Medicare, managed care providers, private health insurers and other organizations. These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. We might need to conduct pharmacoeconomic studies in order to demonstrate the cost-effectiveness of Viprinex. These studies might require us to commit significant time and resources. Reimbursement may not be available or sufficient to allow us to sell Viprinex on a competitive and profitable basis.

Congress enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, which became effective in 2006. It is not clear what effect the MMA will have on the prices paid for currently approved drugs and the pricing options for new drugs approved in the future. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Medicare prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors. We expect that there will continue to be federal and state proposals to implement governmental pricing controls and limit the growth of healthcare costs. While we cannot predict whether these legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business and profitability.

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for Viprinex.

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We have limited control over the development and commercialization of XERECEPT, the rights to which we have sold to Celtic, and as a result, we may not realize a significant portion of the potential value of this product candidate.

In November 2005, we completed the sale of all our rights and assets related to XERECEPT to two newly-formed subsidiaries of Celtic. Under our agreement with the Celtic subsidiaries, we are eligible to receive up to $15 million upon the achievement of certain regulatory objectives, and if XERECEPT is approved for commercial sale, we are eligible to receive profit-sharing payments on sales of XERECEPT in the United States and royalties on sales elsewhere in the world. However, because Celtic has assumed control of the clinical development of XERECEPT throughout the world, our ability to receive these payments largely depends on Celtic. Celtic controls the execution of clinical trials and will direct the final regulatory approval process and commercialization, if the product is approved. If Celtic is unable to successfully develop and market XERECEPT, we may not receive the potential development milestone payments, and the value of our potential future royalty and profit-sharing rights could be greatly diminished.

We face intense competition from other companies.

Our competitors are generally larger biotechnology or pharmaceutical companies, and the National Institute of Neurological Disorders and Stroke, or NINDS, all of which have significantly greater financial resources and experience. In addition, larger companies that compete with us generally have greater manufacturing, marketing, sales, distribution and managerial personnel resources than we do. Many of them also have much more experience than we do in clinical trials of new product candidates and in obtaining FDA and foreign regulatory approvals. Accordingly, we may not be able to develop products that will be as efficacious or as cost-effective as currently-marketed products or those products being developed by our competitors. In addition, others may develop, manufacture and market products that could compete with those that we are developing.

For the treatment of acute ischemic stroke, the only currently approved drug treatment is marketed by Genentech, Inc., a much larger company. Additionally, other large pharmaceutical companies have pursued the development of treatments for ischemic stroke, including AstraZeneca and Forest. These companies have significantly more experience in developing new products and substantially greater financial resources. We may also face competition from medical devices that are currently used in the United States for the treatment of acute ischemic stroke.

If we do not continue to attract and retain key employees, our product development efforts and our operations will be impaired.

We depend on a small number of key management and scientific and technical personnel. There is a shortage of skilled personnel in our industry, we face intense competition in our recruiting efforts, and we may not be able to attract or train qualified personnel. In addition, we have recently made various changes in our management. For example, in June 2006, Stephen J. Petti, our former Vice President, Product Development, and Jonathan R. Wolter, our former Vice President, Finance and Chief Financial Officer, resigned as officers and employees for personal reasons. In July 2006, Craig W. Carlson joined our company as Vice President, Finance and Chief Financial Officer, and, in February 2007, Warren W. Wasiewski, M.D. joined as our Vice President, Clinical Programs. Dr. Lisa U. Carr, M.D., Ph.D., who was our Senior Vice President and Chief Medical Officer, retired in June 2007. Changes in our management team can be disruptive to our business and, if our management team cannot work together effectively, our ability to manage our business will suffer. Further, the loss of any of our key employees, including our President, Chief Executive Officer and Director, Paul E. Freiman; Mr. Carlson; Dr. Wasiewski; David E. Levy, M.D., our Vice President, Clinical Development, and Karl G. Trass, our Vice President, Regulatory Affairs & Quality Assurance, could impair our product development efforts and harm our business. Our employment agreements with these individuals provide for “at-will” employment, which means that they may terminate their employment with us at any time.

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Clinical trials or marketing of any of our potential products may expose us to liability claims from the use of such products, which our insurance may not cover.

We currently have a limited amount of product liability insurance for our clinical trials, with coverage limits of $5 million per incident and $5 million in the aggregate. It is possible that our current insurance may not be adequate to cover liabilities arising from our clinical trials. Our current product liability insurance does not cover the commercial sales of products, and we cannot be sure that we will be able to obtain product liability insurance covering commercial sales if and when they commence or, if such insurance is obtained, that sufficient coverage can be acquired at a reasonable cost. Any inability to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims could prevent or inhibit commercialization of any products we develop.

Acquisitions of new product candidates could result in operating difficulties and harm our results of operations.

We may use a portion of the proceeds from this offering to acquire new product candidates. The process of investigating, acquiring and integrating any business or technology into our business and operations is risky, and we may not be able to accurately predict or derive the benefits of any such acquisition. The process of acquiring and integrating any business or technology may create operating difficulties and unexpected expenditures, such as:

In addition to the factors set forth above, we may encounter other unforeseen problems with acquisitions that we may not be able to overcome. Any future acquisitions may require us to issue shares of our stock or other securities that dilute the ownership interests of our existing stockholders, expend cash, incur debt, assume liabilities, including contingent or unknown liabilities, or incur additional expenses related to write-offs or amortization of intangible assets, any of which could materially adversely affect our operating results and could draw resources away from the development of Viprinex.

Our success will depend, in large part, on our ability to obtain or license patents, protect trade secrets and operate without infringing upon the proprietary rights of others.

The patent position of biotechnology firms generally is highly uncertain because:

In addition, because of the time delay in patent approval and the secrecy afforded United States patent applications, we do not know if other applications, which might have priority over our applications, have been filed. As a result of all of these factors, there can be no assurance that patent applications relating to our potential products or processes will result in patents being issued, or that patents, if issued, will provide protection against competitors who may successfully challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business, or be able to circumvent our patent position. No infringement claims have been brought by third parties, and we are not aware of any basis on which

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these claims could be made. Any infringement claims brought by a third party, even if these claims were ultimately found to be without merit, would be costly to defend and would likely interfere with our operations while the claims were pending. If we were unsuccessful in defending against any such claims, it might be necessary for us to license certain additional rights. These licenses might be costly and might not be available on terms we find acceptable, if at all. Accordingly, the unfavorable resolution of any patent infringement claim could adversely affect our operations and prospects.

We have previously concluded that we have material weaknesses in our internal controls over accounting for certain complex transactions and other items, and we have had to restate financial statements from prior periods.

We record certain transactions in our financial statements using complex accounting rules. Although we believe that we currently have the necessary expertise and resources to ensure that we properly account for these transactions in accordance with U.S. generally accepted accounting principles, we have previously had deficiencies in our internal controls over accounting for complex transactions. In fiscal 2006, we concluded that we had a material weakness in our internal controls following the restatement of our financial statements for fiscal 2005 and a portion of fiscal 2006. The restatement related to errors in our accounting for acquisition costs assigned to certain intangible assets and in-process research and development acquired in connection with our acquisition of Empire Pharmaceuticals, Inc., or Empire, in 2004.

Additionally, in fiscal 2007, we concluded that we had a material weakness in our internal controls over our financial reporting for stock options and accounts payable and accrued liabilities. Although we have taken steps designed to remediate the weakness identified in 2006 and have initiated actions relating to the weakness identified in the last fiscal year, any corrective actions taken may not be sufficient to correct the problems, or other accounting deficiencies could arise in the future. If our internal controls over financial reporting are deficient, we may not properly account for complex transactions and other items, which could lead to a restatement of our financial statements. A restatement could have a negative impact on our stock price and negatively affect the credibility of our financial reporting in future periods.

This offering may result in a significant reduction in our available net operating loss carryforwards and tax research credits.

At June 30, 2007, we had federal net operating loss carryforwards of $32.1 million and state net operating loss carryforwards of $23.4 million. At that time, we also had federal tax research credits of $943,000 and state research and development tax credits of $545,000. Our ability to use these net operating loss carryforwards and tax credits to offset future taxable income will be limited under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, if we experience an “ownership change.” This offering may constitute such an ownership change, depending on the number of shares that we sell. If the offering is deemed to be an ownership change, we would not be able to utilize a significant portion of these net operating losses and tax credits to offset future income. Our inability to fully utilize our net operating loss carryforwards and tax credits could have a negative impact on our tax assets, financial position and results of operations.

Risks Related to Our Common Stock

Our common stock may be delisted from The NASDAQ Capital Market, which could negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is listed on The NASDAQ Capital Market. The listing standards of The NASDAQ Capital Market provide that a company may be delisted if the bid price of its stock drops below

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$1.00 for a period of 30 consecutive business days or if the company fails to maintain (i) stockholders’ equity of at least $2.5 million, (ii) total market value of listed securities of at least $35 million or (iii) net income from continuing operations of at least $500,000 in the latest fiscal year or in two of the last three fiscal years. On August 29, 2007, NASDAQ notified us that we were not in compliance with any of the stockholders’ equity, total market value of listed securities or net income requirements. We expect to regain compliance with the total market value of listed securities requirements upon completion of this offering. However, if we fail to comply with the listing standards applicable to issuers listed on The NASDAQ Capital Market, our common stock may be delisted from The NASDAQ Capital Market. The delisting of our common stock would significantly affect the ability of investors to trade our securities and would significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could materially adversely affect our ability to raise capital on terms acceptable to us or at all. Delisting from The NASDAQ Capital Market could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.

The market price of our common stock has been, and is likely to continue to be, highly volatile.

The average daily trading volume of our common stock has historically been low, even when compared to that of other biopharmaceutical companies. Because of our relatively low trading volume, our stock price can be highly volatile. Any large sales could have a negative effect on our stock price and its volatility. In addition, the issuance of a large number of shares in this offering could increase the volatility of our stock and further depress our stock price. Additional factors that may affect the volatility of our stock price include:

We have broad discretion in the use of the net proceeds from this offering.

We intend to use the net proceeds from this offering primarily for clinical development of Viprinex, as well as for research and development, acquisitions of new technologies, working capital, capital

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expenditures and general corporate purposes. However, we cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds.” Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

If you purchase shares in this offering, the value of your shares based on our actual book value will immediately be less than the offering price you paid. This reduction in the value of your equity is known as dilution. Investors purchasing common stock in this offering will, therefore, incur immediate dilution. Investors will incur additional dilution upon the exercise of outstanding stock options and warrants. In addition, if we raise funds by issuing additional securities, the newly issued shares will further dilute your percentage ownership.

Our certificate of incorporation, our bylaws, Delaware law and our stockholder rights plan contain provisions that could discourage another company from acquiring us and might prevent attempts by our stockholders to replace or remove our current management.

Provisions of Delaware law, our certificate of incorporation, our bylaws and our stockholder rights plan may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our Board of Directors. These provisions include:

In addition, Section 203 of Delaware General Corporation Law may discourage, delay or prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us, unless certain approvals are obtained.

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