UNITED STATES SECURITIES AND EXCHANGE ~~COMMISSION~~

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, ~~2008~~2009

Commission File Number: 000-50470

CERAGENIX PHARMACEUTICALS, INC.

(Exact name of registrant as Specified in its Charter)

Delaware		84-1561463
(State or Other Jurisdiction of Incorporation or Organization)		(Internal Revenue Service Employer Identification Number)

1444 Wazee Street, Suite 210, Denver, Colorado		80202
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (720) 946-6440

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.0001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark ifwhether the registrant: is(1) has ~~not~~filed all reports required to ~~file~~be ~~reports~~filed ~~pursuant~~by to Section 13 or ~~Section~~ 15(d) of the Securities Exchange Act. of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

~~Yes~~Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o No xYes o No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K: x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x (Do not check if a smaller reporting company) ~~Smaller reporting company x~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

The aggregate market value of the voting and non-voting common stock ($.0001 par value) held by non-affiliates was approximately $32,~~712~~177,~~294~~175 as of June 30, ~~2008~~2009 based upon the average bid and asked price of the registrant’s common stock on the Nasdaq Electronic Bulletin Board.

As of ~~March~~April 2312, ~~2009~~2010, the registrant had 17 18,~~808~~303,293 shares of its common stock ($.0001 par value) outstanding.

Table of Contents

Table of Contents

		Page
Forward Looking Statements		1
~~PART I~~	PART I	1
Item 1.	Description of Business	1
	The Company	1
	Our Strategy	2
	Our Technology	34
	Product and Product Candidates	78
	Product Markets	89
	Sales and Marketing	910
	Competition	910
	License Agreements and Proprietary Rights	1011
	Trademarks	1112
	Government Regulation	1112
	Employees	1314
Item 1A.	Risk Factors	1314
Item 1B.	Unresolved Staff Comments	24
Item 2.	Properties	24
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Executive Officers of the Registrant		2425
Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2625
Item 6.	Selected Financial Data	2726
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2726
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Financial Statements and Supplementary Data	3635
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	6561
Item 9A.	Controls and Procedures	6561
Item 9B.	Other Information	6661
~~PART III~~	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	6662
Item 11.	Executive Compensation	7065
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	7771
Item 13.	Certain Relationships and Related Transactions, and Director Independence	7872
Item 14.	Principal Accountant Fees and Services	8074
~~PART IV~~	PART IV
Item 15.	Exhibits.	8174
SIGNATURES		8477

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FORWARD LOOKING STATEMENTS

Our disclosure and analysis in this Annual Report on Form 10-K (this “Form 10-K”), in other reports that we file with the Securities and Exchange Commission (“SEC”), in our press releases and in public statements of our officers contain forward-looking statements. Forward-looking statements are based on the current expectations of or forecasts of future events made by our management. Forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in this Form 10-K, for example general economic conditions, governmental regulation and competition in our industry, will be important in determining future results. No forward-looking statement can be guaranteed, and actual results may vary materially from those anticipated in any forward-looking statement.

You can identify forward-looking statements by the fact that they do not relate strictly to historical or current events. They use words such as “anticipate,” “estimate,” “expect” “will,” “may,” “intent,” “plan,” “believe,” and similar expressions in connection with discussion of future operating or financial performance. These include statements relating to future actions, prospective products or product approvals, future performance or results of anticipated products, expenses, financial results or contingencies.

Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we may not achieve these plans or expectations. Forward-looking statements in this Form 10-K will be affected by several factors, including the following: the ability of the Company to raise sufficient capital to finance its planned activities including completing development of its Ceragenin™ technology; the ability of the Company to meet its obligations under the supply and distribution agreement with Dr. Reddy’s Laboratories; ~~including~~the ~~having~~ability ~~sufficient~~of ~~working~~the ~~capital~~ Company to ~~fulfill~~service ~~purchase~~its outstanding ~~orders~~convertible ~~within~~debt ~~the timeframes required by the agreement~~obligations; the ability of the Company to maintain ~~service~~its intellectual property rights including its ~~outstanding~~ability ~~convertible~~to ~~debt~~pay its obligations; under the license agreements within the timeframes required by the agreements; receiving the necessary marketing clearance approvals from the United States Food and Drug Administration (the “FDA”); successful clinical trials of the Company’s planned products including the ability to enroll the studies in a timely manner, patient compliance with the study protocol, and a sufficient number of patients completing the studies; the ability of the Company to commercialize its planned products; the ability of the Company to successfully manufacture its products in commercial quantities (through contract manufacturers); market acceptance of the Company’s planned products, the Company’s ability to successfully develop its licensed compounds, alone or in cooperation with others, into commercial products, the Company’s ability ~~of the Company~~ to successfully prosecute and protect its intellectual property, and the Company’s ability to hire, manage and retain qualified personnel. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-K. In particular, this Form 10-K sets forth important factors that could cause actual results to differ materially from our forward-looking statements. These and other factors, including general economic factors, business strategies, the state of capital markets, regulatory conditions, and other factors not currently known to us, may be significant, now or in the future, and the factors set forth in this Form 10-K may affect us to a greater extent than indicated. All forward-looking ~~statements~~ statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Form 10-K and in other documents that we file from time to time with the SEC including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K to be filed in ~~2009~~2010. Except as required by law, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

THE COMPANY

Ceragenix Pharmaceuticals, Inc., a Delaware corporation, is an an emerging medical device company focused on infectious disease and dermatology. We have two base technology platforms each with multiple applications: Ceragenins™ (also known as cationic steroid antibiotics or “CSAs”) and barrier repair (“Barrier Repair”). We believe that the Barrier Repair platform represents near term revenue opportunities for prescription skin care products to treat a variety of skin disorders all characterized by a disrupted skin barrier. Our Ceragenin™ technology has shown activity against bacteria, and certain viruses, fungi and cancers in a variety of in vitro tests and represents a near, mid and long term revenue opportunity. References to “the Company,” “we,” “our,” or “us” in this Form 10-K refer to Ceragenix Pharmaceuticals, Inc. and Ceragenix Corporation.

Our Ceragenin™ technology, licensed from Brigham Young University, covers the composition of matter and use of a broad class of small molecule, positively charged aminosterol compounds. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system and several of these candidates are currently in pre-clinical development. Ceragenin™ compounds are electrostatically attracted to bacteria, viruses, fungi and cancers that all share in common the presence of negatively charged phospholipids on their cell membrane surfaces. The compounds are believed to primarily act via induction of apoptosis by rapid depolarization of the cell membranes (by tearing holes in the cell walls). Unlike most antibiotics which are bacteriastatic (prevents the reproduction of bacteria cells), the Ceragenins™ are bacteriacidal (kills the bacterial cells). Our Ceragenin™ technology has shown activity against bacteria, and certain viruses, fungi and cancers in a variety of in vitro tests. While Ceragenins™ have the potential to be developed for a broad range of applications, we intend to focus our efforts on

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Our Ceragenin™ technology, licensed from Brigham Young University, covers the composition of matter and use of a broad class of small molecule, positively charged aminosterol compounds. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system and several of these candidates are currently in pre-clinical development. Ceragenin™ compounds are electrostatically attracted to bacteria, viruses, fungi and cancers that all share in common the presence of negatively charged phospholipids on their cell membrane surfaces. The compounds are believed to primarily act via induction of apoptosis by rapid depolarization of the cell membranes (by tearing holes in the cell walls). Unlike most antibiotics which are bacteriastatic (prevents the reproduction of bacteria cells), the Ceragenins™ are bacteriacidal (kills the bacterial cells). While Ceragenins™ have the potential to be developed for a broad range of applications, we intend to focus our efforts on developing them as an antimicrobial treatment for medical devices such as endotracheal tubes, catheters and implantable devices~~. It~~ ~~is our expectation that we will be able~~ to ~~generate~~ ~~revenue~~help ~~from~~combat the ~~Ceragenin™~~growing ~~technology~~number ~~prior~~of tohospital ~~receiving FDA~~acquired ~~approvals~~infections in the ~~form~~United ofStates ~~upfront~~ and ~~milestone~~throughout ~~payments~~the ~~under development and sublicense agreements~~world.

WeTo ~~have~~that ~~also~~end, ~~licensed~~during ~~patents~~2009, ~~from the~~we ~~Regents~~entered ofinto ~~the~~three ~~University~~development ofagreements ~~California~~with ~~for~~potential acommercialization partners ~~Barrier Repair technology~~ that ~~is a~~provide ~~specific~~these ~~combination~~partners ofwith ~~ceramides,~~an ~~cholesterol~~exclusive ~~and~~period ~~fatty~~of ~~acids~~time ~~which~~to ~~are able~~test, toevaluate ~~create~~and anegotiate ~~human-like~~commercialization ~~skin~~terms ~~barrier~~for ~~and~~specific ~~thus~~devices ~~provide~~using ~~patients~~our Ceragenin™ ~~with~~technology. We ~~a more~~anticipate ~~normal~~entering ~~skin~~into ~~barrier~~several ~~function. This patented~~similar ~~Barrier~~agreements ~~Repair~~during ~~technology~~2010. It is ~~the~~our ~~invention~~expectation ofthat ~~Dr. Peter~~we ~~Elias, Chairman~~will ofbe ~~our~~able ~~Scientific~~to generate ~~Advisory~~revenue ~~Board,~~from the ~~author~~Ceragenin™ oftechnology ~~over~~prior ~~500~~to ~~peer~~receiving ~~reviewed~~FDA ~~journal~~approvals ~~articles. Our~~in ~~first~~the ~~developed product~~form ~~using~~of ~~this~~upfront ~~technology~~and ismilestone ~~EpiCeram®~~payments under development and sublicense agreements.

~~EpiCeram®~~Further, isduring a2009, ~~prescription~~the National ~~only~~Institutes ~~product intended~~of ~~for~~Health ~~use~~(the to“NIH”) ~~treat~~awarded ~~dry~~two ~~skin~~grants ~~conditions~~aggregating approximately ~~and~~$4.5 million to ~~manage~~third ~~and~~parties ~~relieve~~for the development of our ~~burning~~Ceragenin™ ~~and~~technology. One ~~itching~~of ~~associated~~these grants ~~with~~is ~~various~~for ~~types~~the development of ~~dermatoses,~~CSA-13 ~~including atopic~~as ~~dermatitis~~an ~~(“eczema”),~~oral ~~irritant~~drug ~~contact~~to ~~dermatitis,~~treat ~~and radiation~~Clostrdium ~~dermatitis. All~~difficile ofand ~~these~~Shigella ~~conditions~~two ~~share in~~ common aand ~~defective~~potentially ordeadly ~~incomplete~~gastrointestinal ~~skin~~infections. The ~~barrier~~grant ~~and~~will wefund ~~believe~~the ~~current~~preclinical ~~therapies~~development, ~~are~~formulation, ~~viewed~~toxicology asand ~~either~~cGMP ~~lacking~~scale ~~effectiveness~~up orto in1 ~~need~~kilogram of ~~improvement~~ CSA-13. InWhile ~~April 2006,~~our ~~we received~~stated ~~marketing~~focus ~~clearance~~is ~~from~~on ~~the~~developing ~~FDA~~our anti-infective totechnology ~~sell EpiCeram®~~ as a coating for medical ~~device pursuant~~devices, towe aare ~~510(k) filing. The~~interested ~~clearance~~in ~~received~~letting ~~from~~others ~~the~~pursue ~~FDA~~drug ~~allows~~applications usif toit ~~market~~does ~~EpiCeram®~~not ~~for~~require ~~all~~significant financial ofresources from the ~~above~~ ~~listed conditions~~Company. ~~In April~~ ~~2007,~~ weThe ~~announced~~other grant will evaluate the ~~results~~use of a ~~113~~CSA-13 ~~person~~based ~~clinical~~coating ~~trial~~for orthopedic ~~which~~implants ~~demonstrated~~in ~~that EpiCeram®~~a ~~had~~preclinical ~~comparable~~model ~~efficacy~~ to aevaluate ~~mid~~the ~~strength~~safety ~~steroid~~and ~~in treating the~~efficacy ~~symptoms~~of ~~associated~~this ~~with~~approach ~~eczema~~in ~~after~~preventing 28and ~~days~~eradicating ofbacterial ~~treatment~~biofilm. InBacterial ~~November 2007~~biofilms on implanted orthopedic medical devices is a major medical concern, weas ~~entered~~such ~~into~~bacterial ancontamination may ~~exclusive~~lead ~~distribution~~to ~~and~~serious ~~supply~~infections ~~agreement~~necessitating removal of the implant and treatment with ~~Dr. Reddy’s~~extended ~~Laboratories, Inc~~courses of antibiotics. We ~~(“DRL”)~~anticipate ~~for~~that both of these grants will advance the ~~commercialization~~knowledge, understanding, and testing of ~~EpiCeram®~~CSA-13 in ~~the~~ways ~~United~~that ~~States~~may (be beneficial to our efforts to create the ~~“DRL~~needed data package to allow regulatory review of Cerashield™ coated or ~~Agreement”).~~treated devices ~~Under~~in the ~~terms~~future. Most, if not all, of ~~the~~our ~~DRL~~Cerashield™ coating ~~Agreement,~~applications weinvolve ~~are~~use ~~responsible~~of ~~for~~CSA-13 ~~manufacturing~~as ~~(through~~the aactive ~~contract~~ingredient. As CSA-13 has no prior approved use, it is ~~manufacturer)~~viewed ~~and~~as ~~supplying~~a New Chemical Entity by the ~~product~~FDA ~~while~~as ~~DRL~~well isas ~~responsible~~foreign ~~for distribution~~regulatory bodies. Therefore, ~~marketing~~data ~~and~~developed ~~sales.~~ under these grants ~~During~~that ~~September 2008,~~helps weto ~~shipped~~address the ~~first~~safety ~~commercial~~and ~~quantities~~ efficacy of ~~EpiCeram®~~CSA-13, toas ~~DRL~~well ~~and~~as ~~DRL~~cGMP manufacturing ~~officially~~of ~~launched~~CSA-13, ~~sales~~is ~~and~~potentially ~~marketing~~very ~~efforts during~~valuable ~~October 2008~~to the Company.

We have also licensed patents from the Regents of the University of California for a Barrier Repair technology that is a specific combination of ceramides, cholesterol and fatty acids which are able to create a human-like skin barrier and thus provide patients with a more normal skin barrier function. This patented Barrier Repair technology is the invention of Dr. Peter Elias, Chairman of our Scientific Advisory Board, and the author of over 500 peer reviewed journal articles. Our first developed product using this technology is EpiCeram®.

EpiCeram® is a prescription only product intended for use to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses, including atopic dermatitis (“eczema”), irritant contact dermatitis, and radiation dermatitis. All of these conditions share in common a defective or incomplete skin barrier, and we believe current therapies are viewed as either lacking effectiveness or in need of improvement. In April 2006, we received marketing clearance from the FDA to sell EpiCeram® as a medical device pursuant to a 510(k) filing. The clearance received from the FDA allows us to market EpiCeram® for all of the above listed conditions. In April 2007, we announced the results of a 113 person clinical trial which demonstrated that EpiCeram® had comparable efficacy to a mid strength steroid in treating the symptoms associated with eczema after 28 days of treatment. In November 2007, we entered into an exclusive distribution and supply agreement with Dr. Reddy’s Laboratories, Inc. (“DRL”) for the commercialization of EpiCeram® in the United States (the “DRL Agreement”). Under the terms of the DRL Agreement, we are responsible for manufacturing (through a contract manufacturer) and supplying the product while DRL is responsible for distribution, marketing and sales. During September 2008, we shipped the first commercial quantities of EpiCeram® to DRL and DRL officially launched sales and marketing efforts during October 2008.

During 2009, we entered into several exclusive international distribution and supply agreements for EpiCeram®. Commercialization efforts were launched in Canada under one of these agreements during the latter part of 2009, and we expect commercialization activities to commence in certain Asian countries, certain European countries and Israel during 2010. Further, we anticipate entering into additional international agreements during 2010.

Our executive offices are located at 1444 Wazee Street, Suite 210, Denver, Colorado 80202. Our telephone number is (720) 946-6440

OUR STRATEGY

Our principal objective is to be a leading provider of technology used in the prevention and treatment of infectious disease. More specifically, we want our Cerashield™ antimicrobial coatings to be utilized by leading manufacturers to coat their catheters, implantables and devices to prevent the bacterial colonization of such products. Bacterial colonization of indwelling medical devices is a leading cause of nosocomial (hospital acquired) infections. Leading healthcare organizations such as the World Health Organization and the U.S. Centers for Disease Control (the “CDC”) have recognized that the growing number of ~~multidrug resistant bacterial~~ infections poses a major worldwide health risk. According to the CDC, during 2002, there were approximately 1.7 million nosocomial infections in the United States resulting in 99,000 deaths (up from 13,000 in 1992) and over $4 billion in additional treatment costs. Over half of these infections were attributable to bacterial growth on medical devices and the greatest risk of mortality is associated with multidrug resistant bacterial infections. In August of 2007, the Center for Medicare Services (CMS) issued a ruling that it will no longer reimburse hospitals for certain hospital acquired infections including those related to urinary tract infections (associated with urinary catheters) and certain central venous line related bloodstream infections. This ruling went into effect in October 2008. Each year CMS expects to add additional nosocomial infections to its exclusionary list. As a result, hospitals and third party payors are seeking solutions from device makers to help reduce the incidence of nosocomial infections.

We believe that our Ceragenin™ class of compounds has the potential to be a solution for combating nosocomial infections. Our Cerashield™ technology (utilizing CSA-13) is being developed in a variety of forms: (i) as a coating in combination with a polyurethane polymer which may be dip coated onto a broad range of polymeric and metallic medical devices which allows CSA-13 to elute out over time; (ii) as a covalent attachment to polymers (including textiles) and metals to provide a shield against bacterial colonization that does not migrate from the surface; and (iii) by direct incorporation into polymers (during the melt process) to create catheters and other components of medical devices that have antimicrobial

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~~activity~~bacterial infections ~~built~~poses ~~into~~a ~~the~~major ~~device~~worldwide ~~without~~health ~~the need for an exterior coating~~risk. ~~Our primary strategy~~ isAccording to ~~license~~the ~~Cerashield™~~CDC, onduring a2002, ~~device~~there bywere ~~device~~approximately ~~basis~~1.7 tomillion nosocomial ~~the~~infections ~~manufacturers~~in ~~of such~~the ~~devices. We~~United ~~are~~States ~~evaluating retaining~~resulting ~~one~~in or99,000 ~~more~~deaths ~~niche~~(up ~~applications~~from 13,000 ofin ~~the~~1992). The ~~technology~~NIH tonow ~~commercialize~~estimates ~~ourselves~~that ~~once~~nosocomial ~~our~~infections ~~financial~~add ~~and~~between ~~managerial~~$28 ~~resources~~billion ~~make~~and ~~such~~$32 ~~approach~~billion ~~a viable~~annually ~~option. We believe that~~to ~~antimicrobial~~health ~~treated~~care ~~devices~~costs ~~with~~in ~~demonstrated~~the ~~ability~~United ~~to prevent or reduce~~States. ~~bacterial~~Over ~~colonization~~half ~~can~~of ~~demand~~these ~~premium~~infections ~~pricing~~were inattributable ~~the~~to ~~market~~bacterial ~~based~~growth on ~~cost~~ ~~savings~~medical todevices ~~payors~~ and~~/or~~ ~~reduction~~the ingreatest ~~morbidity~~risk ~~and/or~~of mortality ~~rates. Our goal~~ is toassociated ~~establish~~with ~~Cerashield™ as the~~multidrug ~~most~~resistant ~~efficacious~~bacterial ~~antimicrobial technology available for medical devices~~infections. WeIn ~~believe~~August of 2007, ~~that~~the ~~current~~Center ~~antimicrobial approaches~~for ~~(such~~Medicare asServices ~~silver~~(CMS) ~~are~~issued ofa ~~limited~~ruling ~~efficacy~~that ~~and~~it ~~duration. We~~will ~~plan~~no longer toreimburse ~~target~~hospitals ~~Cerashield™~~for ~~development~~certain ~~for several~~hospital ~~devices~~acquired ~~with~~infections ~~high~~including those ~~incidences~~related ofto ~~infection~~urinary ~~such~~tract asinfections ~~endotracheal~~(associated ~~tubes,~~ with urinary catheters, ) and certain central venous ~~catheters~~line asrelated ~~well~~bloodstream asinfections. This ~~those~~ruling ~~devices associated~~went ~~with~~into ~~less~~effect ~~frequent~~in ~~but catastrophic infections~~October 2008. WeEach ~~believe~~year ~~that~~CMS ~~there~~expects isto aadd ~~broad~~additional nosocomial ~~range~~infections ofto its exclusionary list. ~~medical~~As ~~devices~~a ~~that~~result, ~~would~~hospitals ~~benefit~~and ~~from~~third ~~use~~party ofpayors ~~our~~are ~~Cerashield™~~seeking ~~technology~~solutions ~~and~~from wedevice ~~are~~makers ~~open~~ to ~~collaboration~~help ~~arrangements~~reduce ~~with~~the ~~medical~~incidence ~~device~~of ~~manufacturers~~nosocomial infections.

~~While~~We believe that our inCeragenin™ ~~vitro~~class of compounds has the potential to ~~testing~~be ~~activities~~a ~~have~~solution ~~demonstrated~~for ~~that~~combating ~~one~~nosocomial orinfections. Our ~~more~~Cerashield™ technology (utilizing CSA-13) is being developed in a variety of ~~our~~forms: ~~lead~~(i) as ~~Ceragenin™~~a coating in combination ~~compounds~~with a polyurethane polymer which may ~~have~~be ~~efficacy~~dip coated onto a broad range of polymeric and metallic medical devices which allows CSA-13 to elute out over time; (ii) as a ~~pharmaceutical~~covalent ~~therapy~~attachment to polymers (including textiles) and metals to provide a shield against ~~key~~bacterial ~~pathogens~~colonization that does not migrate ~~associated~~from ~~with~~the ~~various~~surface; ~~diseases~~and (~~e.g.~~iii) by ~~multidrug~~direct ~~resistant~~incorporation ~~Pseudomonas~~into polymers (during ~~aeuroginosa~~the ~~associated~~melt ~~with~~process) ~~respiratory~~to ~~infections~~create incatheters ~~Cystic~~and ~~Fibrosis~~other components of medical devices ~~patients),~~that wehave ~~plan~~antimicrobial toactivity ~~focus~~built oninto the device without the need for an exterior coating. Our primary strategy is to license Cerashield™ on a device by device basis to the manufacturers of such devices. We are evaluating retaining one or more niche applications of the technology to commercialize ourselves once our financial and managerial resources make such approach a viable option. We believe that antimicrobial ~~will~~treated bedevices ~~regulated~~with demonstrated ability to prevent or reduce bacterial colonization can demand premium pricing in the market based on cost savings to payors and/or reduction in morbidity and/or mortality rates. Our goal is to establish Cerashield™ as the most efficacious antimicrobial technology available for medical devices. We believe that current antimicrobial approaches (such as ~~opposed~~silver) are of limited efficacy and duration. We plan to ~~pharmaceutical~~target ~~therapies~~Cerashield™ ~~which~~development ~~would~~for several ~~require~~devices with high incidences of infection such as endotracheal tubes, ~~regulation~~urinary catheters, and central venous catheters as ~~new~~well ~~drugs~~as those devices associated with less frequent but catastrophic infections. We ~~have~~believe ~~based~~that there is a broad range of ~~this~~medical ~~decision~~devices onthat ~~the~~would ~~following~~benefit ~~considerations:~~from use of our Cerashield™ technology and we are pursuing collaboration arrangements with medical device manufacturers. As discussed previously in “The Company”, during 2009, we entered into three formal collaboration agreements with medical device manufacturers and anticipate entering into several new agreements during 2010.

While our in-vitro testing activities have demonstrated that one or more of our lead Ceragenin™ compounds may have efficacy as a pharmaceutical therapy against key pathogens associated with various diseases (e.g. multidrug resistant Pseudomonas aeuroginosa associated with respiratory infections in Cystic Fibrosis patients), we plan to focus on Cerashield™ applications that will be regulated as medical devices as opposed to pharmaceutical therapies which would require regulation as new drugs. We have based this decision on the following considerations:

· Anticipated development costs;

· Projected timeframes associated with regulatory approvals;

· Heightened awareness on the part of payors, physicians and patients of nosocomial infections;

· Anticipated market demand;

· Currently available and anticipated competitive products; and

· Projected ~~financial~~ financial resources available to the Company.

AHowever, ~~key~~as ~~component of our~~discussed ~~current~~previously ~~business~~in ~~strategy~~“The ~~has~~Company”, ~~been~~during to2009, ~~operate as~~ a ~~fairly~~consortium ~~“virtual”~~of ~~firm~~research ~~until~~institutions ~~such~~were ~~time~~awarded asa ~~the~~$2.87 ~~business~~million ~~requires~~grant ato ~~more~~fund ~~robust~~the ~~infrastructure. We~~pre-clinical ~~believe~~development ~~this~~of ~~strategy~~a Ceragenin™ ~~has~~based ~~been~~oral ~~successful as~~drug itto ~~allowed~~treat ustwo tocommon ~~direct~~and apotentially ~~greater~~deadly gastrointestinal ~~percentage~~infections: ofClostrdium ~~our~~difficile ~~financial~~and ~~resources~~Shigella. ~~into~~The grant will ~~product~~fund ~~development~~the ~~and~~preclinical ~~provided~~development, usformulation, ~~with~~toxicology ~~greater~~and ~~flexibility~~cGMP byscale ~~limiting~~up ~~the~~to ~~size~~1 kilogram of CSA-13. While our ~~corporate~~stated ~~infrastructure~~focus ~~and~~is ~~workforce. While~~on developing itour isanti-infective ~~possible~~technology ~~that~~as wea ~~will~~coating ~~hire~~for medical devices, we ~~additional~~are ~~management~~interested ~~and~~in ~~staff~~letting ~~resources~~others ~~during~~pursue ~~2009~~drug toapplications ~~develop~~if ~~our~~it ~~business,~~does not werequire ~~believe~~significant wefinancial ~~can~~resources ~~keep~~from ~~our~~the ~~corporate~~Company ~~and~~as ~~development~~the ~~staff~~preclinical testing tomay ~~levels~~result ~~that~~in ~~are substantially~~data ~~lower~~that ~~than~~can ~~found~~be valuable in ~~traditional~~developing ~~medical~~our ~~device~~coatings business ~~companies~~and ~~by carefully~~may ~~leveraging~~also ~~third~~result ~~party~~in ~~expertise~~licensing opportunities for the drug.

We believe that we can partially fund the development costs for our Ceragenin™ technology through cash flows generated from sales of EpiCeram®. While revenues from EpiCeram® are not yet sufficient to make the Company profitable, we believe that EpiCeram® revenues can provide a significant contribution to defraying operating costs by 2011.

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A key component of our current business strategy has been to operate as a fairly “virtual” company until such time as the business requires a more robust infrastructure. We believe this strategy has been successful as it allowed us to direct a greater percentage of our financial resources into product development and provided us with greater flexibility by limiting the size of our corporate infrastructure and workforce. While it is possible that we will hire additional management and staff resources during 2010 to develop our business, we believe we can keep our corporate and development staff to levels that are substantially lower than found in traditional medical device companies by carefully leveraging third party expertise.

OUR TECHNOLOGY

We have two base technology platforms; Ceragenins™ and Barrier Repair. Our primary focus in the future will be on Ceragenin™ development given the remaining patent life of the Barrier Repair technology (54.5 years). See “License Agreements and Proprietary Rights.” A discussion of both technologies follows below.

Ceragenins™

As discussed above, we plan to utilize our Ceragenin™ technology to develop new generation antimicrobial protection for medical devices. Ceragenins™ are small molecule, positively charged compounds that have shown promising activity against bacteria, and certain viruses, fungi and cancers in a variety of inpreclinical ~~vitro~~ tests. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system. The compounds are electrostatically attracted to bacteria, viruses, and certain lines of cancer cells that all share in common the presence of negatively charged phospholipids on their cell membrane surfaces. The compounds are believed to ~~primarily~~ primarily act via induction of apoptosis by rapid depolarization of the cell ~~membranes~~ membranes (tearing holes in the cell walls). Unlike most antibiotics which are bacteriastatic (preventing the reproduction of bacteria cells), the Ceragenins™ are bacteriacidal (kills the bacterial cells). Other efforts to duplicate the naturally occurring antimicrobial peptides have proven not to be commercially viable because of the inability to stabilize and cost effectively produce bulk quantities of such compounds. Ceragenins™, however, are neither peptides nor steroids, but rather cationic steroid shaped small molecules that we believe are far simpler, more stable and inexpensive to produce in bulk quantities.

Since May 2005, we have accomplished the following developments related to our Ceragenin™ technology:

3In vitro testing

~~Table~~ · Demonstrated that a Ceragenin™ based coating prevented bacterial colonization on titanium surfaces and eradicated staphylococcus aureus and E. coli bacteria in the fluid surrounding the coated disk; · Presented data at a meeting of ~~Contents~~the American Academy of Dermatology showing that use of one of our Ceragenin™ compounds (CSA-8) when used in combination with mupirocin (a commonly used topical antibiotic active against gram-positive bacteria) was able to expand mupirocin’s spectrum of activity to include gram-negative bacteria such as E. coli, salmonella and kleibsiella; · Demonstrated that our leading Ceragenin™ pre-clinical compound, CSA-13, was highly effective against vancomycin-resistant staphylococcus aureus (“VRSA”), vancomycin-resistant enterococci (“VRE”), vancomycin intermediate resistant staph aureus (“VISA”), hospital acquired MRSA, and community associated MRSA (“CA-MRSA”) at minimum inhibitory concentrations (“MIC”) of under .25 micrograms/ml; · Demonstrated that compound CSA-13 was highly effective in vitro against strains of pseudomonas infections isolated from cystic fibrosis patients (MIC values of 1 to 3 micrograms/ml) that are highly resistant to tobramycin (mics of over 80 micrograms/ml are required); · Demonstrated that compound CSA-13 was highly effective in vitro against pseudomonas aueroginosa, E. coli; · Demonstrated that compound CSA-13 was highly effective in vitro against bioterrorism surrogate strains of anthrax, listeria and plague; · Demonstrated that compounds CSA’s -8, -13 and -54 possessed activity similar to human angiostatins in vitro and that the compounds had been accepted by the National Cancer Institute’s developmental therapeutics program to evaluate potential activity in inhibiting the growth of tumor blood supply; · Demonstrated that compound CSA-54 was highly active against Epstein-Barr virus;

· Demonstrated that a Ceragenin™ based coating prevented bacterial colonization on titanium surfaces and eradicated staphylococcus aureus and E. coli bacteria in the fluid surrounding the coated plate in an in vitro medical device coating model;

· Presented data at a meeting of the American Academy of Dermatology showing that use of one of our Ceragenin™ compounds (CSA-8) when used in combination with mupirocin (a commonly used topical antibiotic active against gram-positive bacteria) was able to expand mupirocin’s spectrum of activity to include gram-negative bacteria such as E. coli, salmonella and kleibsiella;

· Demonstrated that our leading Ceragenin™ pre-clinical compound, CSA-13, was highly effective in vitro against vancomycin-resistant staphylococcus aureus (“VRSA”), vancomycin-resistant enterococci (“VRE”), vancomycin intermediate resistant staph aureus (“VISA”), hospital acquired MRSA, and community associated MRSA (“CA-MRSA”) at minimum inhibitory concentrations (“MIC”) of under .25 micrograms/ml;

· Demonstrated that compound CSA-13 was highly effective in vitro against strains of pseudomonas infections isolated from cystic fibrosis patients (MIC values of 1 to 3 micrograms/ml) that are highly resistant to tobramycin (mics of over 80 micrograms/ml are required);

· Demonstrated that compound CSA-13 was highly effective in vitro against pseudomonas aueroginosa, E. coli;

· Demonstrated that compound CSA-13 was highly effective in vitro against bioterrorism surrogate strains of anthrax, listeria and plague;

· Demonstrated that compounds CSA’s -8, -13 and -54 possessed activity similar to human angiostatins in vitro and that the compounds had been accepted by the National Cancer Institute’s developmental therapeutics program to evaluate potential activity in inhibiting the growth of tumor blood supply;

· Demonstrated that compound CSA-54 was highly active against Epstein-Barr virus in in vitro testing;

· Demonstrated that compound CSA-13 was highly active in vitro against the vaccinia virus;

· Demonstrated that compound CSA-54 showed potent virucidal activity in in vitro testing against multiple strains of HIV;

· Demonstrated that CSA-13 and CSA-54 showed the ability to inhibit angiogenesis at low micromolar concentrations in in vitro testing performed by the National Cancer Institute;

· Demonstrated that CSA-13 was 100 times more effective in eradicating a MRSA biofilm than vancomycin in in vitro testing;

· Demonstrated that CSA-13 was able to significantly inhibit bladder cancer growth with minimal toxicity to normal cells in in vitro testing;

· Demonstrated that CSA-13 was able to prevent influenza infection by H3N2, one of the common strains of Type A Influenza, in in vitro testing;

· Developed a prototype contact lens disinfectant solution that demonstrated the ability to virtually eradicate the bacterial and fungal strains that the FDA specifies for testing pursuant to its published guidance document in in vitro testing;

· Demonstrated that Ceragenin™ treated hemodialysis catheters were able to virtually prevent bacterial colonization in a 21 day in vitro study;

· Demonstrated that in a series of in vitro experiments that CSA-13 shows promise as a potential therapy to treat multidrug resistant Pseudomonas aeuroginosa infections which are a leading cause of morbidity and mortality in patients with cystic fibrosis;

· Demonstrated that in a series of in vitro experiments that CSA-13 showed rapid killing activity and synergistic activity with conventional antibiotics against multidrug resistant Pseudomonas aeuroginosa bacterial strains. P. aeuroginosa is a leading cause of morbidity and mortality in patients with pneumonia and other respiratory diseases;

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· Demonstrated that in a series of in vitro experiments that prototype Cerashield™ coated endotracheal tube segments were able to completely prevent bacterial adhesion and biofilm formation in a 21 day continuous challenge test;

·	Demonstrated that compound CSA-13 was highly active in vitro against the vaccinia virus;

·	Demonstrated that compound CSA-54 showed potent virucidal activity testing against multiple strains of HIV;

·	Demonstrated that CSA-13 and CSA-54 showed the ability to inhibit angiogenesis at low micromolar concentrations in testing performed by the National Cancer Institute;

·	Demonstrated that CSA-13 was 100 times more effective in eradicating a MRSA biofilm than vancomycin;

·	Demonstrated that CSA-13 was able to significantly inhibit bladder cancer growth with minimal toxicity to normal cells;

·	Demonstrated that CSA-13 was able to prevent influenza infection by H3N2, one of the common strains of Type A Influenza;

·	Developed a prototype contact lens disinfectant solution that demonstrated the ability to virtually eradicate the bacterial and fungal strains that the FDA specifies for testing pursuant to its published guidance document;

·	Demonstrated that Ceragenin™ treated hemodialysis catheters were able to virtually prevent bacterial colonization in a 21 day study;

·	Demonstrated in a series of experiments that CSA-13 shows promise as a potential therapy to treat multidrug resistant Pseudomonas aeuroginosa infections which are a leading cause of morbidity and mortality in patients with cystic fibrosis;

·	Demonstrated in a series of experiments that CSA-13 showed rapid killing activity and synergistic activity with conventional antibiotics against multidrug resistant Pseudomonas aeuroginosa bacterial strains. P. aeuroginosa is a leading cause of morbidity and mortality in patients with pneumonia and other respiratory diseases;

·	Demonstrated in a series of experiments that prototype Cerashield™ coated endotracheal tube segments were able to completely prevent bacterial adhesion and biofilm formation in a 21 day continuous challenge test;

·	Demonstrated that Cerashield™ coated silicone urinary catheters provided complete protection against E.Coli bacterial colonization for the entire duration of the 21 day study when challenged with daily inocula of 1,000 colony forming units of E. Coli;

·	Demonstrated that a silicone intravaginal ring incorporating CeraShield™ achieved 224 days of continuous antimicrobial efficacy when soaked in artificial urine with a fresh inoculum of at least 1,000 colony forming units per ml of E. coli on a daily basis;

·	Demonstrated that CSA-13 was effective in preventing biofilm growth on disks of material used in dentistry for artificial teeth (hydoxyappetitate); and

·	Demonstrated that CSA-13 was effective against H.pylori, a common pathogen linked to stomach ulcers, stomach cancer and various other diseases.

In vivo-testing

·	Demonstrated in a pilot study (sheep), that Cerashield™ treated surgical screws did not have any adverse biological, histological or hematological effects on bone tissue healing or remodeling compared to untreated screws. However, given the small number of animals (n=2), the study did not allow for extended interpretations or provide statistically conclusive data;

	Given our limited financial resources, our ability to expand testing is primarily limited to:

·	Testing performed by individual investigators (usually in academic settings) to whom we have sent compound at little or no cost;

·	Testing performed by potential commercialization partners under material transfer agreements or formal development agreements; or

·	Testing performed under NIH grants.

· Demonstrated that in an in vitro test, Cerashield™ coated silicone urinary catheters provided complete protection against E.Coli bacterial colonization for the entire duration of the 21 day study when challenged with daily inocula of 1,000 colony forming units of E. Coli;5

~~· Demonstrated~~Table ~~that a silicone intravaginal ring incorporating CeraShield™ achieved 120 days~~ of ~~continuous antimicrobial efficacy when soaked in artificial urine with a fresh inoculum of at least 1,000 colony forming units per ml of E. coli on a daily basis; and~~Contents

~~· Demonstrated~~During ~~in a pilot~~2010, inwe ~~vivo~~expect to ~~study~~continue ~~(sheep),~~testing ~~that~~under ~~Cerashield™~~the ~~treated~~arrangements ~~surgical~~described ~~screws~~above ~~did~~as ~~not~~well ~~have~~as ~~any~~commence ~~adverse~~testing ~~biological,~~under ~~histological~~new orbut ~~hematological~~similar ~~effects~~agreements onthat ~~bone~~are ~~tissue healing or remodeling compared to untreated screws. However, given the small number of animals (n=2), the study did~~ not ~~allow~~yet ~~for extended interpretations or provide statistically conclusive data~~identified.

During 2009, we expect that testing of Cerashield™ will be expanded primarily by potential commercialization partners into device specific in vitro and in vivo models.

Barrier Repair

Our Barrier Repair technology is a specific combination of epidermal lipids which are able to create a human-like skin barrier and thus provide patients with a more normal skin barrier function. Defects in the skin’s barrier function play critical roles in the pathogenesis of certain skin diseases such as eczema. The skin’s barrier is composed of a thin sheet of epidermal lipids about half the thickness of a piece of notebook paper. This thin, flexible, strong combination of lipid components forms a mechanical defense against skin irritants and bacterial infections while also helping to retain skin moisture. Persons with a deficient skin barrier suffer from higher levels of moisture evaporating through their skin also known as trans-epidermal water loss (“TEWL”). TEWL leads to dry, itchy, cracked skin which can then lead to further degradation of the skin’s barrier. Deficient skin barrier function can be caused by both internal factors (i.e. genetic predisposition and/or immune system related misregulation) and external factors (i.e. radiation treatment and other skin irritants).

Since May 2005, we accomplished the following developments related to our Barrier Repair technology:

· Received 510(k) marketing clearance from the FDA for EpiCeram®, our first prescription barrier product candidate;

· Demonstrated that EpiCeram® accelerated skin barrier recovery in eczema patients afflicted with moderate to severe symptoms compared to untreated patients in a small but statistically significant third party study. The objective measurement of this study showed that there was 100% reduction in itch, an over 50% reduction in dry skin, over 36% reduction in scaliness and an over 37% reduction in irritation/inflammation (each at the 3 and 6 hour measurement points after applying EpiCeram®);

· Completed a 113 person clinical study to compare the efficacy of EpiCeram® to Cutivate®, a commonly prescribed mid strength steroid, in children with moderate to severe eczema. In the study, we demonstrated that there was no significant statistical difference in efficacy between EpiCeram® and Cutivate® in treating the symptoms of eczema after 28 days of treatment. More detailed study results were as follows:

Study Design

The study was an investigator-blinded, randomized controlled study conducted at five centers which evaluated a total of 113 patients in two groups of children (ages 6 months to 18 years) with moderate-to-severe eczema treated with either Cutivate® Cream, a mid-potency topical steroid, or EpiCeram®. The study was primarily conducted during the winter months of December (‘06), January (‘07) and February (‘07).

Primary and Secondary Outcome Measures

According to the protocol, the primary outcome measure was the change in mean SCORAD score measured at Day 28 as compared to the baseline. The protocol’s secondary efficacy parameters were:

· Percentage of subjects reaching clear or almost clear on Investigator’s Global Assessment (IGA) at Day 28;

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· Change in patient reported assessments of pruritus (itch); and

· Change in patient reported assessment of disturbance of sleep habits.

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Study Results

Primary Outcome Measure (change in mean SCORAD score measured at Day 28 compared to Baseline)

Daily (twice) applications of both Cutivate® Cream and EpiCeram® produced significant reductions in SCORAD scores at Day 28 compared to baseline values. Daily (twice) applications of EpiCeram® produced statistically significant improvement of eczema after 28 days with a reduction in SCORAD scores of 56.41% from baseline. Daily (twice) applications of the comparator product, Cutivate® cream, also produced statistically significant improvement of eczema after 28 days with a reduction in SCORAD scores of 68.77%. Statistical comparison of the treatment effects (SCORAD scores) showed no statistically significant difference between treatment effects after 28 days of treatment.

Secondary Outcome Measures

A. Percentage of subjects reaching clear or almost clear on IGA at Day 28

Assessment of the disease progression showed significant improvements in the IGA scores over time for both EpiCeram® and Cutivate® cream with 61.1% of the EpiCeram® patients assessed as clear or almost clear after 28 days of treatment and 76.2% of the Cutivate® cream patients being assessed as clear or almost clear at Day 28. Comparison of the disease progression results for both treatments showed no statistically significant difference between EpiCeram® and Cutivate® cream after 28 days of treatment.

B. Assessment of Pruritus

Patient reported assessments of pruritus also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® (3.54 change from baseline) and Cutivate® cream (3.75 change from baseline). No statistically significant differences were found between treatments after 28 days of treatment.

C. Assessment of Sleep Habits

Patient reported assessments of sleep habits also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® (2.63 change from baseline) and Cutivate® cream (2.81 change from baseline). No statistically significant differences were found between treatments after 28 days of treatment.

Safety

The investigators concluded that use of EpiCeram® was safe for use under the conditions of the study. There were no serious adverse events reported in the study, all but one of the reported adverse events was either mild or moderate and all were consistent with the symptoms of eczema. The investigators recommended that four EpiCeram® patients experiencing adverse events temporarily discontinue use of the product. Two of these patients fully resolved. The investigators made no recommendation that any of the Cutivate® patients discontinue use.

· Completed a 38 person clinical study to compare the efficacy of EpiCeram® to Elidel®, a commonly prescribed non steroidal therapy, in children with mild to moderate eczema. In the study, we demonstrated that both EpiCeram® and Elidel® produced significant improvement after four weeks of treatment. More detailed study results were as follows:

Study Design

The study was an investigator-blinded, randomized controlled study conducted at two centers which evaluated a total of 38 patients in two groups of children (ages 6 months to 12 years) with mild-to-moderate eczema treated with either Elidel® (pimecrolimus 1%), an immunosuppressant cream, or EpiCeram®. The study was conducted from April 2007 to January 2008.

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Primary and Secondary Outcome Measures

According to the protocol, the primary outcome measure was the change in median Eczema Area and Severity Index (“EASI”) scores measured at Day 28 as compared to the baseline. The protocol’s secondary efficacy parameters were:

· Percentage of subjects reaching clear or almost clear on IGA at Day 28; and

· Change in patient reported assessments of pruritus (itch).

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Study Results

Primary Outcome Measure (change in median EASI score measured at Day 28 compared to Baseline)

Daily (twice) applications of Elidel® produced significant reductions in EASI scores at Day 28 compared to baseline. While twice daily applications of EpiCeram® did not produce statistically significant improvement in EASI scores at Day 28, the overall improvement produced by EpiCeram® was not statistically different from that produced by Elidel®. Additionally, there were no statistically significant differences between EpiCeram® and Elidel® in the proportion of subjects with either greater than 50% improvement in EASI scores or greater than 75% improvement in EASI scores at Day 28.

Secondary Outcome Measures

A. Percentage of subjects reaching clear or almost clear on IGA at Day 28

Both treatments demonstrated statistically significant reductions in eczema symptoms as measured by IGA at Day 28. Assessment of the disease progression showed significant improvements in the IGA scores over time with 27% of the EpiCeram® patients assessed as clear or almost clear after 28 days of treatment and 44% of Elidel® patients being assessed as clear or almost clear at Day 28. Comparison of these disease progression results for both treatments showed no statistically significant difference between EpiCeram® and Elidel® after 28 days of treatment.

B. Assessment of Pruritus

Patient reported assessments of pruritus also showed significant improvement from baseline after 28 days of treatment for both EpiCeram® and Elidel®. No statistically significant differences were found between treatments after 28 days of treatment.

Safety

The investigators concluded that use of EpiCeram® was safe for use in the patient population studied. There were no serious adverse events reported in the study and both treatments had similar rates of adverse events.

· Entered into the DRL Agreement to commercialize EpiCeram® in the United States;

· Commenced shipment of EpiCeram® for commercial launch in the United ~~States~~ ~~(September 2008)~~States;

· Entered into an exclusive distribution and supply ~~agreement~~agreements for commercialization of EpiCeram® in Southeast Asia; Canada, Europe, Israel, Taiwan, Hong Kong, and South Korea; and

· ~~Entered~~Commenced ~~into~~shipment ~~an exclusive distribution and supply agreement for commercialization~~ of EpiCeram® for commercial launch in Canada and Southeast Asia.

PRODUCTS AND PRODUCT CANDIDATES

Nearly all of our product candidates will require clearance by the FDA and in certain cases extensive clinical evaluation before we can sell them either directly or via partners. Any product or technology under development may not result in the successful introduction of a new product.

Cerashield™ Antimicrobial Technology

We believe that our Ceragenin™ class of compounds has the potential to be a solution for combating nosocomial infections. For information on our Cerashield™ technology, see the discussion under the heading “Our Strategy.” We believe that Cerashield™ coatings can receive regulatory approval as medical devices under Pre-Market Approval (“PMA”) regulatory filings or in certain applications under 510(k) (see Government Regulation). However, there is no assurance that the FDA will agree with our conclusions.

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~~believe~~We ~~that~~do ~~Cerashield™~~not ~~coatings~~plan ~~can~~on ~~receive~~doing any new drug ~~regulatory~~development ~~approval~~unless asthat ~~medical~~development ~~devices~~is ~~under~~funded ~~Pre-Market~~by ~~Approval~~potential ~~(“PMA”)~~collaboration ~~regulatory~~partners, ~~filings~~existing grants or inpotential ~~certain~~grant applications. As discussed previously under ~~510(k) (see~~“The ~~Government Regulation). However~~Company”, ~~there~~the NIH ishas ~~no assurance~~approved ~~that~~a ~~the~~grant ~~FDA~~to ~~will~~fund ~~agree~~development ~~with~~of ~~our~~CSA-13 ~~conclusions~~as an oral drug for Clostrdium difficile and Shigella.

We are not doing any new drug development unless that development is funded by potential collaboration partners or under potential grant applications.

Barrier Repair

EpiCeram®

NeoCeram™®

NeoCeram™® is a pediatric barrier repair cream intended to help create a skin barrier in premature infants and neonates. Infants born prematurely enter the world without fully formed skin barriers. As lung surfactant therapy has pushed back the age of viability to 23 weeks of gestational age, the lack of an adequate skin barrier is now of critical importance to morbidity and mortality in this at-risk population. We believe that by providing the topical equivalent of a skin barrier, ~~that~~ these infants will ~~develop~~ develop more rapidly, be at lower risk for bacterial infections and sepsis, and ~~spend~~ spend less time in the neonatal intensive care unit thereby significantly ~~reducing~~ reducing the costs incurred by the health care system to care for these infants. We had intended to utilize our 510(k) approval for EpiCeram® to market NeoCeram™® using an identical formulation packaged for single dose use. However, based ~~upon additional research and feedback from practitioners, we now plan~~ on ~~formulating NeoCeram as~~ a ~~lotion and market as an OTC~~ ~~product. During~~recent ~~2008,~~feedback we ~~progressed~~have ~~with development of NeoCeram~~received, ~~and~~we ~~during~~believe ~~2009,~~that we ~~plan~~will tolikely ~~complete~~have ~~development~~to ~~and commence~~file a ~~clinical study. Our ability~~ tonew ~~commence the study is dependent upon receiving institutional review board~~ 510(~~“IRB”~~k) ~~approval,~~ application ~~which~~for ~~cannot be assured, and having sufficient capital resources to fund~~ the ~~study~~product. ~~As of December~~ ~~31,~~ ~~2008,~~Development weactivities ~~did~~for ~~not~~NeoCeram® ~~have~~are ~~sufficient~~currently ~~funding~~on tohold ~~commence~~pending additional ~~the study~~financing. There is no assurance that we will ever commercialize NeoCeram™®.

PRODUCT MARKETS

Ceragenin™ Based Products

Cerashield™ Antimicrobial Coatings

Every year, approximately 1 million Americans acquire infections while hospitalized as the result of implantation of medical devices such as urinary catheters, central venous catheters, endotracheal tubes, pacemakers, orthopedic implants and fixator pins. These devices act as focal points for bacterial adhesion, growth and infection. Certain of these infections have lethal consequences resulting in over 50,000 deaths each year while non-lethal infections prolong hospital stays, complicate recoveries and increase costs. It has been estimated that the cost of treating medical-device related infections run into the billions of dollars annually. Medical device related infections are becoming of even greater concern in recent years as a result of the development of an increased number of multiple drug resistant bacterial strains particularly in the hospital setting, which are proving increasingly difficult to safely and successfully treat. Nearly every implantable medical device is susceptible to infections by a variety of pathogens, with implantable devices estimated to account for over 50% of all nosocomial infections. Depending on the length of time a medical device is present in the body, the likelihood for a biofilm related infection increases, and biofilm based infections typically require dramatically higher antibiotic concentrations to treat. For example, it has been estimated that up to 90% of bloodstream infections in the hospital setting are related to the use of some type of intravascular medical device. While many factors contribute to the medical device related infection rate, including health care worker hand washing and training procedures, sterilization protocols, and prophylactic use of antibiotics, the development of catheter wound dressings and antimicrobial technology for medical devices aimed at helping to prevent the development of device-related infections is an area of growing interest. Current antimicrobial coatings are extremely limited and in general do not provide very effective long-lasting antimicrobial protection.

Medical device markets are large, and we believe that ~~currently~~ currently available methods for combating the higher incidence of infection ~~associated~~ associated with those devices lack effectiveness. For example, each of the following segments of the medical device market has annual sales over $100 million and has also been reported to have infection rates in the 1% to 30% range: urinary catheters, central venous catheters, dental implants, fracture fixation (including fixator pins and orthopedic implants), and pacemakers. There are a variety of additional attractive market segments with unmet antimicrobial coating needs including segments such as endotracheal tubes, needleless connectors, antimicrobial medical sponges, and wound dressings. We believe that there is a large opportunity for introducing a new generation catheter, wound dressing or antimicrobial coating that is safe, effective and provides longer lasting protection than available product offerings.

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range: urinary catheters, central venous catheters, dental implants, fracture fixation (including fixator pins and orthopedic implants), and pacemakers. There are a variety of additional attractive market segments with unmet antimicrobial coating needs including segments such as endotracheal tubes, needleless connectors, antimicrobial medical sponges, and wound dressings. We believe that there is a large opportunity for introducing a new generation catheter, wound dressing or antimicrobial coating that is safe, effective and provides longer lasting protection than available product offerings.

Barrier Repair Products

EpiCeram®

Atopic Dermatitis

An estimated 15 million Americans suffer from the disease Atopic Dermatitis, which is commonly known as eczema. Eczema is the leading skin disease of childhood and 65% of those affected show clinical symptoms by 6 months of age. The skin of eczema patients becomes extremely itchy and inflamed, causing redness, swelling, cracking and scaling. The skin can become so severely irritated, patients often scratch themselves until they bleed, leading to a secondary infection. Histological analysis of the skin of eczema patients reveals a global deficiency in epidermal lipids (ceramides, cholesterol and essential fatty acids) with a marked deficiency of ceramides. This lack of epidermal lipids leads to a defective skin barrier. Normalizing the barrier is the key to successful treatment. The work of Dr. Elias has shown that topical application of an optimal molar ration of these epidermal lipids can correct the skin barrier abnormality. We believe that EpiCeram® will greatly reduce skin irritation, quickly reduce itch, and help to restore a more normal skin barrier than currently available products. While there are multiple products and treatments for eczema, the most commonly prescribed treatments are immune system suppressants or steroids both of which have well recognized undesirable side effects. Immunomodulator drugs used for treating eczema recently received a black box safety warning from the FDA that is resulting in a substantial decline in sales for these products since 2004, when they combined had over $500 million in sales. EpiCeram® is non steroidal and is not an immunomodulator The current market size for eczema treatments is believed to be between $800 million and $900 million annually in the U.S. alone.

NeoCeram™®

It is estimated that 80,000 infants a year are born in the U.S. under 32 weeks of gestational age. Infants under 32 weeks lack a fully developed skin barrier. Pre -term infants spend an average of 56 days in the neonatal intensive care unit (“NICU”) at a total cost estimated to be $18 billion annually in the United States. The lack of a fully formed barrier increases the risk of infections (sepsis) and other medical complications due to excessive trans-epidermal water loss. Pre term infants who develop sepsis (20%) spend an additional 19 days in the NICU. NICUs receive capitated payments for treating premature infants so any reduction in the length of stay positively affects the institution’s profitability. At present, the standard of care for such infants is to place them in a warmer in a high humidity environment. We believe that if the data shows a significant benefit in the use of NeoCeram™® (for example, reduction of length of stay in the NICU or reduction of bacterial infections), then there is the possibility of rapid adoption of it by the more than 600 neonatologists in the United States. WeIn ~~plan~~order to generate the data required to ~~commence~~successfully market NeoCeram®, we will need to conduct a clinical study to determine the efficacy of NeoCeram™® ~~sometime~~and obtain regulatory clearance. We have not filed for regulatory clearance ~~during~~for ~~2009~~NeoCeram®. Once clearance is received, we believe the duration of such a study will take approximately one year. Our ability to conduct this ~~trial~~ trial is dependent upon receiving IRB approval, which cannot be assured, and ~~having~~ having sufficient financial resources to pay for the study. Under the terms of the DRL Agreement, we have retained the rights to market NeoCeram™®.

SALES AND MARKETING

We currently do not have any sales and marketing personnel. We do not anticipate hiring a significant number of sales and marketing personnel unless we choose to commercialize products using an internal sales force.

COMPETITION

Ceragenins™

The pharmaceutical industry is highly competitive and includes a number of established, large and mid-size companies, as well as smaller emerging companies, whose activities are directly focused on our target markets. ~~Nearly~~We face ~~all~~significant ofcompetition ~~these~~from ~~companies~~pharmaceutical ~~have far greater financial~~ and ~~human~~biotechnology ~~resources~~companies ~~than we~~that doare asdesigning ~~well~~and asselling ~~more~~products ~~experienced~~designed ~~management teams. If approved, we expect~~ to ~~compete~~treat ~~primarily on~~bacterial ~~the efficacy and safety of our planned products~~infections. ~~However,~~Many ~~new~~major ~~developments~~pharmaceutical companies, ~~including~~such ~~the development~~as ofGlaxoSmithKline, ~~other~~Pfizer, ~~drug~~Bayer, ~~technologies~~Merck and ~~methods~~Sanofi ofAventis ~~preventing~~have ~~the~~already ~~incidence of disease,~~established ~~occur~~significant positions in the ~~pharmaceutical~~antibiotic ~~industry~~market. Additionally, atmany asmaller ~~rapid~~companies, ~~pace. These~~such ~~developments~~as ~~may~~Cubist ~~render our product~~Pharmaceuticals, ~~candidates~~Oscient orTherapeutics, ~~technologies~~Polymedix, ~~obsolete~~NovaBay ~~or noncompetitive~~Pharmaceuticals, Inc. ~~While~~ ~~the initial in vitro data generated~~and ~~against~~Inhibitex ahave ~~wide~~either ~~variety~~marketed ofantibiotics ~~infectious~~and/or ~~agents~~are ~~appears~~attempting to beenter ~~promising for~~this ~~selected~~market ~~Ceragenin™~~by ~~candidates,~~developing itnovel isand ~~still~~potentially ~~too~~more ~~early~~potent inantibiotics ~~the~~that ~~development~~are ~~process~~intended to be ~~able~~effective toagainst ~~assess the likelihood for successful pre~~drug-~~clinical~~resistant ~~and clinical~~bacterial ~~development of these compounds~~strains. ~~Many companies are developing or have recently developed new~~

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antibiotic therapies, including Cubist Pharmaceuticals, Inhibitex, Wyeth and others. In addition, several companies are working to commercialize antimicrobial peptides or their analogs as either prescription drugs or antimicrobial coatings, including Polymedix, Helix Biomedical, Demegen and others.

We expect our Cerashield™ technology to compete primarily with other anti-infective coating technologies designed to reduce the infection rates. Competitive product offerings would include the following products: products from C.R. Bard such as Agento Endotracheal Tubes; Bardex IC Foley Catheters with Bacti-Guard® silver and hydrogel coating; Bardex® IC Catheters with a silver hydrogel coating; and Lubri-Sil® Foley Catheter line of silicone catheters with an antimicrobial and hydrogel coating. Competitive entries from Angiotech, Inc. include their recently cleared central venous catheter based on 5-FU and other 5-FU products under development. Competitive entries from The Kendall Company include their DOVER® 100% Silicone Foley Catheters as well as their DOVER Silver catheters which incorporates OMNION® silver ion technology coupled with a hydrogel coating. Competitive entries from Rochester Medical include their RELEASE-NF® Catheter line which has a nitrofurazone coating. Competitive offerings from Arrow International Inc. include their Gard I and Gard II coatings containing chlorhexidine + silver sulfadiazine. Competitive offerings from Cook Critical Care include their SPECTRUM® line of antimicrobial polyurethane catheters containing minocycline and rifampin. The omiganan pentahydrochloride gel under development by Cadence Pharmaceuticals as well as a variety of other new antibiotic or antimicrobial coating based products which may be under development at other firms could also become future competitors. While we expect to compete based primarily on the greater spectrum of efficacy against infectious agents and longer duration of activity, it is too early to know whether the Cerashield™ technology under development will be approved for use in target medical device segments of greatest interest and unmet medical needs.

Barrier Repair

We expect to compete on, among other things, the efficacy of our products, the reduction in adverse side effects experienced when compared with certain current therapies, and more desirable patient treatment regimens. Competing successfully will depend on our ability to demonstrate efficacy of our products through clinical trials, our ability to convince opinion leaders and prescribing physicians of the advantages of our products, and having sufficient financial resources to adequately market our products. In addition, our ability to compete may be affected by our ability to obtain reimbursement from third-party payors. The clearance of EpiCeram® as a 510(k) medical device also limits the type of claims initially associated with the promotion of the product until such time as additional clinical trials, the outcomes of which cannot yet be certain, have been concluded supporting broader claims.

~~Although~~Our wefirst ~~believe~~product, EpiCeram®, ~~that~~is ~~our product~~indicated ~~candidates~~for ~~will~~use ~~have~~to ~~favorable~~treat ~~features~~dry ~~for~~skin conditions and to manage and relieve the ~~treatment~~burning and itching associated with various types of ~~their~~dermatoses, ~~intended~~including ~~indications~~atopic dermatitis, ~~existing~~irritant ~~treatments~~contact ordermatitis, ~~treatments~~radiation ~~currently~~dermatitis, and ~~under~~dry skin. Accordingly, we compete ~~clinical~~with ~~development~~well established products such as Elidel® from Novartis AG, Protopic® from Fujisawa, Atopiclair® from Sinclair Pharmaceuticals, MimyX® from Steifel Laboratories as well as a variety of topical steroids and skin emollients. We believe that ~~also~~the ~~receive~~limitations ~~regulatory~~established by ~~approval~~the ~~may~~FDA ~~possess~~on prescribing steroids and immunosuppressants to children under the ~~advantages~~age inof ~~competing~~two ~~for~~years of age will provide EpiCeram® with a competitive advantage in the market ~~share~~to children in this age category with symptoms of eczema.

Our first product, EpiCeram®, is indicated for use to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses, including atopic dermatitis, irritant contact dermatitis, radiation dermatitis, and dry skin. Accordingly, it will compete with well established products such as Elidel® from Novartis AG, Protopic® from Fujisawa, Atopiclair® from Sinclair Pharmaceuticals, MimyX® from Steifel Laboratories as well as a variety of topical steroids and skin emollients. We believe that the limitations established by the FDA on prescribing steroids and immunosuppressants to children under the age of two years of age will provide EpiCeram® with a competitive advantage in the market to children in this age category with symptoms of eczema.

LICENSE AGREEMENTS AND PROPRIETARY RIGHTS

License Agreement with the Regents of the University of California

Osmotics Corporation (“Osmotics”) entered into an exclusive license agreement with the Regents of the University of California (the “Regents”) for the Barrier Repair technology on June 28, 2000. The license agreement grants exclusive U.S. and international rights to issued patent 5,634,899 — “Lipids for epidermal moisturization and repair of barrier function.” The patent expires in July 2014. In connection with the merger of Ceragenix Corporation (f/k/a Osmotics Pharma, Inc.) and the Company in May 2005 (the “Merger”), Ceragenix Corporation was substituted in place of Osmotics as the licensee under the agreement. The license agreement provides Ceragenix Corporation with the worldwide ~~exclusive~~ exclusive right to commercially develop, use and sell therapeutic and cosmetic applications for the Barrier Repair technology. Under the terms of a sublicense agreement with Osmotics, Ceragenix Corporation agreed that Osmotics will retain the license rights for all cosmetic, non-prescription applications (as defined in the sublicense agreement). The rights of Ceragenix Corporation under the license agreement are subject to a non-exclusive, irrevocable, royalty free license to the U.S. Government with the power to grant a license for all governmental purposes. ~~Unless~~ Unless terminated earlier by Ceragenix Corporation for any reason or by the Regents due to Ceragenix Corporation’s breach, the license agreement continues until the date of expiration of the last to expire patent licensed under this agreement. Ceragenix Corporation is obligated to pay the Regents, on an annual basis, the greater of $50,000 or five percent of net sales (as defined in the agreement) of products derived from the Barrier Repair technology. Upfront and milestone payments received from sub licensed products are subject to a 15% royalty. In addition, the agreement requires Ceragenix Corporation to reimburse the Regents for legal expenses associated with patent protection and expansion.

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net sales (as defined in the agreement) of products derived from the Barrier Repair technology. Upfront and milestone payments received from sub licensed products are subject to a 15% royalty. In addition, the agreement requires Ceragenix Corporation to reimburse the Regents for legal expenses associated with patent protection and expansion.

License Agreement with the Brigham Young University

On May 1, 2004, Osmotics Corporation and Ceragenix Corporation entered into an exclusive license agreement with Brigham Young University (“BYU”) for the intellectual property rights to the Ceragenin™ technology. The exclusive license agreement grants the U.S. and international rights to U.S. composition of matter patents: 6,350,738, 6,486,148 and 6,767,904 which are in effect until 2022. In connection with the Merger, Osmotics was removed as a co-licensee and Ceragenix Corporation is now the sole licensee under the agreement. The license agreement provides Ceragenix Corporation with the worldwide exclusive right to develop, use and sell all applications based on the Ceragenin™ technology until May 1, 2006. After May 1, 2006, the exclusive license extends only to those applications for which Ceragenix Corporation has conducted research or engaged in substantial commercialization efforts, including research or commercialization by strategic partners and sublicensees. To date, we have conducted research related to the Ceragenin™ technology for use as an antibiotic, antiviral agent, anticancer agent and antifungal agent. We believe such research meets the application definition to preserve exclusivity under the agreement. The rights of Ceragenix Corporation under the license agreement are subject to the right of BYU and the Church of Jesus Christ of Latter day Saints and the Church Education System to use the technology for continuing research and non-commercial academic and ecclesiastical uses without cost.

The BYU License requires ~~quarterly~~us to pay quarterly research and development support fees of $22,500, and ~~earned~~ royalty ~~payments~~ payments equal to 2% - 10% of adjusted gross sales (as defined in the agreement) on any product ~~using~~we sell using the licensed technology. The ~~earned~~ royalty is subject to an annual minimum royalty ~~for which payment commenced in calendar year 2008~~. The minimum annual royalty iswas $100,000 in 2008, $200,000 in 2009, and $300,000 in 2010 and each year thereafter. We have not made the payment which was due in 2009 nor have we made the quarterly support fee payments that were due on August 1, 2009, November 1, 2009, and February 1, 2010. These delinquent payments represent a technical default under the terms of the BYU License. We are also obligated to reimburse BYU for any legal expenses associated with patent protection and expansion. During the year ended December 31, 2009, ~~Unless~~we did not reimburse BYU for these legal fees in accordance with the required timeframes set forth in the BYU License agreement. These delinquent payments also represent a technical default under the terms of the BYU License. On April 7, 2010, BYU declared us in breach of the agreement. Under the terms of the BYU License, we have 30 days to cure the breach. If we cannot cure the breach, the BYU License will be terminated. Further, a default under the BYU License would also constitute a default under our convertible debt obligations. Unless terminated earlier by Ceragenix Corporation for any reason or by BYU due to Ceragenix Corporation’s breach, the license agreement terminates on the date of expiration of the last valid claim of any patent included in the technology.

The underlying patents and license agreements with the Regents and BYU are critically important to the Company’s business prospects. We have no proprietary technologies outside of these agreements. The loss of either of these license agreements, or if the underlying patents were declared invalid or could not be protected, would result in a material adverse effect on the Company.

TRADEMARKS

We believe that trademark protection is an important part of establishing product and brand recognition. The United States Patent and Trademark Office has approved EpiCeram® asand aNeoCeram® as registered ~~trademark~~trademarks and the following ~~applications~~ applications for registration subject to final approval of statements of use: ~~NeoCeram™,~~ Ceracide™, Ceragenins™, ~~Ceragenix~~Ceragenin™ and Cerashield™. United States federal registrations for trademarks remain in force for ten years and may be renewed every ten years after issuance, provided the mark is still being used in commerce. We have also ~~filed~~received trademark protection for EpiCeram® ~~trademark~~in Korea, the Philippines and Singapore, and we have filed for EpiCeram® trademark protection in the European Union, Canada, ~~Korea,~~ Malaysia, ~~Singapore~~ Indonesia, ~~Indonesia~~ and the ~~Philippines~~Russian Federation. However, any such trademark or service mark registrations may not afford us adequate protection, and we may not have the financial resources to enforce our rights under any such trademark or service mark registrations. If we are unable to protect our trademarks or service marks from infringement, any ~~goodwill~~value developed in such trademarks and service marks could be impaired.

GOVERNMENT REGULATION

~~The~~Government ~~pharmaceutical~~authorities ~~industry~~in ~~is subject to regulation by~~ the ~~FDA~~U.S., ~~under~~at the ~~Food~~federal, ~~Drug and Cosmetic Act~~state, ~~by the states under state food~~ and ~~drug~~local ~~laws~~level, and byforeign ~~similar agencies outside the~~countries ~~United~~extensively ~~States. In order to clinically test~~regulate, ~~manufacture,~~among ~~and~~other ~~market products for therapeutic use~~things, wethe ~~generally~~following ~~must satisfy~~areas ~~mandatory~~relating ~~procedures and safety and effectiveness standards established by various regulatory bodies. We may spend a significant amount of money~~ to ~~obtain FDA and other regulatory~~our ~~approvals,~~product ~~which may never be granted. We cannot sell any of our planned products if we do not obtain~~ and ~~maintain~~ ~~government~~product ~~approvals.~~candidates:

~~Federal,~~· Research ~~state~~ and ~~international~~ regulatory bodies govern or influence, among other things, warning letters, fines, injunctions, penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of approval, and criminal prosecution. Accordingly, initial and ongoing regulation by governmental entities in the United States and other countries is a significant factor in the production and marketing of any pharmaceutical products that we may develop.development;

We· Testing, ~~expect~~manufacture, ~~that all of our~~labeling ~~prescription~~and ~~pharmaceutical products will require regulatory approval by governmental~~ distribution;

11· Advertising, promotion, sampling and marketing; and

· Import and export

We expect that all of our prescription pharmaceutical products will require regulatory approval by governmental agencies before we can commercialize them. The nature and extent of the review process for our potential products will vary depending on the

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~~agencies before we can commercialize them. The nature and extent of the review process for our potential products will vary depending on the~~ regulatory categorization of particular products. Prescription products can be cleared as either medical devices or new drugs. The clearance process for medical devices is typically shorter and less expensive than for a new drug. Within the medical device category, there are two approval paths: 510(k) or PMA. Typically, the 510(k) path is shorter and less expensive than the PMA. The 510(k) process is an abbreviated approval process that typically does not require clinical studies.

The FDA determines whether a product is a drug or device based on its primary mode of action. If a product is determined to be a device, in order to qualify for the 510(k) process, it must be demonstrated that the product is substantially equivalent to a previously approved device. If a product is determined to be a device, but not substantially equivalent to a previously approved device, then it would be subject to the PMA. A PMA application requires clinical studies and the approval time is longer (typically several years from filing).

We received marketing ~~clearance~~ clearance for EpiCeram® under 510(k). We ~~currently~~ currently plan on marketing NeoCeram™® (if and when development is completed and a a clinical trial is completed with favorable results) as a ~~non prescription, Over The Counter~~ 510(~~“OTC”~~k) medical device. We ~~product~~have ~~which will~~ not ~~require~~filed ~~FDA~~a ~~approval~~separate ~~as there is~~510(k) for ~~precedent~~NeoCeram® ~~for~~as ~~use~~ of ~~topical emollients in~~ the ~~NICU~~date ~~that~~of ~~are~~this ~~OTC~~Form 10-K ~~products. In~~nor ~~the~~can ~~event~~we ~~that~~provide ~~IRBs reject our proposed~~an ~~clinical~~anticipated ~~trial,~~filing itdate. Our ~~may~~ability ~~require us~~ to complete ~~conduct~~development ~~preclinical~~of ~~testing~~NeoCeram® orand ~~require us to~~ seek ~~FDA~~regulatory ~~approval~~clearance ~~(most~~is ~~likely~~dependent ~~as a 510(k)) which will delay the commercial~~upon ~~launch of the product and increase~~ our ~~costs. Such~~financial aresources ~~delay~~which ~~could~~are ~~result~~currently ininadequate ~~us choosing not~~ to ~~pursue~~proceed ~~the~~with ~~product given~~our ~~the~~planned ~~limited remaining patent life~~development.

We believe that the appropriate approval path for our Cerashield™ antimicrobial coatings will be through the process established for medical devices. We base this belief on the guidelines published by the FDA as well as the approval paths followed by other antimicrobial coatings. In June 2006, the FDA notified us that a Ceragenin™ wound dressing would be regulated as a device and we believe that the same fact pattern would apply to antimicrobial coatings. However, there is no assurance that the FDA will agree that Cerashield™ coated devices should be regulated as medical devices. Systemic, topical and inhaled applications of the Ceragenins™ will be considered new drugs by the FDA and require the submission of an Investigational New Drug Application and a NDA.

Our products will also be subject to foreign regulatory requirements governing human clinical trials, manufacturing and market approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement are similar, but not identical, to FDA requirements, and they vary widely from country to country. Product development and approval within this regulatory framework, and subsequent compliance with appropriate federal and foreign statutes and regulations, takes a number of years and involves the expenditure of substantial resources.

Manufacturing

The FDA regulates and inspects equipment, facilities, and processes used in the manufacturing of pharmaceutical products before providing approval to market a product. If after receiving clearance from the FDA, we make a material change in manufacturing equipment, location, or process, we may have to undergo additional regulatory review. We must apply to the FDA to change the manufacturer we use to produce any of our products. We and our contract manufacturers must adhere to current Good Manufacturing Practices (“cGMP”) and product-specific regulations enforced by the FDA through its facilities inspection program. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes after the initial approval. If, as a result of these inspections, the FDA determines that our (or our contract manufacturers’) equipment, facilities, or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek sanctions and/or remedies against us, including suspension of our manufacturing operations. We do not plan on manufacturing any of our products using in-house facilities. Rather, we will outsource the manufacturing to experienced contractors with approved, cGMP facilities.

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Post-Approval Regulation

The FDA continues to review marketed products even after granting regulatory clearances, and if previously unknown problems are discovered or if we fail to comply with the applicable regulatory requirements, the FDA may restrict the marketing of a product or impose the withdrawal of the product from the market, recalls, seizures, injunctions or criminal sanctions. In its regulation of advertising, the FDA from time to time issues correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices.

Pharmacy Boards

It is possible that we could be required to be licensed with the state pharmacy boards as a manufacturer, wholesaler, or wholesale distributor. Many of the states allow exemptions from license if our products are ~~distributed~~ distributed through a licensed wholesale distributor. We believe that we will be exempt from registration for EpiCeram® as a result of DRL’s distribution licenses. The regulations of each state are different, and receiving a license in one state will not authorize us to sell our products in other states. Accordingly, we will have to undertake an annual review of our license status to ensure compliance with the state pharmacy board requirements. We are currently not licensed with any state pharmacy board.

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Accordingly, we will have to undertake an annual review of our license status to ensure compliance with the state pharmacy board requirements. We are currently not licensed with any state pharmacy board.

Fraud and Abuse Regulations

We are subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. The Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services has provided guidance that outlines several considerations for pharmaceutical manufacturers to be aware of in the context of marketing and promotion of products reimbursable by the federal health care programs. ~~Effective~~The ~~July 1~~federal anti-kickback statute places constraints on business activities in the health care sector that are common business activities in other industries, ~~2005~~including sales, ~~pursuant~~marketing, discounting, toand apurchase relations. ~~new~~Practices ~~California~~that ~~law,~~may ~~all~~be ~~pharmaceutical~~common ~~companies~~or ~~doing~~longstanding in other businesses are not necessarily acceptable or lawful when soliciting federal health care program business. Specifically, anti-kickback laws make it illegal for a prescription drug manufacturer to solicit or to offer or pay anything of value for patient referrals, or in ~~California~~return for ~~will~~purchasing, beleasing, ~~required~~ordering, toor ~~certify~~arranging for or recommending the purchase, lease or ordering of, any item or service that ~~they~~is ~~are~~reimbursable in ~~compliance~~whole ~~with~~or part by a federal health care program, including the ~~OIG~~purchase ~~guidance~~or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the anti-kickback statutes. We will seek to comply with the safe harbors where possible.

The federal anti-kickback statute places constraints on business activities in the health care sector that are common business activities in other industries, including sales, marketing, discounting, and purchase relations. Practices that may be common or longstanding in other businesses are not necessarily acceptable or lawful when soliciting federal health care program business. Specifically, anti-kickback laws make it illegal for a prescription drug manufacturer to solicit or to offer or pay anything of value for patient referrals, or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease or ordering of, any item or service that is reimbursable in whole or part by a federal health care program, including the purchase or prescription of a particular drug. The federal government has published regulations that identify “safe harbors” or exemptions for certain payment arrangements that do not violate the anti-kickback statutes. We will seek to comply with the safe harbors where possible.

False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Our planned activities relating to the sale and marketing of our products may be subject to scrutiny under these laws.

Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid).

EMPLOYEES

As of ~~March~~April 112, 2009, we had ~~seven~~five full-time employees. We do not carry key man life insurance on any of our employees. We are not part of any collective bargaining agreement. There have been no work stoppages and we believe our employee relations are good.

Item 1A. Risk Factors

An investment in our securities is speculative and involves a high degree of risk. Please carefully consider the following risk factors, as well as the possibility of the loss of your entire investment, before deciding to invest in our securities. ~~There~~Any ~~are~~of ~~many~~the ~~factors~~following ~~that~~risks, either alone or taken together, could materially and adversely affect an investment in our ~~business~~securities and ~~results of~~our ~~operations~~business, ~~some~~financial position or future prospects. If one or more of ~~which~~these ~~are~~or ~~beyond~~other risks or uncertainties materialize, or if our ~~control. The~~underlying ~~following~~assumptions ~~section~~prove ~~describes~~to ~~important~~be ~~factors~~incorrect, ~~that~~our actual results may ~~cause~~vary ~~actual~~materially ~~results~~from ofwhat ~~our~~we ~~operations~~have inprojected. There ~~future~~may ~~periods~~be toadditional risks that we do not ~~differ~~presently ~~materially~~know ~~from~~or ~~the~~that ~~results~~we currently ~~expected~~believe orare ~~desired~~immaterial ~~and~~which incould ~~turn~~also materially affect ~~our~~an ~~future~~investment ~~developments~~in our securities and ~~performance~~our business, financial position or future prospects. Accordingly, you should evaluate all forward-looking statements with the understanding of their inherent uncertainty. Due to the following factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance.

13Risks Related to Our Business

~~Table of~~Our ~~Contents~~securities represent a highly speculative investment.

~~Risks~~We ~~Related~~are an early stage company with a limited operating history. As of December 31, 2009, we had an accumulated deficit of approximately $19.7 million. We have incurred losses since inception and we anticipate that we will continue to incur ~~Our~~operating ~~Business~~losses, in the aggregate and on a per share basis, for the next several years. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, net current assets and working capital. While we currently project that these losses will shrink over time as EpiCeram® revenues increase, there is no assurance that EpiCeram® will have the commercial success that we currently anticipate. We have not had sufficient capital to fund all of our capital resource needs since our formation, and you cannot assume that our plans will either materialize or prove successful. There is no assurance that our operations will ever produce sufficient revenue to fund our capital resource needs. If our plans are unsuccessful, the price and liquidity of our common stock will be adversely affected and you could lose your entire investment.

Our ~~securities represent~~auditors have included a ~~highly~~“going ~~speculative~~concern” ~~investment~~emphasis paragraph in their report which expresses substantial doubt about our ability to continue as a going concern.

We have not had sufficient capital to fund all of our capital resource needs since our formation, and you cannot assume that our plans will either materialize or prove successful. There is no assurance that our operations will ever produce sufficient revenue to fund our capital resource needs. If our plans are unsuccessful, the price and liquidity of our common stock will be adversely affected and you could lose your entire investment.14

~~Our~~Table ~~auditors~~of ~~have expressed substantial doubt about our ability to continue as a going concern.~~Contents

We believe that existing cash on hand in combination with projected ~~operating~~ cash ~~flows~~receipts ~~should~~and beactions ~~sufficient~~ to ~~fund~~delay or ~~our~~defer ~~planned~~payment ~~corporate~~to ~~activities,~~certain ~~all~~vendors ~~current~~will ~~contractual~~allow ~~obligations and~~us ~~planned~~to ~~development~~maintain ~~activities~~a ~~through~~positive atcash balance ~~least~~into ~~the~~April 2010. Accordingly, ~~early~~we ~~part~~will ofrequire ~~the~~additional ~~third quarter~~funding ofby ~~2009~~April 30, 2010. ~~Accordingly~~However, the actions we ~~will~~have taken ~~require~~to ~~additional~~extend ~~funding~~our ~~within~~short-term ~~the~~cash ~~next~~balance ~~six~~may ~~months~~result in negative near and long-term consequences to the Company. As of the date of this Form 10-K, we believe that we have an agreement in principal to provide short-term funding for the Company, however, it is dependent upon cooperation from our secured creditors which cannot be assured. Further, we have no firm commitments for raising additional capital and as described in further detail in Management’s Discussion and Analysis “Liquidity and Capital Resources,” our ability to access the capital markets may be severely limited for a variety of reasons that we do not see changing in the near term. There is no assurance that we will be able to raise additional capital within the timeframe described above. Even if we are successful, it could be on terms that substantially dilute our current shareholders. If we are unsuccessful in raising additional capital we may not be able to continue our business operations and our securities may have little or no value.

WeIf ~~cannot~~we ~~predict our~~are ~~future~~unable ~~capital~~to meet our needs ~~and~~for weadditional funding ~~may~~in ~~not~~the future, we will be ~~able~~required to ~~secure~~limit, ~~additional~~scale-back ~~financing.~~or cease operations

~~Our~~We ~~projection~~do ofnot ~~future capital~~currently ~~needs~~have ~~is based on our operating plan, which in turn is based on~~the ~~assumptions~~funding ~~that~~resources ~~may~~necessary ~~prove~~ to becarry ~~incorrect. As~~out aall ~~result,~~of our ~~financial~~proposed ~~resources~~short ~~may not be sufficient to satisfy our~~and ~~future~~long-term ~~capital~~operating ~~requirements~~activities. ~~Should~~Our ~~these~~projection ~~assumptions~~of ~~prove~~future ~~incorrect,~~capital ~~there~~needs is nobased ~~assurance that we can raise additional financing~~ on aour ~~timely~~operating ~~basis~~plan, orwhich onin turn ~~favorable terms. If funding~~ is ~~insufficient~~based aton ~~any~~assumptions ~~time~~that ~~in the future, we~~ may ~~not~~prove ~~be able~~ to ~~repay~~be ~~our~~incorrect. Our ~~debt~~future ~~obligations,~~capital ~~develop~~requirements ~~or commercialize~~will ~~our products or services, take advantage of business~~depend ~~opportunities~~on ormany ~~respond to competitive pressures~~factors, ~~any of which could harm our business.~~including:

~~Future~~· The ~~financings may~~commercial ~~result~~success inof EpiCeram® ~~dilution~~both todomestically ~~our shareholders~~ and ~~restrictions on our business operations.~~internationally;

If· The weability ~~raise additional funds by issuing equity or convertible debt securities, further dilution~~ to ~~our shareholders~~enter ~~could occur. Additionally,~~into we may grant registration rights to investors purchasing equity or debt securities. Debt financing, if available, may involve pledging some or all of our assets and may contain restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain necessary additional ~~capital,~~international wedistribution ~~may~~agreements befor ~~unable~~EpiCeram® ~~to execute our business strategy, which would have a material adverse effect~~ on ~~our~~commercially ~~business,~~attractive ~~financial condition and results of operations.~~terms;

· The ~~DRL~~cost ~~Agreement~~of ~~will~~raw ~~increase~~materials, ~~our~~and ~~cash~~payment ~~requirements~~terms for such materials, for EpiCeram®;

~~Under~~· The ~~the~~cost ~~terms~~associated ofwith completing the ~~DRL Agreement~~development, weregulatory ~~are~~filings, ~~responsible for manufacturing (through a contract manufacturer)~~ and ~~supplying~~clinical ~~EpiCeram®. This~~trials ~~results in us having to pay our vendors~~ for ~~the cost of the product~~ ~~prior to receiving payment from DRL. This creates a working capital requirement which is expected to increase over time as sales of EpiCeram~~NeoCeram® increase. We may not have sufficient cash on hand to meet all purchase orders from DRL. If we cannot provide product to DRL within the timeframes called for under the DRL Agreement, DRL could assume manufacturing responsibilities which will serve to reduce the profits we earn on the sale of EpiCeram®.;

~~Under~~· Progress ~~the~~with ~~terms of our~~preclinical ~~amended~~experiments ~~convertible~~and ~~debt~~development ~~agreements, all~~ of our ~~net~~Ceragenin™ revenue (as defined in the agreements) from the DRL Agreement is required to be used to service the debt. Accordingly, we will not generate any net cash from the DRL Agreement until such time that the convertible debt is paid in full.technology;

· The ~~existence~~success, oftiming, and financial consequences of our ~~convertible~~existing ~~debt~~and ~~will~~any ~~make~~future itcollaborative, ~~difficult~~licensing and toother ~~raise~~arrangements ~~additional~~for ~~capital~~our Ceragenin™ technology;

We· Our ~~will~~ability ~~require additional capital~~ to ~~execute~~restructure ~~our business~~the ~~plan~~terms ~~and continue as a going concern. As~~ of ~~December 31,~~our ~~2008, we had $9,087,525 outstanding in secured~~ convertible ~~debt. Repayment~~ of these obligations is secured by a first lien on all of our assets, including all of our intellectual property rights and intellectual property licenses. While we believe the amended repayment terms of our debt ~~agreements are more favorable to the Company~~securities, ~~the~~if ~~convertible~~even debt agreements contain a number of provisions which new investors could find problematic and could deter investment. See discussion in Management’s Discussion and Analysis “Liquidity and Capital Resources” for a discussion of the specific possible;

14· The conditions in the capital markets and the biopharmaceutical industry that make raising capital or entering into strategic arrangements difficult or expensive;

~~Table~~· Ongoing ofgeneral ~~Contents~~and administrative expenses related to being a reporting company;

~~terms~~· The ~~of the convertible debt agreements that new investors could find problematic. If we default on any of the covenants or other requirements of our debt agreements~~cost, the debt holders will be able to foreclose on our assets by which their debts are secured which would likely cause you to lose your entire investment. Such foreclosure would likely force us out of business. Furthermoretiming, ifand ~~the~~results ~~debt holders choose to convert their debt into shares~~ of ~~common stock it is possible~~ ~~that~~regulatory ~~the~~reviews ~~sale~~and ~~of such shares could have a depressive effect on the share price of our common stock.~~approvals;

~~Recent~~· The ~~interpretations~~maintenance byof ~~the~~our ~~SEC~~existing oflicenses ~~Rule 415~~with of the ~~Securities~~University ~~Act~~of ~~may~~California ~~affect~~and ~~our~~Brigham ~~ability~~Young ~~to register securities on a delayed or continuous basis.~~University;

Recently, the SEC provided guidance to certain issuers that based upon the nature and size of their private securities transactions, it may require that the private placements be registered as primary offerings listing the investors in the transaction as the selling securityholders and underwriters. This is a change from past practice in which private placements and the securities underlying such transactions qualified for registration on resale registration statements pursuant to Rule 415(a)(1)(x). · The ~~implication~~cost ~~is that private placements by companies in which a large amount~~ of ~~securities become eligible for resale~~filing, ~~in comparison to the company’s public float~~prosecuting, ~~will be considered primary offerings~~ indefending ~~which the investors are considered the underwriters. As a primary offering, resales of such securities must be made by the selling securityholders at a fixed, pre-determined price,~~ and ~~are~~enforcing not eligible to be sold into the trading market from time to time at prevailing prices. In the private placement, investors would be required to choose one price at which to re-sell all of their shares purchased from the issuer and would not profit from subsequent price increases, if any~~. As~~ ~~this~~patent ~~practice~~claims ~~will restrict an investor’s ability to invest in~~ and ~~profit~~other ~~from~~intellectual ~~private placements, we can provide no~~property ~~assurance that this limitation on our ability to register securities underlying our private placements will not impact our ability to raise capital in the future through private placements.~~rights;

~~Until~~· Technological ~~such~~and ~~time~~market ~~as Osmotics~~developments; consummates its planned exchange offering (see discussion below), our public float for Rule 415 purposes excludes the 12,004,569 shares of common stock Osmotics has placed in escrow. As a result, it further limits the number of underlying shares sold in a private placement that we can register at any one time. Accordingly, this could result in us having to file multiple registration statements over a period of time to register all of the underlying shares purchased in a private placement transaction. This may serve to further limit our ability to raise capital through private placements or result in the investors in such transactions seeking additional economic compensation. If we are unable to raise additional capital in private placement transactions, it could have a material adverse affect on our liquidity and ~~business prospects.~~

A· The ~~substantial number~~timing and level of ~~our~~sales ~~outstanding~~of any ~~common~~new ~~shares~~products ~~are~~for ~~controlled~~which bywe ~~one~~may ~~shareholder~~obtain marketing approval.

~~Osmotics~~These ~~owns~~factors ~~12,222,170~~could result ~~shares,~~in orvariations ~~69%,~~from of our ~~outstanding~~currently ~~common~~projected ~~stock. Osmotics~~operating ~~has placed 12,004,569 of these shares into escrow for a planned common stock exchange with their shareholders~~ and ~~debtholders~~liquidity requirements. ~~Pursuant~~Additional tofunds ~~a registration~~may ~~rights agreement we have with Osmotics we were obligated to~~not ~~register~~be ~~such~~available ~~shares~~when ~~with the SEC. We filed such a registration statement in February 2007~~needed, ~~however~~or, ~~based~~if ~~on discussions with the SEC~~available, we ~~withdrew~~may ~~such~~not ~~registration~~be ~~statement. After~~able ~~subsequent~~to ~~discussions~~obtain ~~with the SEC, we~~such ~~believe~~funds ~~that we will have to register the Osmotics exchange transaction~~ on ~~Form S-4 in~~terms ~~order~~acceptable to ~~avoid Rule 415 limitations~~us. If Weadequate ~~cannot~~funds ~~file~~are ~~the~~unavailable, ~~S-4~~we ~~until Osmotics comes to an agreement with its debtholders regarding how many of the escrowed shares~~ will befurther used to satisfy their debt obligations. We do not know when Osmotics will complete this negotiation. Osmotics has signed a limited standstill agreement which requires that the shares currently held in escrow be released into the trading market over a 24 month period commencing on the later of June 30delay, ~~2008~~scale-back or ~~the~~eliminate ~~consummation~~certain of ~~the~~our planned ~~exchange. Once~~development ~~these shares have been registered and distributed by Osmotics~~activities, such shares will be freely tradable and could have a depressive effect on the price of our stock. The recipients of these shares will be subject to the provisions of the limited standstill agreement. Additionally, the planned release of these shares into the trading market could prevent or ~~limit~~cease ~~our ability to raise additional capital during this time period~~operations.

~~Our~~Funding, ~~convertible~~especially on terms acceptable to us, may not ~~debt~~be ~~agreements~~available ~~contain~~to ~~repricing~~meet ~~provisions~~our future capital needs because of the deterioration of the credit and capital markets.

~~Our~~Global ~~secured~~market ~~convertible~~and ~~debt~~economic conditions ~~agreements~~have ~~contain~~been, ~~provisions that provide for the conversion price of the debt~~ and ~~exercise~~continue ~~price of common stock purchase warrants~~ to be, ~~reduced~~disruptive ~~under certain~~and ~~circumstances~~volatile. InThe ~~the event that the conversion price of such~~ debt, orand ~~the~~equity ~~exercise~~capital ~~price~~markets ofhave ~~the warrants, is~~been ~~reduced,~~impacted ~~the~~by ~~holders~~significant ~~will~~write-offs ~~receive~~in ~~more~~the ~~shares~~financial ofservices ~~our~~sector ~~common~~and ~~stock upon~~the ~~conversion~~re-pricing of ~~the~~credit ~~debt,~~risk orin the ~~exercise~~broadly ofsyndicated ~~warrants~~market, ~~than~~among ~~they~~other ~~would with the current conversion price~~things. ~~This~~These ~~would result~~events inhave ~~current~~negatively ~~shareholders~~affected ~~experiencing~~general economic ~~dilution~~conditions ~~to their holdings~~ and ~~could~~ ~~result~~it inis auncertain ~~depressive~~when ~~effect on~~ the ~~share~~credit ~~price~~and ofcapital ~~our common stock. There is no assurance that conversion price~~markets ~~reductions~~ will ~~not~~stabilize ~~take~~or ~~place in the future~~improve.

15In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets has diminished significantly. Also, as a result of concern about the stability of the financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced and, in some cases, ceased to provide funding to borrowers. Low valuations and decreased appetite for equity investments, among other factors, may make the equity markets difficult to access on acceptable terms or unavailable altogether.

~~Table~~If funding is not available when needed, or is available only on unfavorable terms, meeting our capital needs or otherwise taking advantage of ~~Contents~~business opportunities may become challenging, which could have a material adverse effect on our business plans.

~~Our near term revenues will be dependent upon the efforts of DRL.~~15

~~The~~Table ~~commercial success~~ of ~~EpiCeram®~~ will in large part be dependent upon the efforts of DRL. While we believe that DRL is committed to providing the necessary resources to promote and market EpiCeram® to prescribing physicians and patients, there is no assurance that DRL will do so. We cannot terminate the agreement if sales do not reach our expectations.Contents

WeFuture dofinancings ~~not~~may ~~know~~result ~~whether~~in ~~EpiCeram®~~dilution to our ~~will~~shareholders beand ~~reimbursed~~restrictions byon ~~third~~our ~~party~~business ~~payors~~operations.

~~The~~Given ~~market~~the ~~acceptance~~state of the ~~EpiCeram®~~capital ~~will~~markets indescribed ~~part~~above, ~~depend~~if ~~upon~~we ~~the~~are ~~amount~~successful ofin ~~reimbursement~~raising ~~coverage third~~additional ~~party~~funds ~~payors~~by ~~will~~issuing ~~provide~~equity ~~for~~or ~~EpiCeram®. Under~~convertible ~~the~~debt ~~terms~~securities, offurther ~~the~~dilution ~~DRL~~to ~~Agreement,~~our shareholders ~~DRL~~will isoccur ~~responsible~~and ~~for~~could ~~managing the~~be ~~reimbursement~~substantially ~~process~~dilutive to existing shareholders. IfAdditionally, ~~third~~we ~~party~~may grant ~~payors~~registration dorights ~~not~~to ~~provide~~investors ~~sufficient~~purchasing ~~reimbursement~~equity ~~for~~or ~~EpiCeram®~~debt securities. Debt financing, itif available, may ~~inhibit~~involve ~~physicians~~pledging ~~from~~some ~~prescribing~~or all of our assets and~~/or~~ ~~prevent~~may ~~certain~~contain ~~patients~~restrictive ~~from~~covenants ~~purchasing~~with respect ~~the~~to raising future capital and other financial and operational ~~product~~matters. ~~Additionally,~~If ~~inadequate~~we are unable to obtain ~~reimbursement~~necessary ~~coverage~~additional ~~could~~capital, ~~result~~we inmay ~~DRL~~be ~~having~~unable to ~~reduce~~execute ~~the~~our ~~sales~~business strategy, ~~price~~which ~~per unit. All~~would ofhave ~~these~~a ~~factors~~material ~~would~~adverse ~~result in~~effect ~~reducing~~on our ~~revenues~~business, ~~from~~financial position ~~EpiCeram®~~and future prospects.

The ~~patents~~existence ~~underlying~~of our ~~Barrier Repair~~convertible ~~technology~~debt ~~have~~will ~~relatively~~make ~~short~~it difficult ~~patent~~to ~~lives~~raise ~~remaining.~~additional capital

~~The~~We ~~patents~~will ~~underlying~~require additional capital to ~~EpiCeram®~~execute ~~will~~our ~~expire~~business inplan ~~July~~and continue as a going concern. As of December ~~2014~~31, 2009, we had $9,738,812 outstanding in secured convertible debt. Repayment of these obligations is secured by a first lien on all of our assets, including all of our intellectual property rights and intellectual property licenses. We have amended the terms of the debt several times but the convertible debt agreements still contain a number of provisions which ~~will~~new ~~likely~~investors ~~serve~~could find problematic and could deter investment. We do not believe it is possible to ~~limit~~raise additional capital without further modification of the debt. See ~~revenues~~discussion in Management’s Discussion and Analysis “Liquidity and Capital Resources” for a discussion of the specific terms of the convertible debt agreements that new investors could find problematic. If we default on any of the covenants or other requirements of our debt agreements, the debt holders will be able to foreclose ~~generate~~on ~~from~~our ~~this~~assets ~~product~~by which their debts are secured which would likely cause you to lose your entire investment. Such foreclosure would likely force us out of business. Furthermore, if the debt holders choose to convert their debt into shares of common stock it is possible that the sale of such shares could have a depressive effect on the share price of our common stock.

~~Our~~The ~~anti-infective products~~DRL ~~are~~Agreement atwill aincrease ~~very~~our cash ~~early stage of development.~~requirements

~~Our~~Under ~~Ceragenin™~~the ~~technology~~terms ~~is at~~of athe ~~very~~DRL Agreement, ~~early~~we ~~stage~~are ofresponsible ~~development. While~~for wemanufacturing ~~have~~(through ~~received~~a ~~encouraging~~contract manufacturer) ~~results~~and ~~from~~supplying ~~testing~~EpiCeram®. This ~~the~~results ~~technology~~ in ~~vitro,~~us ~~there~~having isto ~~substantial~~pay ~~additional~~our ~~development~~vendors tofor bethe ~~done~~cost asof ~~well~~the asproduct ~~preclinical~~prior ~~and~~to ~~clinical~~receiving ~~testing~~payment ~~before~~from ~~we,~~DRL. This orcreates a ~~commercialization~~working ~~partner,~~capital ~~can market~~requirement awhich ~~product. We~~is ~~have~~expected ~~only~~to ~~recently~~increase ~~begun~~over ~~certain~~time ~~animal~~as ~~model~~sales ~~testing~~of EpiCeram® increase. We ~~currently~~We domay not have sufficient cash on hand to ~~develop~~meet ~~this~~all ~~technology~~purchase asorders from ~~rapidly~~DRL. If orwe ~~extensively~~cannot asprovide weproduct ~~would~~to ~~like.~~ DRL ~~Accordingly,~~within ~~there~~the ~~may~~timeframes becalled ~~delays~~for inunder ~~developing~~the ~~this~~DRL ~~technology. Additionally~~Agreement, asDRL ofcould ~~the~~assume manufacturing ~~date~~responsibilities ofwhich ~~this~~will ~~Form 10-K, we~~serve ~~have~~to ~~very~~reduce ~~limited~~the ~~data~~profits onwe ~~toxicity.~~ earn ~~See~~on the ~~discussion~~sale ~~under~~of ~~the~~EpiCeram®. During ~~heading~~2009, DRL ~~“Government~~worked ~~Regulation.” As~~with weus ~~progress~~to ~~through~~mitigate the ~~development~~working ~~and approval~~capital ~~process~~requirements ofby ~~different~~prepaying ~~applications~~a number of ~~the~~purchase ~~Ceragenin™~~orders ~~technology,~~placed ~~there~~with us. ~~are~~However, ~~numerous~~this ~~factors~~arrangement ~~that~~expired ~~could~~during ~~prevent~~2009, usand ~~from~~we ~~ever~~do ~~generating~~not ~~revenue~~expect ~~from~~DRL ~~the~~to ~~Ceragenin™~~agree ~~technology. Accordingly, there~~to issimilar nopayment ~~assurance~~terms ~~that~~in the ~~Ceragenin™ technology will ever generate revenue for us~~future.

~~Current~~Under ~~levels~~the terms of ~~market~~our amended ~~volatility~~convertible ~~could~~debt ~~have~~agreements, aall ~~negative~~of our net revenue (as defined in the ~~effect~~agreements) onfrom ~~our~~the ~~business~~DRL Agreement is required to be used to service the debt. Accordingly, ~~results~~we ofwill not be able to utilize cash flows from the DRL Agreement for operations ~~and~~until ~~financial~~such ~~condition~~time that the convertible debt is paid in full.

~~The~~Our capital and credit markets have been experiencing extreme volatility and disruption for more than 12 months. If the current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to ~~access~~register ~~capital and on~~securities ~~our~~sold ~~results of operations. We are unable to predict the likely duration and severity of the current disruption~~ in ~~financial~~private ~~markets~~placements ~~and~~is ~~adverse~~extremely ~~economic conditions in the U~~limited.S. Deteriorating market and liquidity conditions may also give rise to issues which may impact our lenders’ ability or their willingness to waive any future defaults or enter into further debt amendments. Due to the existing uncertainty in the capital and credit markets, and current adverse changes in the global economy, our access to capital may not be available on terms feasible to us or we may not have access to capital at all.

WeOur ~~have~~ability to register securities sold in private placements transactions qualified for registration on resale registration statements pursuant to Rule 415(a)(1)(x) is extremely limited . Until such time as ~~human~~Osmotics ~~resources;~~consummates its planned exchange offering (see discussion below), our public float for Rule 415 purposes excludes the 12,004,569 shares of common stock Osmotics has placed in escrow. The implication is that unless an investor is willing to wait for Rule 144 eligibility, we ~~need~~will have to ~~attract~~raise ~~and~~capital ~~retain~~through ~~highly~~registered ~~skilled~~offerings ~~personnel;~~which can be more time consuming and we more expensive. As a result, this may beserve to further limit our ability to raise capital through private placements or result in the investors in such transactions seeking additional economic compensation. If we are unable to ~~manage~~raise additional ~~our~~capital ~~growth~~in ~~with~~private placement transactions, it could have a material adverse affect on our ~~limited~~liquidity ~~resources~~and ~~effectively~~business prospects.

WeA ~~expect~~substantial ~~that~~number ~~the expansion~~ of our ~~business~~outstanding ~~will~~common ~~place a significant strain on our limited managerial,~~shares operational, and financial resources. We will be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in the pharmaceutical industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. If we are ~~not~~controlled ~~successful~~by inone ~~attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected~~shareholder. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results could be materially adversely affected.

16Osmotics is the owner of record of 12,162,170 shares, or 67%, of our outstanding common stock. Osmotics has placed 12,004,569 of these shares into escrow for a planned common stock exchange with their security holders. Pursuant to a registration rights agreement we have with Osmotics, we were obligated to register such shares with the SEC. We filed such a registration statement in February 2007, however, based on discussions with the SEC, we withdrew such registration statement. After subsequent discussions with the SEC, we believe that we will have to register the Osmotics exchange transaction on Form S-4 in order to avoid Rule 415 limitations. We cannot file the S-4 until Osmotics comes to an agreement with its debtholders regarding how many of the escrowed shares will be used to satisfy their debt obligations. We do not know when Osmotics will complete this negotiation. Osmotics has signed a limited standstill agreement which requires that the shares currently held in escrow be released into the trading

~~Table of Contents~~16

WeTable ~~depend on licenses from others for all~~ of ~~our products.~~Contents

Wemarket ~~have~~over ~~licensed~~a ~~patents~~24 ~~and proprietary~~month ~~technologies~~period ~~owned~~commencing ~~by third parties under two license~~on ~~agreements. These~~the ~~agreements~~later ~~may~~of ~~be terminated~~June 30, if2008 weor ~~fail~~the toconsummation ~~perform~~of ~~our~~the ~~obligations~~planned exchange. Once ~~under~~ these ~~licenses~~shares inhave been ~~accordance~~registered ~~with~~and ~~their~~distributed ~~terms~~by ~~including~~Osmotics, ~~but~~such ~~not~~shares ~~limited~~will ~~to,~~be ~~our~~freely ~~ability~~tradable ~~to make~~and ~~all~~could ~~payments~~have ~~due~~a ~~under~~depressive ~~such~~effect ~~agreements. Our~~on ~~inability~~the toprice ~~continue~~of toour ~~license~~stock. The recipients of these ~~technologies~~shares ~~could~~will ~~materially~~be ~~adversely~~subject ~~affect~~to ~~our~~the ~~business,~~provisions ~~prospects,~~of ~~financial~~the ~~condition,~~limited ~~and~~standstill ~~operating results~~agreement. ~~In addition~~Additionally, ~~our strategy depends on~~ the ~~successful~~planned ~~development~~release of these shares ~~licensed technologies~~ into ~~commercial~~ ~~products,~~the ~~and,~~trading ~~therefore,~~market ~~any~~could ~~limitations~~prevent onor ~~our~~limit ~~ability to utilize these technologies may impair~~ our ability to ~~market and sell our products,~~raise ~~delay~~additional ~~new~~capital ~~product~~during ~~introductions,~~this ~~and/or~~time ~~adversely affect our reputation, any of which could have a material adverse effect on our business, prospects, financial condition, and operating results~~period.

IfOur ~~clinical~~convertible ~~trials of~~debt ~~our~~agreements ~~current~~contain ~~or future product candidates do not produce results necessary to~~repricing ~~support regulatory approval in the United States or elsewhere, we will be unable to commercialize these products~~provisions.

ToOur ~~receive~~secured ~~regulatory~~convertible debt ~~approval~~agreements contain provisions that provide for the ~~commercial~~conversion ~~sale~~price of ~~our~~the ~~product~~debt and ~~candidates~~exercise ~~that~~price weof ~~may~~common ~~develop or~~stock ~~out-license,~~purchase ~~we,~~warrants orto ~~our~~be ~~potential~~reduced ~~partners,~~under certain ~~must~~circumstances. In ~~conduct,~~the ~~adequate~~event ~~and well~~that ~~controlled~~the ~~clinical~~conversion ~~trials~~price toof ~~demonstrate~~such ~~efficacy~~debt, ~~and~~or ~~safety~~the inexercise ~~humans. Clinical~~price ~~testing~~of isthe ~~expensive~~warrants, ~~takes many~~is ~~years~~reduced, ~~and~~the ~~has~~holders anwill ~~uncertain~~receive ~~outcome. Clinical~~more ~~failure~~shares ~~can~~of ~~occur~~our atcommon ~~any~~stock ~~stage~~upon conversion of the ~~testing. Our~~debt, ~~clinical~~or ~~trials~~the ~~may~~exercise ~~produce~~of ~~negative~~warrants, ~~or inconclusive~~than ~~results,~~they ~~and~~would ~~we,~~with orthe current ~~our~~conversion ~~partners,~~price. This ~~may~~would result ~~decide,~~in orcurrent ~~regulators~~shareholders ~~may require~~experiencing ~~us,~~dilution to ~~conduct~~their ~~additional~~holdings ~~clinical~~ and~~/or~~ could ~~non-clinical~~result ~~testing. Our~~in ~~failure~~a todepressive ~~adequately~~effect ~~demonstrate~~on the ~~efficacy and~~share ~~safety~~price of ~~any~~our ~~product~~common stock. There ~~candidate~~is ~~that~~no weassurance ~~may develop or out-license would~~that ~~prevent~~conversion ~~receipt~~price ofreductions ~~regulatory~~will ~~approval~~not ~~and,~~take ~~ultimately,~~place in the ~~commercialization of that product candidate~~future.

~~Even~~Our ifnear ~~our product~~term ~~candidates~~revenues ~~receive~~will ~~regulatory~~be dependent ~~approval,~~upon ~~they~~the ~~may~~efforts ~~still~~of ~~face future development and regulatory difficulties~~DRL.

~~Even~~The ifcommercial ~~U.S.~~success regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product’s indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of ~~these restrictions or requirements could adversely affect our~~ ~~potential~~EpiCeram® ~~product~~will ~~revenues. Our~~in ~~product candidates~~large ~~will~~part ~~also~~ be ~~subject~~dependent toupon ~~ongoing FDA requirements for~~ the ~~labeling, packaging,~~efforts ~~storage, advertising, promotion, record-keeping and submission~~ of ~~safety~~ ~~and other post-market information on the drug~~DRL. InWhile ~~addition,~~we ~~approved~~believe ~~products,~~that ~~manufacturers and~~DRL ~~manufacturers’~~is ~~facilities~~committed ~~are subject~~ to ~~continual review and periodic~~ ~~inspections. If~~providing athe ~~regulatory~~necessary ~~agency discovers~~resources ~~previously~~to ~~unknown~~promote ~~problems~~and ~~with~~market aEpiCeram® ~~product, such as adverse events of~~to ~~unanticipated~~prescribing ~~severity~~physicians orand ~~frequency~~patients, orthere ~~problems with the facility where the product~~ is ~~manufactured,~~no aassurance ~~regulatory agency may impose restrictions on~~ that ~~product~~ orDRL ~~us,~~will ~~including requiring withdrawal of the product from the~~do ~~market~~so. IfWe ~~our~~cannot ~~product~~terminate ~~candidates~~the ~~fail~~agreement if tosales ~~comply~~do ~~with~~not ~~applicable~~reach ~~regulatory~~our ~~requirements, such as cGMP, a regulatory agency may:~~expectations.

·We ~~issue~~do ~~warning~~not ~~letters~~know orwhether ~~untitled~~EpiCeram® will ~~letters;~~be ·reimbursed require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; · impose other civil or criminal penalties; · suspend regulatory approval; · suspend any ongoing clinical trials; · refuse to approve pending applications or supplements to approved applications filed by ~~us;~~third ·party ~~impose restrictions on operations, including costly new manufacturing requirements; or · seize or detain products or require a product recall~~payors.

~~Our~~The ~~ability~~market toacceptance of ~~successfully~~EpiCeram® ~~commercialize~~will ~~our~~in ~~products~~part depend upon the amount of reimbursement coverage third party payors will ~~greatly~~provide ~~depend~~for onEpiCeram®. Under the ~~success~~terms of the DRL Agreement, DRL is responsible for managing the reimbursement process. If third party payors do not provide sufficient reimbursement for EpiCeram®, it may inhibit physicians from prescribing and/or prevent certain patients from purchasing the product. Additionally, inadequate reimbursement coverage could result in DRL having to reduce the sales price per unit. All of these factors would result in reducing our ~~clinical~~revenues ~~trials~~from EpiCeram®.

~~Our~~The ~~commercialization efforts~~patents ~~will~~underlying ~~be greatly dependent upon~~ our ~~ability to demonstrate product~~Barrier ~~efficacy~~Repair intechnology clinical trials. Without compelling supporting data, pharmacies and other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our products. While we believe that our products will be effective for our planned indications, there is no assurance that this will be proven in clinical trials. The failure to demonstrate efficacy in our clinical trials, or a delay or failure to complete our clinical trials, would have arelatively ~~material~~short ~~adverse~~patent ~~effect~~lives ~~on our business, prospects, financial condition and operating results~~remaining.

17The patents underlying EpiCeram® will expire in July 2014, which will likely serve to limit the revenues we will be able to generate from this product.

~~Table~~Our anti-infective products are at a very early stage of ~~Contents~~development.

~~Delays~~Our inCeragenin™ ~~the~~technology is ~~commencement~~at ora ~~completion~~very early stage of ~~clinical~~development. While we have received encouraging results from testing ~~could~~the ~~result~~technology in vitro, and several in ~~increased~~vivo ~~costs~~models, there is substantial additional development to usbe done as well as preclinical and ~~delay~~clinical testing before we, or ~~limit~~a ~~our~~commercialization ~~ability~~partner, can market a product. We currently do not have sufficient cash on hand to ~~obtain~~develop ~~regulatory~~this technology as rapidly or extensively as we would like. Accordingly, there may be delays in developing this technology. Additionally, as of the date of this Form 10-K, we have very limited data on toxicity. See the discussion under the heading “Government Regulation.” As we progress through the development and approval ~~for~~process ~~our~~of different applications of the Ceragenin™ technology, there ~~product~~are ~~candidates~~numerous factors that could prevent us from ever generating revenue from the Ceragenin™ technology. Accordingly, there is no assurance that the Ceragenin™ technology will ever generate revenue for us.

~~Delays~~We inhave ~~the~~limited ~~commencement or~~human ~~completion~~resources; ofwe ~~clinical~~need ~~testing could significantly affect our product development costs. Our clinical trials for EpiCeram® took longer~~ to ~~complete than planned and our NeoCeram™ clinical~~attract ~~trial has not yet commenced as originally planned. Accordingly, any future clinical trials may not begin on time or be completed on schedule, if at all. The commencement~~ and ~~completion~~retain ofhighly ~~clinical trials~~skilled ~~requires~~personnel; ~~us to identify~~ and ~~maintain~~we ~~a sufficient number of trial sites, many of which~~ may ~~already~~ be ~~engaged~~unable into ~~other~~manage ~~clinical~~our ~~trial programs for the~~growth ~~same~~with ~~indication as~~ our ~~product~~limited ~~candidates~~resources ~~or may not be eligible to participate in or may be required to withdraw from a clinical trial as a result of changing standards of care~~effectively. ~~The commencement and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:~~

·We ~~reaching~~expect ~~agreements~~that onthe ~~acceptable~~expansion of ~~terms~~our ~~with~~business ~~prospective~~will ~~clinical~~place ~~research~~a ~~organizations,~~significant orstrain ~~CROs,~~on ~~and~~our ~~trial~~limited ~~sites~~managerial, operational, ~~the~~and ~~terms~~financial ofresources. We will ~~which can~~ be ~~subject~~required to ~~extensive~~expand ~~negotiation~~our operational and ~~may~~financial ~~vary~~systems significantly and ~~among~~to ~~different~~expand, ~~CROs~~train and ~~trial~~manage ~~sites;~~our ·work ~~obtaining~~force ~~regulatory~~in ~~approval~~order to ~~commence~~manage athe ~~clinical~~expansion of ~~trial;~~our ·operations. Our ~~obtaining~~future ~~institutional~~success will ~~review~~depend ~~board~~in ~~approval~~large topart ~~conduct~~on aour ~~clinical~~ability ~~trial~~to atattract, atrain, ~~prospective~~and ~~site;~~retain additional ·highly ~~recruiting~~skilled ~~and~~executive ~~enrolling~~level ~~patients~~management towith ~~participate~~experience in ~~clinical~~the pharmaceutical ~~trials~~industry. Competition is intense for athese ~~variety~~types of ~~reasons~~personnel from more established organizations, ~~including~~many of ~~competition~~which ~~from~~have ~~other~~significantly ~~clinical~~larger ~~trial~~operations ~~programs~~and ~~for~~greater ~~the~~financial, ~~same~~marketing, human, ~~indication~~and asother ~~our~~resources ~~product~~than ~~candidates;~~we have. We may not be successful in attracting and ·retaining qualified personnel on a timely basis, on competitive terms or at all. If we are not successful in attracting and retaining ~~patients~~these ~~who~~personnel, ~~have~~our ~~initiated~~business, aprospects, ~~clinical~~financial ~~trial~~condition ~~but~~and operating ~~may~~results would be ~~prone~~materially adversely affected. Further, our ability to ~~withdraw~~manage ~~due~~our growth effectively will require us to ~~the~~continue ~~treatment~~to ~~protocol~~improve our operational, ~~lack~~financial and ofmanagement ~~efficacy~~controls, ~~personal~~reporting ~~issues~~systems and procedures, ~~side~~to ~~effects~~install ~~from~~new management ~~the~~information ~~therapy~~and orcontrol ~~who~~systems and to train, motivate and manage employees. If we are ~~lost~~unable to ~~further~~manage growth ~~follow-up~~effectively and new employees are unable to achieve adequate performance levels, our business, financial condition and prospects could be materially adversely affected.

~~A clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors.~~17

ATable ~~clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number~~ of ~~factors,~~ ~~including:~~Contents

·We depend ~~failure~~on tolicenses ~~conduct~~from ~~the~~others ~~clinical~~for ~~trial~~all ~~in accordance with regulatory requirements or our clinical protocols; · inspection~~ of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; · unforeseen safety issues or any determination that a trial presents unacceptable health risks; or · lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our ~~CROs and other third parties~~products.

~~Additionally,~~All ~~changes~~of ~~in regulatory~~our ~~requirements~~products and product ~~guidance~~candidates ~~may~~are ~~occur~~based ~~and~~upon welicenses ~~may~~from ~~need~~either tothe ~~amend~~University of California ~~clinical~~or ~~trial~~Brigham ~~protocols~~Young toUniversity. If ~~reflect~~either or any of these ~~changes~~license agreements are properly terminated, our business will be materially adversely affected. ~~Amendments~~These agreements may ~~require~~be usterminated if we fail to ~~resubmit~~perform our ~~clinical~~ ~~trial~~obligations ~~protocols~~under tothese licenses ~~institutional~~in ~~review~~accordance ~~boards~~with ~~for~~their ~~reexamination~~terms including, ~~which~~ ~~may~~but ~~impact~~not ~~the~~limited ~~cost~~to, ~~timing~~our ability orto ~~successful~~make ~~completion~~all ofpayments adue ~~clinical trial~~under such agreements. IfDuring 2009, we ~~experience~~failed ~~delays~~to inmake all of the ~~completion~~payments ~~of,~~due orto ifBrigham weYoung ~~terminate,~~University ~~our~~in ~~clinical~~accordance ~~trials,~~with the ~~commercial~~time ~~prospects~~frames called for ~~our~~in ~~product~~the ~~candidates~~agreement, ~~will~~and beon ~~harmed~~April 7, ~~and~~2010, ~~our~~Brigham ~~ability~~Young University todeclared ~~generate~~us ~~product~~in breach. We can ~~revenues~~provide no assurance that we will behave ~~delayed~~the financial resources to cure the breach. InEven ~~addition~~if we can cure the breach, ~~many~~there ofis ~~the~~no ~~factors~~assurance that ~~cause,~~we orwill ~~lead~~be able to, amake ~~delay~~all infuture ~~the~~payments ~~commencement~~owed orto ~~completion~~Brigham ofYoung ~~clinical~~University ~~trials~~when ~~may~~due, ~~also~~and ~~ultimately~~we ~~lead~~can toprovide ~~the~~no ~~denial~~assurance ofthat Brigham ~~regulatory~~Young ~~approval~~University ofwill aaccommodate ~~product~~our ~~candidate~~financial constraints in the future. ~~Even~~ Further, ifin March 2010, we ~~are~~became ~~able~~in technical default under the license with the University of California for failure to ~~ultimately~~make ~~commercialize~~certain ~~our~~payments ~~product~~when ~~candidates,~~due. Should the University of California ~~other~~declare ~~therapies~~us ~~for~~to be in breach of the ~~same~~agreement, ~~indications~~we ~~may~~will have ~~been~~60 ~~introduced~~days to ~~the~~cure ~~market~~the ~~and~~breach ~~established~~or aotherwise ~~competitive~~risk ~~advantage~~termination of the agreement.

~~Our~~In ~~failure~~addition to these ~~convince~~licensing ~~medical~~agreements, ~~practitioners~~we torely ~~prescribe~~on ~~products~~the expertise of Dr. Paul Savage, a professor of chemistry at Brigham Young University and Dr. Peter Elias, a professor of dermatology. Dr. Elias is the Chairman of our Scientific Advisory Board and we utilize Dr. Savage’s services under a consulting agreement. If our agreements with either or ~~use~~both Drs. Savage and Elias were terminated, our ~~technologies~~ability to advance our product candidates or develop new ~~will~~products ~~limit~~may be adversely affected. We are delinquent in our ~~revenue~~payments to both Drs. Savage and ~~profitability~~Elias.

If clinical ~~we,~~trials orof our ~~commercialization~~ ~~partners,~~current ~~fail~~or tofuture ~~convince~~product ~~medical~~candidates ~~practitioners~~do tonot ~~prescribe~~produce ~~products~~results ~~using~~necessary ~~our technologies, we will not be able~~ to ~~sell~~support ~~our~~regulatory ~~products~~approval ~~or license our technologies~~ in ~~sufficient~~the ~~volume~~United ~~for~~States ~~our business to become profitable. We,~~ or ~~our commercialization~~ ~~partners~~elsewhere, we will ~~need~~be tounable make leading physicians aware of the benefits of products using our technologies through published papers, presentations at scientific conferences and favorable results from our clinical studies. Failure to becommercialize ~~successful in~~ these ~~efforts would make it difficult for us to convince medical practitioners to prescribe~~ products ~~using our technologies for their patients~~. Failure to convince medical practitioners to prescribe our products will damage our commercialization efforts and would have a material adverse effect on our business, prospects, financial condition and operating results.

~~Some~~To receive regulatory approval for the commercial sale of our product candidates that we may develop ~~ingredients~~or ~~come~~out-license, ~~from~~we, ~~sole~~or ~~source~~our ~~providers~~potential partners, must conduct, adequate and well controlled clinical trials to demonstrate efficacy and safety in humans. Clinical testing is expensive, takes many years and has an uncertain outcome. Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we, or our partners, may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing. Our failure to adequately demonstrate the efficacy and safety of any product candidate that we may develop or out-license would prevent receipt of regulatory approval and, ultimately, the commercialization of that product candidate.

~~While we have supply~~Even ~~agreements~~if inour ~~place~~product ~~for~~candidates ~~certain~~receive ~~key~~regulatory ~~ingredients used in the formulation of EpiCeram®~~approval, ~~two~~they ofmay ~~these~~still ~~ingredients come from sole source providers. To date, we have not had any difficulties in~~face ~~acquiring~~future ~~any~~development ofand ~~these~~regulatory ~~ingredients~~difficulties. ~~While we believe that similar ingredients are available from other sources, there is no assurance that they will work~~

18Even if U.S. regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product’s indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of these restrictions or requirements could adversely affect our potential product revenues. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as cGMP, a regulatory agency may:

~~Table~~· issue warning letters or untitled letters; · require us to enter into a consent decree, which can include imposition of ~~Contents~~various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; · impose other civil or criminal penalties; · suspend regulatory approval; · suspend any ongoing clinical trials; · refuse to approve pending applications or supplements to approved applications filed by us; · impose restrictions on operations, including costly new manufacturing requirements; or · seize or detain products or require a product recall.

~~as well as the ingredients currently used,~~Even ~~and~~if inregulatory ~~certain~~authorities ~~cases,~~approve a change in ingredients could require us to receive clearance from the FDA. Any delays in manufacturing resulting from an inability to purchase ingredients or waiting on FDA clearance could have a material adverse effect on our ~~business prospects, financial condition and operating results. Further, any reduction in~~ product ~~efficacy resulting from using alternative ingredients could also have a material adverse effect on our business prospects~~candidates, ~~financial~~they ~~condition~~may ~~and~~not ~~operating results. Such delays or reduction in efficacy could~~be ~~result~~commercially ~~in DRL terminating the DRL Agreement~~successful.

IfOur weproduct ~~lose~~candidates ~~the~~may ~~support~~not ofbe commercially ~~our~~successful ~~key~~because ~~scientific collaborators~~physicians, itgovernment agencies and other third-party payors may benot ~~difficult~~accept tothem. Third ~~establish~~parties may develop superior products ~~using~~or have proprietary rights that preclude us from marketing our ~~technologies~~products. asWe aalso ~~standard~~expect that most of ~~care~~our ~~for~~products ~~various~~will ~~indications~~be premium priced, ~~which~~if approved. If ~~may~~we ~~limit~~do obtain regulatory approval for any of our ~~revenue~~product candidates, we will need to achieve physician ~~growth~~and patient acceptance and ~~profitability~~demand in order to be commercially successful. Acceptance and demand for our product candidates will depend on many factors, including but not limited to, the extent,

We have established relationships with leading scientists around the world. We have formalized certain of these relationships by establishing a scientific advisory board. We believe that such relationships are key to establishing products using our technologies as commercially viable for various indications. We have entered into consulting agreements with our scientific advisory board members, but such agreements provide for termination with 30 days notice. Additionally, there is no assurance that our current research partners will continue to work with us or we will be able to attract additional research partners. The inability to maintain and build on our existing scientific relationships could have a material adverse effect on our business, prospects, financial condition and operating results.18

WeTable ~~may~~of ~~not be able to successfully manufacture Ceragenins™ in commercial quantities.~~Contents

Toif ~~date~~any, weof ~~have~~reimbursement ~~only produced~~by ~~Ceragenin™~~government ~~compound~~agencies inand ~~a laboratory.~~ other Wethird doparty ~~not~~payors, ~~know~~pricing, ~~whether~~the wesafety ~~will~~and beeffectiveness ~~able~~of ~~to produce quantities sufficient~~alternative ~~for~~products, ~~commercial~~and ~~use~~the inprevalence aof ~~cGMP~~hospital ~~manufacturing~~acquired ~~facility~~infections. If we ~~cannot~~do ~~manufacture~~not ~~these~~achieve ~~compounds~~product inacceptance and ~~commercial~~sufficient ~~quantities~~demand, itwe ~~could~~will ~~have~~not abe ~~material~~able ~~adverse~~to ~~effect~~sell onour products and our ~~business~~operating ~~prospects~~results and financial condition will be materially adversely affected.

WeOur ability ~~may~~to ~~not~~successfully becommercialize ~~able~~our toproducts ~~market~~will orgreatly ~~generate~~depend ~~sales~~on the success of our ~~products~~ toclinical ~~the extent anticipated~~trials.

~~Assuming~~Our ~~that~~commercialization efforts wewill ~~are~~be greatly dependent upon our ability, or the ability of our ~~successful~~partners, to demonstrate product efficacy in ~~receiving~~clinical ~~regulatory~~trials. Without ~~clearances~~compelling tosupporting ~~market~~data, hospitals, ~~any~~pharmacies ofand other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our ~~ability~~products. While towe ~~successfully~~believe ~~penetrate~~that ~~the~~our products ~~market~~will ~~and~~be ~~generate~~effective ~~sales~~for ofour ~~those~~planned indications, there is no assurance ~~products~~that ~~may~~this will be ~~limited~~proven byin clinical trials. The failure to demonstrate efficacy in our clinical trials, or a ~~number~~delay or offailure ~~factors~~to complete our clinical trials, ~~including~~would ~~the~~have ~~following:~~a material adverse effect on our business, prospects, financial condition and operating results.

~~· Certain of our competitors~~ Delays in the ~~field~~commencement ~~have~~or ~~already~~completion ~~received~~of ~~regulatory~~clinical ~~approvals~~testing ~~for~~could ~~and have begun marketing similar products in the United States, the EU, Japan and other territories, which may~~ result in ~~greater~~increased costs ~~physician awareness of their products as compared~~ to ~~ours.~~us ~~· Information from our competitors or the academic community indicating that current products or new products are more effective than our products could, if~~ and ~~when~~delay ~~it is generated, impede our market penetration~~ or ~~decrease~~limit our ~~existing~~ability ~~market share. · Physicians may be reluctant~~ to ~~switch~~obtain ~~from~~regulatory ~~existing~~approval ~~treatment methods, including traditional therapy agents, to our products. · The price~~ for our products, as well as pricing decisions by our competitors, may have an effect on our revenues. · Our revenues may diminish if third party payors, including private health coverage insurers and health maintenance organizations, do not provide adequate coverage or reimbursement for our products. · If any of our future marketed products were to become the subject of problems related to their efficacy, safety, or otherwise, or if new, more effective treatments were to be introduced, our revenues from such marketed products could decrease. · If any of our current or future marketed products become the subject of problems, including those related to, among others: efficacy or safety concerns with the products, even if not justified; unexpected side effects; regulatory proceedings subjecting the products to potential recall; publicity affecting doctor prescription or patient use of the product; ~~pressure from competitive products; or introduction of more effective treatments~~candidates.

~~For~~Delays ~~example,~~in ~~efficacy~~the commencement or completion of clinical testing could significantly affect our product ~~safety~~development ~~concerns~~costs. Our ~~may~~clinical ~~arise~~trials for EpiCeram® took longer to complete than planned and our NeoCeram™ clinical trial has not yet commenced as originally planned. Accordingly, ~~whether~~any orfuture clinical trials may not ~~justified~~begin on time or be completed on schedule, ~~that~~if ~~could~~at ~~lead~~all. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the ~~recall~~same indication as our product candidates or ~~withdrawal~~may ofnot ~~such~~be ~~marketed~~eligible ~~products.~~ to participate Inin ~~the~~or ~~event~~may ofbe required to withdraw from a ~~recall~~clinical ortrial ~~withdrawal~~as a result of changing standards of care. The commencement and completion of clinical trials can be delayed for a ~~product,~~variety ~~our~~of ~~revenues~~other ~~would~~reasons, ~~significantly~~including ~~decline.~~delays related to:

If· ~~the~~reaching ~~government~~agreements on acceptable terms with prospective clinical research organizations, or ~~third-party~~CROs, ~~payors~~and ~~fail~~trial sites, the terms of which can be subject to ~~provide~~ ~~coverage~~extensive negotiation and ~~adequate~~may ~~coverage~~vary significantly among different CROs and ~~payment~~trial ~~rates~~sites; ~~for~~· ~~our~~obtaining ~~future products,~~regulatory ifapproval ~~any,~~to orcommence ifa ~~hospitals~~clinical ~~choose~~trial; · obtaining institutional review board approval to ~~use~~conduct ~~therapies~~a ~~that~~clinical ~~are~~trial ~~less expensive~~at a prospective site; · recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our ~~revenue~~product candidates; and ~~prospects~~· ~~for~~retaining ~~profitability~~patients ~~will~~who have initiated a clinical trial but may be ~~limited~~prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.

InA ~~both~~clinical ~~domestic~~trial ~~and~~may ~~foreign markets,~~be ~~our~~suspended ~~sales~~or ofterminated ~~any~~by ~~future~~us, ~~products will depend in part upon~~ the ~~availability~~ ofFDA ~~coverage~~or ~~and reimbursement from third-party payors. Such third-party payors include government~~other ~~health~~regulatory ~~programs~~authorities ~~such~~due asto ~~Medicare,~~a ~~managed~~number ~~care~~of ~~providers, private health insurers and other organizations~~factors. ~~In particular, many U.S. hospitals receive a~~

19A clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:

~~Table~~ · failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols; · inspection of ~~Contents~~the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; · unforeseen safety issues or any determination that a trial presents unacceptable health risks; or · lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

~~fixed~~Additionally, ~~reimbursement~~changes ~~amount~~in regulatory ~~per~~requirements ~~procedure~~and ~~for certain~~guidance ~~surgeries~~may occur and ~~other~~we ~~treatment~~may ~~therapies~~need ~~they~~to ~~perform. Because~~amend ~~this~~clinical trial ~~amount~~protocols ~~may~~to ~~not~~reflect bethese ~~based~~changes. Amendments onmay ~~the actual~~require ~~expenses~~us ~~the~~to ~~hospital~~resubmit ~~incurs,~~our ~~hospitals~~clinical ~~may~~trial ~~choose~~protocols to institutional ~~use~~review ~~therapies~~ boards for reexamination, which ~~are~~may ~~less~~impact ~~expensive~~the ~~when~~cost, timing ~~compared~~or tosuccessful ~~our~~completion ~~product~~of ~~candidates~~a clinical trial. WeIf ~~may~~we ~~need~~experience todelays ~~conduct~~in ~~post-marketing~~the ~~studies~~completion of, inor ~~order~~if towe ~~demonstrate~~terminate, ~~the~~our ~~cost-effectiveness~~clinical oftrials, ~~any~~the ~~future~~commercial ~~products~~prospects tofor ~~the~~our ~~satisfaction~~product ofcandidates ~~hospitals~~will be harmed, ~~other~~and ~~target~~our ~~customers~~ability ~~and~~to ~~their~~generate ~~third-party~~product revenues ~~payors~~will be delayed. ~~Such~~In ~~studies~~addition, ~~might~~many ~~require~~of the usfactors that cause, or lead to ~~commit~~, a ~~significant~~delay ~~amount~~in the commencement or completion of ~~management~~clinical ~~time~~trials ~~and~~may ~~financial~~also ~~and~~ultimately ~~other resources. Our~~lead ~~future~~to ~~products~~the ~~might~~denial ~~not~~of regulatory ~~ultimately~~approval beof ~~considered~~a ~~cost-effective~~product candidate. Even if ~~Adequate~~we ~~third-party~~are ~~coverage~~able ~~and~~to ~~reimbursement~~ultimately ~~might~~commercialize ~~not~~our beproduct ~~available~~candidates, other therapies tofor ~~enable~~the ussame toindications ~~maintain~~may ~~price~~have ~~levels~~been ~~sufficient~~introduced to ~~realize~~the anmarket ~~appropriate~~and established ~~return~~a oncompetitive ~~investment in product development~~advantage.

~~Governments continue to propose and~~Some ~~pass~~of ~~legislation~~our ~~designed~~ingredients tocome ~~reduce~~from ~~the~~sole ~~cost~~source ~~of healthcare~~providers.

InWhile ~~the United States,~~ we ~~expect~~ ~~that~~have ~~there will continue to be federal and state proposals to implement~~supply ~~similar~~agreements ~~governmental controls. For example,~~ in ~~December 2003,~~place ~~Congress~~for ~~enacted~~certain akey ~~limited~~ingredients ~~prescription~~used ~~drug benefit for Medicare beneficiaries~~ in the ~~Medicare~~formulation ~~Prescription Drug,~~of ~~Improvement~~EpiCeram®, ~~and~~two ~~Modernization Act~~ of ~~2003. Under~~these ~~this~~ingredients ~~program,~~come ~~drug~~from ~~prices~~sole ~~for~~source ~~certain prescription drugs are negotiated by drug plans, with the goal to lower costs for Medicare beneficiaries~~providers. InTo ~~some foreign markets~~date, ~~the~~ ~~government~~we ~~controls~~have ~~the~~not ~~pricing~~had ofany ~~prescription~~difficulties ~~pharmaceuticals. In these countries, pricing negotiated with~~in ~~governmental~~acquiring ~~authorities~~any ~~can take six to 12 months or longer after the receipt~~ of ~~regulatory~~these ~~marketing approval for a product~~ingredients. ~~Cost~~While ~~control~~we ~~initiatives~~believe ~~could decrease the price~~ that wesimilar ~~would~~ingredients ~~receive for~~are ~~any~~available ~~products~~from ~~in the future, which would limit our revenue and~~other ~~profitability. Accordingly~~sources, ~~legislation and~~there ~~regulations~~is ~~affecting~~no ~~the~~assurance ~~pricing~~that ofthey ~~pharmaceuticals~~will ~~might~~work ~~change~~as ~~before our~~well ~~product~~as ~~candidates~~the ~~are~~ingredients ~~approved for marketing. Adoption of such legislation could further limit reimbursement for pharmaceuticals.~~

~~None of our potential products may reach the commercial market for a number of reasons.~~19

~~Successful~~Table ~~research and development~~ of pharmaceutical products is highly risky. Most products and development candidates fail to reach the market. Our success depends on the discovery of new drugs or devices that we can commercialize. It is possible that our potential products may never reach the market for a number of reasons. They may be found to be toxic, ineffective or may cause harmful side effects during pre-clinical testing or clinical trials or fail to receive necessary regulatory approvals. We may find that certain products cannot be manufactured on a commercial scale basis and, therefore, they may not be economical to produce. Our products could also fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. We have a number of product candidates in various stages of development, but do not expect the majority of them to be commercially available for a number of years, if at all. If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our products, then our products and technologies may be rendered less competitive.Contents

Wecurrently ~~will~~used, ~~face~~and ~~significant~~in certain cases, a change in ingredients could ~~competition~~require us to receive clearance from ~~industry~~the ~~participants~~FDA. Further, ~~that~~our ~~are~~ability ~~pursuing~~to ~~similar~~mitigate ~~products~~cost ~~and~~increases for these ingredients ~~technologies~~may ~~that~~be welimited, ~~are~~thus ~~pursuing~~reducing our margins. Any delays in manufacturing resulting from an inability to purchase ingredients or waiting on FDA clearance could have a material adverse effect on our business prospects, financial condition and ~~are~~operating ~~developing~~results. Further, ~~pharmaceutical~~any ~~products~~reduction in product efficacy ~~that~~resulting ~~are~~from ~~competitive~~using ~~with~~alternative ingredients could also have a material adverse effect on our ~~planned~~business ~~products~~prospects, financial condition and ~~potential~~operating results. Such ~~products~~delays or reduction in efficacy could result in DRL terminating the DRL Agreement.

~~Nearly~~If ~~all~~we oflose ~~our~~the ~~industry competitors~~support ~~have~~of ~~greater~~our ~~capital~~key ~~resources, larger overall research and~~scientific ~~development staffs and facilities~~collaborators, ~~and~~it ~~a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors~~ may be ~~able~~difficult to ~~respond to~~establish ~~the~~products ~~rapid~~using ~~and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on~~ our ~~ability to maintain a competitive position with respect to these~~ technologies~~. Rapid technological development,~~ as ~~well~~a ~~as new~~standard ~~scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any~~ of ~~the~~care ~~expenses~~for ~~incurred~~various ~~to develop them. For example~~indications, ~~changes~~which ~~in our understanding of the appropriate population of patients who should be treated with a targeted therapy we are developing~~ may limit ~~the~~our ~~product’s market~~revenue ~~potential~~growth ifand ~~it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy~~profitability.

~~Our~~We ~~reliance~~have onestablished ~~third~~relationships ~~parties,~~with leading scientists around the world. We have formalized certain of these relationships by establishing a scientific advisory board. We believe that such relationships are key to establishing products using our technologies as commercially ~~clinical~~viable for various indications. ~~research~~We ~~organizations~~have entered into consulting agreements with our scientific advisory board members, ~~may~~but ~~result~~such inagreements ~~delays~~provide infor ~~completing~~termination with 30 days notice. Additionally, orthere ais ~~failure~~no assurance that our current research partners will continue to work with us or ~~complete,~~we ~~clinical~~will ~~trials~~be ifable ~~they~~to ~~fail~~attract additional research partners. The inability to ~~perform~~maintain ~~under~~and build on our existing ~~agreements~~scientific ~~with~~relationships could have a material adverse effect on our ~~them~~business, prospects, financial condition and operating results.

InWe ~~the course of product development, we~~ may ~~engage~~not clinical research organizations to conduct and manage clinical studies and to assist us in guiding our products through the FDA review and approval process. If we engage clinical research organizations to help us obtain market approval for our drug candidates, many important aspects of this process have been and will be ~~out~~able ~~of our direct control. If the clinical research organizations fail~~ to ~~perform~~successfully ~~their obligations under our agreements~~manufacture ~~with~~Ceragenins™ ~~them or fail to perform clinical trials~~ in acommercial ~~satisfactory manner, we may face delays in completing our clinical trials, as well as commercialization of one or more drug candidates~~quantities. ~~Furthermore, any loss or delay in obtaining contracts with such entities may also delay the completion of our clinical trials and the market approval of drug candidates.~~

20To date, we have only produced Ceragenin™ compound in a laboratory. We do not know whether we will be able to produce quantities sufficient for commercial use in a cGMP manufacturing facility. If we cannot manufacture these compounds in commercial quantities it could have a material adverse effect on our business prospects.

~~Table~~If the government or third-party payors fail to ofprovide ~~Contents~~coverage and adequate coverage and payment rates for our future products, if any, or if hospitals choose to use therapies that are less expensive, our revenue and prospects for profitability will be limited.

IfIn ~~the~~both ~~manufacturers~~domestic ~~upon~~and ~~whom~~foreign markets, weour ~~rely~~sales ~~fail~~of toany ~~produce our~~future ~~product~~products ~~candidates~~will depend in part upon the availability ~~volumes~~of ~~that~~coverage weand ~~require~~reimbursement onfrom third-party payors. Such third-party payors include government health programs such as Medicare, managed care providers, private health insurers and other organizations. In particular, many U.S. hospitals receive a ~~timely~~fixed ~~basis~~reimbursement amount per procedure for certain surgeries and other treatment therapies they perform. Because this amount may not be based on the actual expenses the hospital incurs, orhospitals may choose to use ~~comply~~therapies ~~with~~which ~~stringent~~are ~~regulations~~less ~~applicable~~expensive when compared to ~~pharmaceutical~~our ~~drug~~product ~~manufacturers,~~candidates. We we may ~~face~~need ~~delays~~to conduct post-marketing studies in order to demonstrate the ~~development~~cost-effectiveness ~~and~~of ~~commercialization~~any future products to the satisfaction of hospitals, other target customers and their third-party payors. Such studies might require us, or beour ~~unable~~partners, to ~~meet~~commit ~~demand~~a ~~for,~~significant ~~our~~amount of management time and financial and other resources. Our future products might not ultimately be considered cost-effective. Adequate third-party coverage and reimbursement ~~may~~might ~~lose~~not ~~potential~~be ~~revenues~~available to enable us to maintain price levels sufficient to realize an appropriate return on investment in product development.

WeHealthcare doreform ~~not~~measures ~~manufacture~~could any of our product candidates, and we do not currently plan to develop any capacity to do so. Any problems or delays we experience in manufacturing of EpiCeram® or any other product candidate may impair our ability to manufacture commercial quantities, which would adversely affect our business. For example, our manufacturers will need to produce specific batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug or device substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

The ~~manufacture~~business and financial condition of pharmaceutical ~~products~~companies ~~requires~~is ~~significant~~affected ~~expertise~~by ~~and capital investment, including~~ the ~~development~~efforts of ~~advanced~~governmental ~~manufacturing techniques~~ and ~~process~~third ~~controls. Manufacturers~~party ~~of pharmaceutical~~payors ~~products~~to ~~often~~contain ~~encounter~~or ~~difficulties~~reduce inthe ~~production, particularly~~costs inof ~~scaling~~healthcare. In upthe ~~initial production~~U. ~~These~~S. ~~problems~~and ~~include~~in ~~difficulties~~foreign ~~with~~jurisdictions there ~~production~~have ~~costs~~been, and ~~yields, quality~~we ~~control,~~expect ~~including~~that ~~stability~~there ofwill ~~the~~continue ~~product~~to ~~candidate and quality assurance testing~~be, ~~shortages~~a ofnumber ~~qualified personnel, as well as compliance with~~of ~~strictly~~legislative ~~enforced federal, state~~ and ~~foreign~~regulatory ~~regulations. Our~~proposals ~~manufacturers~~aimed ~~may~~at ~~not~~changing ~~perform~~the ashealthcare ~~agreed~~system. IfFor ~~our manufacturers were to encounter any of these difficulties~~example, ~~our ability to provide product to commercialization partners or product candidates to patients~~ in ~~our~~some ~~clinical~~countries ~~trials~~other ~~would~~than bethe ~~jeopardized~~U. ~~In addition~~S., ~~all~~pricing ~~manufacturers~~ of ~~our~~drugs ~~product~~and ~~candidates~~devices ~~must~~are ~~comply~~subject ~~with~~to ~~cGMP~~governmental ~~requirements~~price ~~enforced by the FDA through its facilities inspection program~~controls. ~~These~~The ~~requirements~~implementation ~~include~~of ~~quality~~such ~~control,~~additional ~~quality~~controls ~~assurance~~could ~~and~~have the ~~maintenance~~effect of ~~records~~reducing ~~and~~what ~~documentation. Manufacturers~~we ofare ~~our~~able ~~product candidates may~~to becharge ~~unable~~for toany ~~comply~~products ~~with~~that ~~these~~we ~~cGMP~~may ~~requirements and with other FDA, state and foreign regulatory requirements~~develop. ~~We have~~ ~~little~~While ~~control~~we ~~over~~believe that our ~~manufacturers’~~Ceragenin™ ~~compliance~~technology ~~with~~will ~~these~~result ~~regulations~~in ~~and~~lower ~~standards. A~~costs ~~failure~~ to ~~comply~~the ~~with these~~healthcare ~~requirements~~system ~~may~~as ~~result~~a inwhole ~~fines~~by ~~and~~reducing ~~civil~~infections ~~penalties,~~and ~~suspension of~~the ~~production,~~associated ~~suspension~~costs orto ~~delay~~treat ~~in product approval~~them, ~~product~~there ~~seizure~~is orno ~~recall, or~~assurance ~~withdrawal~~that ofwe ~~product~~will ~~approval. If the~~be ~~safety~~able ~~of any quantities supplied is compromised due~~ to ~~our manufacturers’~~ ~~failure~~demonstrate tothis ~~adhere~~through toclinical ~~applicable~~trials ~~laws~~ or, ~~for~~even ~~other~~if ~~reasons~~demonstrated, wethat healthcare ~~may~~reform will not beserve ~~able~~ to ~~obtain~~reduce ~~regulatory~~what ~~approval~~we ~~for~~can orcharge ~~successfully~~even ~~commercialize~~with demonstrated ~~our~~economic ~~product candidates~~benefit.

WeNone ~~will~~of ~~rely~~our onpotential ~~third~~products ~~parties~~may toreach the commercial market ~~our~~for ~~products~~a number of reasons.

WeSuccessful ~~currently~~research ~~plan~~and ondevelopment of ~~licensing~~pharmaceutical ~~our planned~~ products tois ~~third~~highly ~~parties~~risky. Most products and~~/or~~ ~~utilizing~~development ~~third~~candidates ~~parties~~ fail to ~~market~~reach ~~our~~the ~~planned products~~market. InOur ~~such cases,~~success depends on the ~~amount~~discovery of ~~revenue~~new drugs or devices that we ~~receive~~can ~~will~~commercialize. It beis ~~dependent~~possible ~~upon~~that ~~the~~our ~~success~~potential ofproducts may never reach the market ~~such~~for ~~third~~a ~~parties~~number of reasons. InThey ~~all~~may ~~likelihood~~be found to be toxic, ineffective or may cause harmful side effects during ~~our~~pre-clinical ~~products~~testing ~~will~~or ~~not~~clinical betrials ~~the~~or ~~only~~fail to receive necessary regulatory approvals. We may find that certain products ~~sold~~cannot orbe ~~marketed~~manufactured byon ~~such~~a ~~parties~~commercial scale basis and, therefore, they may not ~~devote~~be ~~the~~economical ~~necessary~~to ~~resources~~produce. Our products could also fail to ~~successfully~~achieve ~~sell~~market ~~our~~acceptance or be ~~products~~precluded from commercialization by proprietary rights of third parties. ~~Accordingly,~~We ~~these arrangements~~have ~~may~~a ~~result~~number of product candidates in various ~~our~~stages ~~products~~of development, but do not ~~reaching~~expect ~~their~~the ~~full~~majority ~~revenue~~of them to be ~~potential~~commercially ~~which~~available ~~could~~for ~~have~~a annumber ~~adverse~~of ~~affect~~years, onif at all. If our ~~operations,~~competitors ~~liquidity~~succeed ~~and~~in developing ~~business~~products ~~prospects.~~and technologies that are more effective

~~The use of any of our potential products in clinical trials and the sale of any approved products exposes us to liability claims.~~20

~~The~~Table ~~nature~~ of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Although we believe we have adequate product liability insurance, we are subject to the risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development, could generate adverse publicity regarding our product, and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.Contents

~~Our~~than ~~future~~our ~~success depends~~own, inor ~~part,~~if onscientific ~~the~~developments ~~continued~~change our understanding of ~~service~~the potential scope and utility of our ~~management~~products, ~~team~~then our products and technologies may be rendered less competitive.

~~Our success is dependent in~~We ~~part~~will ~~upon~~face ~~the~~significant ~~availability~~competition offrom ~~our~~industry ~~senior~~participants ~~executive~~that ~~officers~~are ~~and our scientific~~pursuing ~~advisors. The~~similar ~~loss~~products orand ~~unavailability~~technologies ~~to us~~that ofwe ~~any~~are ofpursuing ~~these~~and ~~individuals~~are ~~or key research, development, sales and~~developing ~~marketing~~pharmaceutical ~~personnel,~~products ~~particularly,~~that ifare ~~lost~~competitive towith ~~competitors, could have a material adverse effect on~~ our ~~business,~~planned ~~prospects,~~products ~~financial condition,~~ and ~~operating~~ ~~results. We~~potential ~~have no key man insurance on any of our employees~~products.

21Nearly all of our industry competitors have greater capital resources, larger overall research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Rapid technological development, as well as new scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy we are developing may limit the product’s market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.

~~Table~~Our reliance on third parties, such as clinical ofresearch ~~Contents~~organizations, may result in delays in completing, or a failure to complete, clinical trials if they fail to perform under our agreements with them.

~~Recent~~In ~~proposed~~the ~~legislation~~course of product development, we may engage ~~permit~~clinical ~~re-importation~~research organizations to conduct and manage clinical studies ofand ~~drugs~~to ~~from~~assist ~~foreign~~us ~~countries~~in ~~into~~guiding our products through the ~~United~~FDA ~~States,~~review ~~including~~and ~~foreign~~approval ~~countries~~process. If ~~where~~we engage clinical research organizations to help us obtain market approval for our drug candidates, many important aspects of this process have been and will be out of our direct control. If the ~~drugs~~clinical ~~are~~research organizations ~~sold~~fail atto ~~lower~~perform ~~prices~~their ~~than~~obligations under our agreements with them or fail to perform clinical trials in ~~the~~a ~~United~~satisfactory ~~States~~manner, we may face delays ~~which~~in ~~could~~completing ~~materially~~our ~~adversely~~clinical ~~affect~~trials, as well as commercialization of one or more drug candidates. Furthermore, any loss or delay in obtaining contracts with such entities may also delay the completion of our ~~operating~~clinical ~~results~~trials and ~~our~~the ~~overall financial~~market ~~condition~~approval of drug candidates.

~~Legislation~~If ~~has~~the ~~been introduced~~manufacturers inupon ~~Congress~~whom ~~that,~~we ifrely ~~enacted,~~fail ~~would~~to ~~permit more widespread~~produce ~~re-importation~~our ofproduct ~~drugs~~candidates ~~from~~in ~~foreign countries into~~ the ~~United~~volumes ~~States,~~that ~~which may~~we ~~include~~require ~~re-importation~~on ~~from~~a ~~foreign~~timely ~~countries~~basis, ~~where~~or ~~the drugs are sold at~~to ~~lower~~comply ~~prices~~with ~~than~~stringent inregulations ~~the~~applicable ~~United~~to ~~States. Such~~pharmaceutical ~~legislation~~drug manufacturers, orwe ~~similar~~may ~~regulatory~~face ~~changes,~~delays ~~could~~in ~~decrease~~ the ~~price~~ wedevelopment ~~receive~~and ~~for~~commercialization ~~any approved products which~~of, or inbe ~~turn,~~unable ~~could~~to ~~materially adversely~~meet ~~affect~~demand for, our ~~operating~~products ~~results~~ and ~~our~~may ~~overall~~lose ~~financial~~potential ~~condition~~revenues.

~~The~~We ~~difficulty~~do not manufacture any of our product candidates, and ~~cost~~we do not currently plan to develop any capacity to do so. Any problems or delays we experience in manufacturing of ~~protecting~~EpiCeram® or any other product candidate may impair our ability ~~proprietary~~to manufacture commercial quantities, which would adversely affect our ~~rights~~business. For ~~makes~~example, itour ~~difficult~~manufacturers will need to ~~ensure~~produce ~~their~~specific ~~protection~~batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug or device substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

~~Our~~The ~~commercial~~manufacturing ~~success~~of ~~will~~pharmaceutical products ~~depend~~requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in ~~part~~production, onparticularly ~~maintaining~~in ~~patent~~scaling ~~protection~~up initial production. These problems include difficulties with production costs and ~~trade~~yields, ~~secret~~quality ~~protection~~control, ~~for~~including ~~our~~stability ~~products~~of the product candidate and quality assurance testing, shortages of qualified personnel, as well as ~~successfully~~compliance ~~defending~~with ~~these~~strictly ~~patents~~enforced ~~against~~federal, ~~third-party~~state ~~challenges~~and foreign regulations. WeOur manufacturers ~~will~~may ~~only~~not ~~be able~~perform toas ~~protect~~agreed. If our ~~technologies~~manufacturers ~~from~~were ~~unauthorized~~to ~~use~~encounter byany ~~third~~of ~~parties~~these todifficulties, ~~the~~our ~~extent~~ability ~~that~~to ~~valid~~provide ~~and~~product ~~enforceable~~to ~~patents~~commercialization partners or ~~trade~~product ~~secrets~~candidates to ~~cover~~patients ~~them. The~~in ~~patent~~our ~~positions~~clinical oftrials ~~pharmaceutical~~would ~~and biotechnology~~be ~~companies~~jeopardized. In ~~can~~addition, beall ~~highly~~manufacturers ~~uncertain~~of ~~and~~our ~~involve~~product candidates ~~complex~~must ~~legal~~comply ~~and factual~~with ~~questions~~cGMP ~~for~~requirements ~~which~~enforced ~~important~~by ~~legal~~the ~~principles~~FDA ~~remain~~through ~~unresolved~~its facilities inspection program. NoThese requirements ~~consistent~~include ~~policy~~quality ~~regarding~~control, quality assurance and the ~~breadth~~maintenance of ~~claims~~records ~~allowed~~and indocumentation. Manufacturers of ~~pharmaceutical~~our orproduct ~~biotechnology~~candidates ~~patents~~may ~~has~~be ~~emerged~~unable to ~~date~~comply with these cGMP requirements inand ~~the~~with ~~United~~other ~~States~~FDA, state and foreign regulatory requirements. ~~The~~We ~~patent situation~~have ~~outside~~little ~~the~~control ~~United~~over ~~States~~our ismanufacturers’ compliance ~~even~~with ~~more~~these ~~uncertain~~regulations and standards. ~~Changes~~A infailure ~~either~~to ~~the~~comply ~~patent~~with ~~laws~~these orrequirements may result in ~~interpretations~~ fines and civil penalties, suspension of ~~patent~~production, ~~laws~~suspension or delay in ~~the~~product ~~United~~approval, ~~States~~product ~~and~~seizure ~~other~~or ~~countries~~recall, ~~may~~or withdrawal of ~~diminish~~product approval. If the ~~value~~safety of ~~our~~any quantities ~~intellectual~~supplied ~~property. Accordingly,~~is wecompromised ~~cannot~~due ~~predict~~to ~~the~~our ~~breadth~~manufacturers’ offailure to adhere ~~claims~~to ~~that~~applicable laws or for other reasons, we may not be ~~allowed~~able orto ~~enforced~~obtain regulatory inapproval ~~our~~for ~~patents~~ or insuccessfully ~~third-party patents~~commercialize our product candidates.

~~The~~We ~~degree~~will ofrely ~~future protection~~on ~~for~~third ~~our~~parties ~~proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us~~ to ~~gain~~market ~~or keep~~ our ~~competitive advantage~~products. ~~For example:~~

·We ~~our~~currently ~~licensors~~plan ~~might~~on ~~not~~licensing ~~have~~our ~~been~~planned products ~~the first~~ to ~~make~~third ~~the~~parties ~~inventions covered by each of our pending patent applications~~ and/or ~~issued~~utilizing ~~patents;~~third ·parties ~~our licensors might not have been the first~~ to ~~file~~market ~~patent applications for these inventions; · others may independently develop similar or alternative technologies or duplicate any of~~ our ~~product~~planned products. In ~~candidates~~such orcases, ~~technologies;~~the ·amount ~~it is possible that none~~ of revenue ~~the~~we ~~pending~~receive ~~patent applications licensed to us~~ will ~~result~~be independent ~~issued~~upon ~~patents; ·~~ the ~~issued~~success ~~patents~~of ~~covering~~such ~~our~~third parties. In ~~product~~all ~~candidates~~likelihood, ~~may~~our ~~not provide a basis for commercially viable active~~ products, will ~~may~~ not ~~provide~~be usthe ~~with~~only ~~any~~products ~~competitive~~sold ~~advantages,~~ or ~~may~~marketed ~~be challenged~~ by ~~third~~such parties; ·and wethey may not devote ~~develop~~the ~~additional~~necessary ~~proprietary~~resources ~~technologies~~to ~~that are patentable; or · patents of others may have an adverse effect on our business.~~

In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible that we may not have the financial resources to pursue infringement actions on a timely basis, if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.21

InTable ~~addition, some countries, including many in Europe, do not grant patent claims directed to methods~~ of ~~treating~~ humans, and in these countries patent protection may not be available at all to protect our drug or device candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.Contents

Wesuccessfully ~~may~~sell ~~also rely on trade secrets to protect~~ our ~~technology, particularly where we do not believe patent protection is appropriate or obtainable~~products. ~~However~~Accordingly, ~~trade~~these ~~secrets~~arrangements ~~are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors~~ may ~~unintentionally~~result orin ~~willfully disclose~~ our ~~information~~products tonot ~~competitors.~~ reaching ~~Enforcing~~their afull ~~claim~~revenue ~~that~~potential awhich ~~third~~could ~~party~~have ~~illegally~~an ~~obtained~~adverse ~~and~~affect ison ~~using~~ our ~~trade~~operations, ~~secrets~~liquidity ~~is expensive~~ and ~~time~~business ~~consuming, and the outcome is unpredictable~~prospects. ~~In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.~~

22We may suffer losses from product liability claims

~~Table~~Any of our products or product candidates could cause adverse events to patients, such as immunologic or allergic reactions. These reactions may not be observed in clinical trials, but may nonetheless occur after commercialization. If any of ~~Contents~~these reactions occur, they may render our products or product candidates ineffective in some patients and our sales would suffer.

IfWe ~~our~~may ~~licensors~~be orsusceptible ~~we fail~~ to ~~obtain~~product orliability ~~maintain~~lawsuits, ~~patent~~from ~~protection~~events orarising ~~trade~~out ~~secret~~of ~~protection~~the ~~for~~use ~~our~~of products, ~~third~~or product candidates ~~parties~~in ~~could~~clinical ~~use~~studies ~~our~~or ~~proprietary~~products ~~information,~~sold ~~which~~in ~~could~~the ~~impair~~market. Product liability claims may also require us to limit commercialization of our ~~ability~~products. Our business exposes us to ~~compete~~potential product liability risks, which are inherent in the ~~market~~testing, manufacturing, marketing and ~~adversely~~sale ~~affect~~of ~~our~~pharmaceutical products. We ~~ability~~may not be able to ~~generate~~avoid product ~~revenues~~liability claims. If product liability lawsuits are brought against us, we may incur substantial liabilities that exceed the coverage of our product liability insurance, and ~~achieve~~as ~~profitability~~a result, our business may fail.

IfThe weapproval ~~are~~path ~~sued~~ for ~~infringing~~our ~~intellectual~~Ceragenin™ ~~property~~technology ~~rights~~contains ofregulatory ~~third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.~~uncertainty

Our ~~ability~~Ceragenin™ technology is a new chemical entity that we intend to ~~develop,~~combine with medical ~~manufacture,~~devices. While ~~market~~we ~~and~~believe ~~sell~~that regulatory ~~our~~clearances ~~products~~for ~~depends~~these ~~upon~~combination ~~our~~devices ~~ability~~should be made pursuant to 510(k) or ~~avoid~~PMA filings based on published guidance and prior communications ~~infringing~~with the ~~proprietary~~FDA, ~~rights~~there ofis ~~third~~no ~~parties~~assurance that the FDA will concur with our belief. ~~There~~Accordingly, isregulatory clearances afor ~~substantial~~these ~~amount~~devices ofmay ~~litigation involving~~take ~~patent~~longer and ~~other~~cost ~~intellectual~~more ~~property~~money ~~rights~~than inwe, ~~the biotechnology~~or ~~and~~our ~~biopharmaceutical~~commercialization ~~industries~~partners, ~~generally~~currently anticipate. If Uncertain aregulatory ~~third~~approval ~~party~~paths ~~claims~~could deter ~~that~~potential wecommercialization ~~infringe~~partners onfrom ~~their~~entering ~~products~~into orcommercialization ~~technology~~arrangements with us, or result in less favorable financial terms than we ~~could~~would otherwise ~~face~~expect ato ~~number~~receive ofunder ~~issues,~~such ~~including:~~arrangements.

·Our ~~infringement~~future ~~and~~success ~~other intellectual property claims which~~depends, ~~with~~in ~~or without merit~~part, can be expensive and time consuming to litigate and can divert management’s attention from our core business; · substantial damages for past infringement which we may have to pay if a court decides that our product infringes on ~~a competitor’s patent; · a court prohibiting us from selling or licensing our product unless~~ the ~~patent~~continued service ~~holder~~of ~~licenses the patent to us, which it is not required to do; · if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to~~ our ~~patents;~~management ~~and · redesigning our processes so they do not infringe which may not be possible or could require substantial funds and time~~team.

Our ~~corporate~~success ~~charter~~is ~~places~~dependent ~~certain~~in ~~limitations~~part upon the availability of our senior executive officers and our scientific advisors. The loss or unavailability to us of any of these individuals or key research, development, sales and marketing personnel, particularly, if lost to competitors, could have a material adverse effect on ~~director~~our ~~liability~~business, prospects, financial condition, and operating results. We have no key man insurance on any of our employees.

~~Our~~The ~~Certificate~~difficulty of Incorporation provides, as permitted by Delaware law, that our directors shall not be personally liable to the corporation or our stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and ~~may~~cost ~~reduce the likelihood~~ of ~~derivative~~protecting ~~litigation brought by stockholders on behalf of us against directors. In addition,~~ our ~~Certificate of Incorporation~~proprietary ~~and~~rights ~~bylaws~~makes ~~provide~~it ~~for~~difficult ~~mandatory indemnification of directors and officers~~ to ~~the~~ ~~fullest~~ensure ~~extent~~their ~~permitted by Delaware law~~protection.

~~Members~~Our commercial success will depend in part on maintaining patent protection and trade secret protection for our products, as well as successfully defending these patents against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnology patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our ~~management~~intellectual ~~have~~property. Accordingly, ~~conflicts~~we cannot predict the breadth of claims ~~interest~~that may be allowed or enforced in our patents or in third-party patents.

~~Our~~The ~~directors,~~degree ~~are, or may become in their individual capacity, officers, and directors, controlling shareholders and/or partners~~ of ~~other~~future ~~entities~~protection ~~engaged~~for ~~in a variety of~~our ~~businesses. Thus,~~proprietary ~~the~~rights ~~involvement~~is ~~of these~~uncertain ~~individuals~~because ~~with~~legal ~~such~~means ~~other~~afford ~~business~~only ~~entities may create conflicts of~~limited ~~interest~~protection ~~including, among other things, time, effort,~~ and ~~corporate opportunity. The~~may ~~amount~~not ofadequately ~~time~~protect ~~that~~ our ~~directors~~ ~~will~~rights ~~devote~~or topermit ~~our~~us ~~business will be limited. Additionally, our Chief Executive Officer retains a significant ownership interest in Osmotics (approximately 10%) and is married~~ to ~~the~~gain ~~Chief Executive Officer of Osmotics. Accordingly, he is conflicted in all Company~~or ~~matters~~keep ~~dealing~~our ~~with~~competitive ~~Osmotics~~advantage. ~~Further,~~For ~~a certain other director also retains a small ownership interest in Osmotics (less than 1%). It is possible that Osmotics may have interests that are in conflict with our best interests.~~example:

~~There~~· ~~are~~our ~~trading~~licensors ~~risks~~might not have been the first to make the inventions covered by each of our pending patent applications and issued patents; · our licensors might not have been the first to file patent applications for ~~low~~these ~~priced~~inventions; ~~stocks~~· others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies; · it is possible that none of the pending patent applications licensed to us will result in issued patents; · the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties; · we may not develop additional proprietary technologies that are patentable; or · patents of others may have an adverse effect on our business.

~~Our~~In ~~common~~the ~~stock~~event ~~is currently~~that ~~traded~~a inthird ~~the~~party ~~over~~has ~~the~~also filed ~~counter~~a ~~market~~U.S. onpatent ~~the~~application ~~“Electronic~~relating ~~Bulletin Board”~~to ofour ~~the~~product ~~National~~candidates ~~Association~~or ~~of Securities Dealers, Inc. As~~ a ~~consequence~~similar invention, anwe ~~investor~~may ~~could~~have ~~find~~to ~~it more~~participate ~~difficult~~in tointerference ~~dispose~~proceedings ~~of,~~declared orby the toU.S. ~~obtain~~Patent ~~accurate~~and ~~quotations~~Trademark asOffice to ~~the~~determine ~~price~~ priority of, ~~our securities.~~

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure, relating to the market for penny stocks, in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission (the “SEC”) recently adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three (3) years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three (3) years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three (3) years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.22

IfTable ~~our~~of securities are not quoted on NASDAQ, or we do not have $2,000,000 in net tangible assets, trading in our securities will be covered by Rules 15(g)(1) through 15(g)(6) promulgated under the Exchange Act for non NASDAQ and Contents

23invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible that we may not have the financial resources to pursue infringement actions on a timely basis, if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.

~~Table~~In addition, some countries, including many in Europe, do not grant patent claims directed to methods of ~~Contents~~treating humans, and in these countries patent protection may not be available at all to protect our drug or device candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.

~~nonexchange~~We ~~listed~~may ~~securities~~also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. ~~Under~~However, trade ~~such~~secrets ~~rules,~~are ~~broker~~difficult ~~dealers~~to ~~who~~protect. ~~recommend~~While ~~such~~we ~~securities~~use reasonable efforts to ~~persons~~protect ~~other~~our ~~than~~trade ~~established~~secrets, ~~customers~~our licensors, ~~and~~employees, consultants, contractors, outside scientific ~~accredited~~collaborators ~~investors~~and ~~must~~other ~~make~~advisors amay ~~special~~unintentionally ~~written~~or ~~suitability~~willfully ~~determination~~disclose ~~that~~our ~~the~~information ~~penny~~to ~~stock~~competitors. Enforcing is a claim ~~suitable~~that ~~investment~~a ~~for~~third ~~the~~party ~~purchaser~~illegally obtained and ~~receive~~is ~~the~~using our trade secrets is ~~purchaser’s~~expensive ~~written~~and ~~agreement~~time inconsuming, ~~connection~~and ~~with~~the ~~any~~outcome ~~transaction~~is unpredictable. ~~Securities~~In ~~are~~addition, ~~exempt~~courts ~~from~~outside ~~these~~the ~~rules if~~United States ~~the~~are ~~market~~sometimes ~~price~~less ofwilling ~~the~~to ~~common~~protect ~~stock~~trade issecrets. Moreover, atour ~~least~~competitors ~~$5.00~~may ~~per~~independently develop ~~share~~equivalent knowledge, methods and know-how.

~~Our~~If ~~ability~~our licensors or we fail to ~~issue~~obtain ~~additional~~or ~~securities~~maintain ~~without~~patent protection or trade secret protection ~~shareholder~~for ~~approval~~our ~~could~~products, ~~have~~third ~~substantial~~parties ~~dilutive~~could ~~and~~use ~~other~~our ~~adverse~~proprietary ~~effects~~information, which oncould ~~existing~~impair ~~stockholders~~our ~~and~~ability ~~investors~~to compete in ~~this~~the ~~offering~~market and adversely affect our ability to generate revenues and achieve profitability.

WeIf have the authority to issue additional shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval. Future issuance of common stock could be at values substantially below the exercise price of the warrants, and therefore could represent further substantial dilution to you as an investor in this offering. In addition, we ~~could~~are ~~issue~~sued ~~large~~for ~~blocks~~infringing ofintellectual ~~voting stock to fend off unwanted~~property ~~tender~~rights ~~offers or hostile takeovers without further shareholder approval. As~~ of ~~December 31,~~third ~~2008~~parties, weit ~~had outstanding~~will ~~options~~be ~~exercisable~~costly ~~to purchase up to 5,796,750 shares of common stock at a weighted average exercise price of $1.50 per share,~~ and ~~outstanding warrants~~time ~~exercisable to purchase up to 10~~consuming,~~842,609~~ ~~shares of common stock at a weighted average exercise price of $1.00 per share. Exercise of these warrants~~ and ~~options could~~an ~~have~~unfavorable aoutcome ~~further~~in ~~dilutive~~any ~~effect~~litigation onwould ~~existing~~harm ~~stockholders~~our ~~and potential investors~~business.

~~Item~~Our 1Bability to develop, manufacture, market and sell our products depends upon our ability to avoid infringing the proprietary rights of third parties. There ~~Unresolved~~is ~~Staff~~a ~~Comments~~substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

~~Not~~· ~~applicable~~infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business; · substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent; · a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do; · if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and · redesigning our processes so they do not infringe which may not be possible or could require substantial funds and time.

~~Item~~Our 2.corporate ~~Properties~~charter places certain limitations on director liability.

Our ~~principal offices~~Certificate ~~are~~of ~~located~~Incorporation atprovides, as ~~1444~~permitted ~~Wazee~~by ~~Street,~~Delaware ~~Suite 210~~law, ~~Denver,~~that ~~Colorado 80202. Our~~our ~~telephone~~directors ~~number~~shall isnot ~~(720) 946-6440. We~~be ~~currently~~personally ~~utilize office~~liable ~~space~~to ~~provided~~the bycorporation ~~Osmotics~~or ~~pursuant~~our tostockholders afor ~~shared~~monetary ~~services~~damages ~~agreement~~for ~~under~~breach ~~which we~~of ~~pay~~fiduciary ~~Osmotics~~duty ~~$5,000~~as ~~per~~a ~~month~~director, ~~for~~with ~~office space and~~ certain ~~administrative services~~exceptions. ~~The~~These ~~shared~~provisions ~~services~~may ~~agreement expires~~discourage ~~on December 31, 2009. We~~stockholders ~~believe~~from ~~that~~bringing ~~our~~suit ~~facility~~against isa ~~adequate~~director for ~~its~~breach ~~intended~~of ~~purpose. Should~~fiduciary weduty ~~increase~~and ~~our staffing levels or~~may ~~should~~reduce the ~~shared~~likelihood ~~services~~of ~~agreement~~derivative ~~expire~~litigation ~~without~~brought ~~being~~by ~~extended,~~stockholders ~~we will be~~on ~~required~~behalf toof ~~locate~~us ~~additional~~against ordirectors. In addition, ~~substitute~~our ~~office~~Certificate ~~space,~~of ~~which~~Incorporation weand ~~believe~~bylaws ~~is readily~~provide ~~available~~for tomandatory ~~us. As~~indemnification ~~manufacturing~~of isdirectors ~~contracted~~and officers to ~~third~~the ~~parties,~~fullest weextent dopermitted ~~not~~by ~~have,~~Delaware ~~nor do we require, property for that purpose~~law.

~~Item~~Members 3.of ~~Legal~~our ~~Proceedings~~management have conflicts of interest.

WeOur directors, are, ~~not~~or may become in their ~~currently~~individual ~~involved~~capacity, officers, and directors, controlling shareholders and/or partners of other entities engaged in ~~any~~a ~~legal~~variety ~~proceedings~~of businesses. Thus, the involvement of these individuals with such other business entities may create conflicts of interest including, among other things, time, effort, and corporate opportunity. The amount of time that our directors will devote to our business will be limited. Additionally, our Chief Executive Officer retains a significant ownership interest in Osmotics (approximately 10%) and is married to the Chief Executive Officer of Osmotics. Accordingly, he is conflicted in all Company matters dealing with Osmotics. Further, a certain other director also retains a small ownership interest in Osmotics (less than 1%). It is possible that Osmotics may have interests that are in conflict with our best interests.

~~Item 4. Submission of Matters to a Vote of Security Holders~~23

~~None.~~Table of Contents

~~EXECUTIVE~~There ~~OFFICERS~~are OFtrading ~~THE~~risks ~~REGISTRANT~~for low priced stocks.

~~The~~Our ~~following~~common stock is currently traded in the ~~table~~over ~~shows~~the ~~information~~counter ~~about~~market ~~our~~on ~~executive~~the ~~officers~~“Electronic asBulletin Board” of ~~March~~the National Association of Securities Dealers, 1Inc. As a consequence, ~~2009~~an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our securities.

Name	Age	Position	Director/Officer Since
Steven S. Porter	59	Chief Executive Officer, Chairman and Director	2005
Jeffrey Sperber	44	Chief Financial Officer and Director	2005
Carl Genberg	57	Senior Vice President	2005
Russell L. Allen	62	Vice President of Corporate Development	2005

~~Steven~~If S.our ~~Porter~~securities ~~has~~are ~~served as the Company’s~~not ~~Chief~~quoted ~~Executive~~on ~~Officer~~NASDAQ, ~~and~~or ~~Chairman~~we ~~since~~do ~~May 2005. Prior~~not tohave ~~joining us~~$2,000,000 hein ~~served~~net astangible ~~Chief~~assets, trading ~~Executive~~in ~~Officer~~our ~~and~~securities ~~Chairman~~will ofbe ~~the~~covered ~~Board~~by ~~of Osmotics from its inception in August~~Rules ~~1993 until May~~15(g)(1) ~~2005. He served as a director of Osmotics Corporation~~ through ~~December~~15(g)(6) ~~2007. He~~promulgated under ~~has~~the ~~served~~Exchange asAct ~~Chief~~for ~~Executive~~non ~~Officer~~NASDAQ and ~~Chairman~~ ofnonexchange ~~Ceragenix~~listed ~~Corporation since February 2002~~securities. InUnder ~~January 1986,~~such ~~Mr. Porter and two other individuals founded GDP Technologies~~rules, ~~Inc.~~ ~~(GDP),~~broker adealers ~~medical imaging~~who ~~company,~~recommend ~~completing~~such ~~major~~securities ~~strategic~~to ~~partnerships~~persons ~~with~~other ~~Olympus~~than ~~Optical,~~established ~~Japan, GE~~customers ~~Medical~~ and ~~Bruel & Kjaer, Denmark.~~ ~~From~~accredited ~~that~~investors ~~time~~must ~~until~~make ~~August 1993,~~a ~~Mr. Porter~~special ~~served~~written assuitability ~~Executive Vice~~determination ~~President of GDP. Prior to 1986, Mr. Porter~~that ~~was~~ the ~~National~~penny ~~Sales~~stock ~~Manager~~is ~~for Protronyx Research, Inc.,~~ a ~~large~~suitable ~~scale scientific~~investment ~~computer~~for ~~systems~~the ~~company,~~purchaser ~~working~~and ~~with~~receive the purchaser’s ~~United~~written ~~States~~agreement ~~Department of~~in ~~Energy,~~connection ~~United~~with ~~States~~any ~~Department~~transaction. Securities ofare ~~Defense,~~exempt ~~Boeing~~from ~~and~~these rules if the ~~National Security~~market ~~Agency. Mr. Porter~~price ~~has~~of ~~a Bachelor~~the ofcommon ~~Arts~~stock ~~degree~~is inat ~~Economics~~least ~~from~~$5.00 ~~UCLA~~per share.

~~Jeffrey~~Our S.ability ~~Sperber has served as the Company’s Chief Financial Officer since May 2005. Prior~~ to ~~joining~~issue ~~us,~~additional hesecurities ~~served as the Chief Financial Officer of~~without ~~Osmotics~~shareholder ~~Corporation~~approval ~~from~~could ~~June 2004~~have ~~until~~substantial ~~May 2005. He~~dilutive ~~has~~and ~~served~~other asadverse ~~Chief Financial Officer of~~effects ~~Ceragenix~~on ~~Corporation~~existing ~~since~~stockholders ~~June 2004. From~~and ~~January 2004~~investors ~~through~~in ~~May 2004,~~this Mroffering. ~~Sperber worked as an~~

24We have the authority to issue additional shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval. Future issuance of common stock could be at values substantially below the exercise price of the warrants, and therefore could represent further substantial dilution to you as an investor in this offering. In addition, we could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval. As of December 31, 2009, we had outstanding options exercisable to purchase up to 5,611,750 shares of common stock at a weighted average exercise price of $1.51 per share, and outstanding warrants exercisable to purchase up to 10,747,609 shares of common stock at a weighted average exercise price of $.99 per share. Exercise of these warrants and options could have a further dilutive effect on existing stockholders and potential investors.

~~Table~~Item 1B. Unresolved ofStaff ~~Contents~~Comments

~~independent~~Not ~~consultant for various companies, including Osmotics Corporation~~applicable. From March 2001 through January 2004, Mr. Sperber served as the Vice President and Controller of TeleTech Holdings, Inc., a $1 billion, global, public company which provides outsourced call center services primarily to the Fortune 1000. From October 1997 through March 2001, he served as the Chief Financial Officer of USOL Holdings, Inc., a publicly traded broadband provider focused on multi family housing communities. At USOL, Mr. Sperber led a successful public offering of USOL’s common stock. From August 1995 through September 1997, Mr. Sperber served as a business unit controller for Tele Communications, Inc., which was subsequently acquired by Comcast. From September 1991 through August 1995, he served in various financial positions for Concord Services, Inc., an international conglomerate, most recently as the Chief Financial Officer of its manufacturing and processing business unit where he oversaw both public and private entities. From September 1986 through September 1991, Mr. Sperber was employed by Arthur Andersen LLP in Denver, Colorado. Mr. Sperber received a CPA license in the State of Colorado, which has since expired.

25Item 2. Properties

~~Table~~Our principal offices are oflocated ~~Contents~~at 1444 Wazee Street, Suite 210, Denver, Colorado 80202. Our telephone number is (720) 946-6440. We currently utilize office space provided by Osmotics pursuant to a shared services agreement under which we pay Osmotics $5,000 per month for office space and certain administrative services. The shared services agreement expires on December 31, 2010. We believe that our facility is adequate for its intended purpose. Should we increase our staffing levels or should the shared services agreement expire without being extended, we will be required to locate additional or substitute office space, which we believe is readily available to us. As manufacturing is contracted to third parties, we do not have, nor do we require, property for that purpose.

~~Carl~~Item ~~Genberg has served as the Company’s Senior Vice President of Research and Development since May 2005~~3. ~~Prior to joining us, he served as Senior Vice~~ Legal President, Research and Development and Business Development of Osmotics Corporation from August 1999 until May 2005. He served as President of Ceragenix Corporation from February 2002 through December 2004 and as Senior Vice President of Research and Development for Ceragenix Corporation since January 2005. Mr. Genberg has an extensive background in licensing and product development. From 1989 to 1999, Mr. Genberg served in a variety of executive capacities with Neuromedical Systems, Inc., and its regional licensees, Cytology West, Inc. and Papnet of Ohio, Inc., medical imaging companies that applied artificial intelligence to the analysis of pathology samples. Neuromedical Systems was a venture funded company whose major investor was Goldman Sachs Limited Partners Fund and which undertook an IPO in 1996 that raised over $100 million dollars. Mr. Genberg was instrumental in the design of Neuromedical Systems’ FDA clinical study and the recruitment of key research investigators. He has a Bachelor of Science Degree in Life Sciences from Cornell University and a Juris Doctor from the Ohio State University College of Law. Mr. Genberg filed a Chapter 13 Petition in May of 2004 which was dismissed in 2006.Proceedings

~~Russell~~We L.are ~~Allen~~not ~~was appointed as our Vice~~currently ~~President~~involved ~~of Corporate Development~~ in ~~June 2005. Prior~~any tolegal ~~joining~~proceedings ~~us,~~that hewe ~~worked~~believe aswill ~~an independent~~result ~~consultant. Previously,~~in ~~he served~~a ~~from 2002 to 2004 as Senior Vice President Corporate Development for~~material ~~Cellular~~obligation ~~Genomics Inc., a private drug discovery biopharmaceutical firm. From 1997~~ to 2001, he served as Vice President, Corporate Development and Strategic Planning at Ligand Pharmaceuticals, where he was responsible for concluding a wide variety of business development transactions including major strategic alliances with pharmaceutical firms. Between 1985 and 1996, Mr. Allen held senior positions with Sanofi Winthrop (including preceding corporate entities Sterling Winthrop and Eastman Pharmaceuticals), including being General Manager for Central American pharmaceutical operations and holding Vice President and Director level positions in business development and strategic planning. Prior experience includes more than 10 years of marketing and business development related positions with Bristol Myers Squibb and Procter & Gamble in Rx, OTC, and nutritional products. Mr. Allen received his B.A. from Amherst College and his MBA from the ~~Harvard Graduate School of Business Administration~~Company.

~~PART II~~Item 4. Submission of Matters to a Vote of Security Holders

~~Item~~Not 5applicable. ~~Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~

~~PRICE RANGE OF OUR COMMON STOCK~~24

~~Our~~Table ~~shares~~ of ~~common~~ stock commenced trading on the OTC Bulletin Board (“OTCBB”) on February 3, 2004. Prior to June 27, 2005, our trading symbol was “OSCE.” On June 27, 2005, to reflect our new name, our trading symbol was changed to “CGXP.” The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. An OTCBB equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange. The reported high and low bid and ask prices for the common stock are shown below for each quarterly period from January 1, 2007 through December 31, 2008 as derived from NASDAQ trading reports.Contents

	Bid				Ask
	High		Low		High		Low
2007 Fiscal Year
Jan. 1 — Mar. 31, 2007	$	2.44	$	1.20	$	2.46	$	1.55
Apr. 1 — June 30, 2007	$	2.10	$	1.65	$	2.15	$	1.70
July 1 — Sept. 30, 2007	$	1.85	$	1.06	$	1.91	$	1.10
Oct. 1 — Dec. 31, 2007	$	1.85	$	0.92	$	1.94	$	0.95
2008 Fiscal Year
Jan. 1 — Mar. 31, 2008	$	1.05	$	0.76	$	1.13	$	0.80
Apr. 1 — June 30, 2008	$	0.96	$	0.58	$	1.01	$	0.65
July 1 — Sept. 30, 2008	$	0.98	$	0.53	$	1.25	$	0.63
Oct. 1 — Dec. 31, 2008	$	0.65	$	0.16	$	0.70	$	0.19

EXECUTIVE OFFICERS OF THE REGISTRANT

The following ~~bid~~table ~~and~~shows ~~ask~~information ~~prices~~about of our ~~common~~executive ~~stock~~officers as of ~~March~~April 23, 2009 were $.56 and $.69, respectively, as reported on the Bulletin Board. The Bulletin Board prices are bid and ask prices which represent prices between broker dealers and do not include retail mark ups and mark downs or any commissions to the broker dealer. The prices do not reflect prices in actual transactions. As of March 1, ~~2009, there were~~ ~~approximately 800 record owners of our common stock~~2010.

Our common stock is subject to rules adopted by the SEC regulating broker dealer practices in connection with

Name	Age	Position	Director/Officer Since
Steven S. Porter	60	Chief Executive Officer, Chairman and Director	2005
Jeffrey Sperber	45	Chief Financial Officer and Director	2005
Russell L. Allen	63	Vice President of Corporate Development	2005

26Steven S. Porter has served as the Company’s Chief Executive Officer and Chairman since May 2005. Prior to joining us, he served as Chief Executive Officer and Chairman of the Board of Osmotics from its inception in August 1993 until May 2005. He served as a director of Osmotics Corporation through December 2007. He has served as Chief Executive Officer and Chairman of Ceragenix Corporation since February 2002. In January 1986, Mr. Porter and two other individuals founded GDP Technologies, Inc. (GDP), a medical imaging company, completing major strategic partnerships with Olympus Optical, Japan, GE Medical and Bruel & Kjaer, Denmark. From that time until August 1993, Mr. Porter served as Executive Vice President of GDP. Prior to 1986, Mr. Porter was the National Sales Manager for Protronyx Research, Inc., a large scale scientific computer systems company, working with the United States Department of Energy, United States Department of Defense, Boeing and the National Security Agency. Mr. Porter has a Bachelor of Arts degree in Economics from UCLA.

~~Table~~Jeffrey S. Sperber has served as the Company’s Chief Financial Officer since May 2005. Prior to joining us, he served as the Chief Financial Officer of ~~Contents~~Osmotics Corporation from June 2004 until May 2005. He has served as Chief Financial Officer of Ceragenix Corporation since June 2004. From January 2004 through May 2004, Mr. Sperber worked as an independent consultant for various companies, including Osmotics Corporation. From March 2001 through January 2004, Mr. Sperber served as the Vice President and Controller of TeleTech Holdings, Inc., a $1 billion, global, public company which provides outsourced call center services primarily to the Fortune 1000. From October 1997 through March 2001, he served as the Chief Financial Officer of USOL Holdings, Inc., a publicly traded broadband provider focused on multi family housing communities. At USOL, Mr. Sperber led a successful public offering of USOL’s common stock. From August 1995 through September 1997, Mr. Sperber served as a business unit controller for Tele Communications, Inc., which was subsequently acquired by Comcast. From September 1991 through August 1995, he served in various financial positions for Concord Services, Inc., an international conglomerate, most recently as the Chief Financial Officer of its manufacturing and processing business unit where he oversaw both public and private entities. From September 1986 through September 1991, Mr. Sperber was employed by Arthur Andersen LLP in Denver, Colorado. Mr. Sperber received a CPA license in the State of Colorado, which has since expired. Mr. Sperber was appointed as an outside director of Omni Bio Pharmaceutical Corporation in October 2009 where he also serves as Audit Committee Chair.

~~transactions~~Russell ~~in “penny stocks~~L.~~” Those~~ ~~disclosure~~Allen ~~rules applicable to “penny~~was ~~stocks”~~appointed ~~require~~as aour ~~broker~~Vice ~~dealer,~~President ~~prior~~of toCorporate aDevelopment ~~transaction~~ in aJune 2005. Prior ~~“penny~~to ~~stock”~~joining ~~not otherwise exempt from the rules~~us, tohe ~~deliver~~worked aas ~~standardized~~an independent ~~list~~consultant. Previously, ~~disclosure~~he ~~document~~served ~~prepared~~from by2002 ~~the~~to ~~Securities~~2004 ~~and~~as ~~Exchange~~Senior ~~Commission. That~~Vice ~~disclosure~~President ~~document~~Corporate ~~advises~~Development ~~an investor~~for ~~that~~Cellular ~~investment~~Genomics inInc., ~~“penny~~a ~~stocks”~~private ~~can~~drug bediscovery ~~very~~biopharmaceutical ~~risky~~firm. From ~~and~~1997 ~~that~~to ~~the~~2001, ~~investor’s salesperson~~he orserved ~~broker~~as isVice President, ~~not~~Corporate anDevelopment ~~impartial~~and ~~advisor~~Strategic ~~but~~Planning ~~rather~~at ~~paid~~Ligand Pharmaceuticals, towhere ~~sell~~he ~~the shares. The~~was ~~disclosure~~responsible ~~contains~~for ~~further warnings~~concluding ~~for~~a ~~the~~wide ~~investor~~variety toof business ~~exercise~~development ~~caution~~transactions inincluding ~~connection~~major ~~with~~strategic analliances ~~investment~~with inpharmaceutical ~~“penny~~firms. Between ~~stocks~~1985 and 1996,” toMr. Allen ~~independently~~held ~~investigate~~senior ~~the~~positions ~~security,~~with asSanofi ~~well~~Winthrop ~~as the~~(including ~~salesperson~~preceding ~~with~~corporate ~~whom~~entities ~~the~~Sterling ~~investor~~Winthrop ~~is working~~ and toEastman ~~understand~~Pharmaceuticals), including ~~the~~being ~~risky nature~~General ofManager anfor ~~investment~~Central inAmerican ~~this~~pharmaceutical ~~security.~~ operations ~~The~~and ~~broker~~holding ~~dealer~~Vice ~~must~~President ~~also~~and ~~provide~~Director ~~the~~level ~~customer~~positions ~~with~~in ~~certain~~business ~~other~~development ~~information~~ and ~~must~~strategic ~~make~~planning. Prior ~~a special written determination that the “penny stock”~~experience isincludes amore ~~suitable~~than ~~investment~~10 ~~for~~years ~~the~~of ~~purchaser~~marketing and ~~receive~~business ~~the~~development ~~purchaser’s written~~related ~~agreement~~positions towith ~~the~~Bristol ~~transaction. Further, the~~Myers ~~rules require~~Squibb ~~that,~~and ~~following~~Procter & ~~the~~Gamble ~~proposed~~in ~~transaction~~Rx, ~~the~~OTC, and ~~broker~~nutritional products. Mr. Allen ~~provide~~received ~~the~~his ~~customer~~B.A. ~~with~~from ~~monthly~~Amherst ~~account~~College ~~statements~~and ~~containing~~his ~~market information~~MBA ~~about~~from the ~~prices~~Harvard Graduate School of ~~the~~Business ~~securities~~Administration.

~~These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock.~~PART ~~Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.~~II

~~Dividend~~Item ~~Policy~~5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

WePRICE ~~have~~RANGE ~~not declared~~OF orOUR ~~paid~~COMMON cash dividends on our common stock since our inception. We intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not anticipate paying dividends in the foreseeable future. The terms of our convertible debt securities prevent the payment of common stock dividends. Future cash dividends, if any, will be determined by our board of directors.STOCK

~~Unregistered~~Our ~~Sales~~shares of ~~Equity~~common ~~Securities~~stock commenced trading on the OTC Bulletin Board (“OTCBB”) on February 3, 2004. Prior to June 27, 2005, our trading symbol was “OSCE.” On June 27, 2005, to reflect our new name, our trading symbol was changed to “CGXP.” The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and ~~Use~~volume ofinformation in ~~Proceeds~~over-the-counter equity securities. An OTCBB equity security generally is any equity that is not listed or traded on NASDAQ or a national securities exchange. The reported high and low bid and ask prices for the common stock are shown below for each quarterly period from January 1, 2008 through December 31, 2009 as derived from NASDAQ trading reports.

~~None.~~25

~~Issuer~~Table ~~Purchases~~ of ~~Equity Securities~~Contents

None.

	Bid				Ask
	High		Low		High		Low
2008 Fiscal Year
Jan. 1 — Mar. 31, 2008	$	1.05	$	0.76	$	1.13	$	0.80
Apr. 1 — June 30, 2008	$	0.96	$	0.58	$	1.01	$	0.65
July 1 — Sept. 30, 2008	$	0.98	$	0.53	$	1.25	$	0.63
Oct. 1 — Dec. 31, 2008	$	0.65	$	0.16	$	0.70	$	0.19

2009 Fiscal Year
Jan. 1 — Mar. 31, 2009	$	0.85	$	0.17	$	0.90	$	0.23
Apr. 1 — June 30, 2009	$	0.61	$	0.27	$	0.69	$	0.37
July 1 — Sept. 30, 2009	$	0.50	$	0.25	$	0.55	$	0.33
Oct. 1 — Dec. 31, 2009	$	0.65	$	0.35	$	0.70	$	0.39

~~Item~~The 6bid and ask prices of our common stock as of April 12, 2010 were $.21 ~~Selected~~and ~~Financial~~$.33, ~~Data~~respectively, as reported on the Bulletin Board. The Bulletin Board prices are bid and ask prices which represent prices between broker dealers and do not include retail mark ups and mark downs or any commissions to the broker dealer. The prices do not reflect prices in actual transactions. As of April 1, 2010, there were approximately 800 record owners of our common stock.

~~Not~~Our common stock is subject ~~Applicable~~to rules adopted by the SEC regulating broker dealer practices in connection with transactions in “penny stocks.” Those disclosure rules applicable to “penny stocks” require a broker dealer, prior to a transaction in a “penny stock” not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Securities and Exchange Commission. That disclosure document advises an investor that investment in “penny stocks” can be very risky and that the investor’s salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in “penny stocks,” to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and must make a special written determination that the “penny stock” is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.

~~Item~~These 7disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many ~~Management’s~~brokers ~~Discussion~~may ~~and~~be unwilling ~~Analysis~~to engage in transactions in our common stock because of ~~Financial~~the ~~Condition~~added disclosure ~~and~~requirements, ~~Results~~thereby making it more difficult for stockholders to dispose of ~~Operations~~their shares.

~~This~~Dividend discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company for the fiscal years ended December 31, 2008 and December 31, 2007. The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-K.Policy

~~BUSINESS~~We ~~OVERVIEW~~have not declared or paid cash dividends on our common stock since our inception. We intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not anticipate paying dividends in the foreseeable future. The terms of our convertible debt securities prevent the payment of common stock dividends. Future cash dividends, if any, will be determined by our board of directors.

WeUnregistered ~~are~~Sales an emerging medical device company focused on prescription products for infectious disease and dermatology. Since our inception in February 2002, our principal activities have involved raising capital, identifying and licensing technology, researching applications for the licensed technology, and testing the licensed technology. Nearly all of ~~our~~Equity ~~planned~~Securities products require marketing clearance from the FDA. In April 2006, we received clearance from the FDA to market our first product, EpiCeram®. In November 2007, we entered into an exclusive supply and ~~distribution~~Use ~~agreement with DRL for the commercialization~~ of ~~EpiCeram® in the United States. In October 2008, DRL officially launched EpiCeram® sales and marketing efforts.~~Proceeds

27None.

~~Table~~ Issuer Purchases of ~~Contents~~Equity Securities

~~RESULTS OF OPERATIONS AND CERTAIN EVENTS DURING 2008 AND 2007~~None.

~~Our historical~~Item ~~operating results consist primarily of expenditures on corporate activities, research and development costs, payments due under our license agreements and interest expense~~6. In Selected ~~order~~Financial ~~of magnitude, our expenditures have generally consisted of the following cash expenses:~~Data

~~· Payroll~~Not ~~and related costs;~~Applicable

~~· Interest;~~Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~· Fees~~This ~~paid~~discussion tosummarizes ~~third~~the significant ~~parties~~factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company for ~~clinical~~the fiscal years ended December 31, ~~trials~~2009 and ~~other~~December 31, ~~development~~2008. ~~costs;~~The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-K. This discussion and analysis may contain forward-looking information based on current expectations that involve risks and uncertainties. Our actual results may differ materially as a result of various factors, including those set forth under “Risk Factors” or elsewhere in this Form 10-K.

~~· Professional fees (legal and accounting);~~26

~~· Licensing~~Table ~~fees;~~of Contents

~~· Travel;~~BUSINESS OVERVIEW

~~· Insurance;~~We are an emerging medical device company focused on dermatology and infectious disease. We have two base technology platforms each with multiple applications: Barrier Repair and Ceragenins™ (also known as cationic steroid antibiotics or “CSAs”). Our Barrier Repair platform represents near term revenue opportunities for prescription skin care products to treat a variety of skin disorders all characterized by a disrupted skin barrier. In April 2006, we received clearance from the United States Food and Drug Administration (“FDA”) to market EpiCeram® our first commercial product using the Barrier Repair technology. EpiCeram® is a prescription-only topical cream intended to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses including eczema, irritant contact dermatitis, and radiation dermatitis. All of these conditions share in common a defective or incomplete skin barrier function. In November 2007, we entered into an exclusive distribution and supply agreement with Dr. Reddy’s Laboratories, Inc. (“DRL”) for the commercialization of EpiCeram® in the United States (the “DRL Agreement”). Under the terms of the DRL Agreement, we are responsible for manufacturing (through a contract manufacturer) and supplying the product while DRL is responsible for distribution, marketing and sales. DRL launched sales and marketing efforts during October 2008. During 2009, we entered into supply and distribution agreements to commercialize EpiCeram® in Canada (the “Canadian Agreement”), certain Southeast Asian countries (the “Asian Agreement”), the European Union (the “EU Agreement”), and Israel (collectively the “International Agreements”). Sales and marketing efforts under the Canadian Agreement commenced during the fourth quarter of 2009. In January 2010, we entered into a supply and distribution agreement to commercialize EpiCeram® in Hong Kong and Taiwan, and we expect to consummate additional international agreements during the remainder of 2010.

~~· Investor~~Our Ceragenin™ technology represents near, mid and ~~public~~long-term ~~relations;~~revenue opportunities for treating infectious disease. Ceragenins™ are small molecule, positively charged, aminosterol compounds that have shown activity against both gram negative and gram positive bacteria, certain viruses, certain fungi and certain cancers in preclinical testing. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system. We are initially pursuing activities in antimicrobial medical device coatings. We have not applied for, nor have we received, approval from the FDA to market any product using our Ceragenin™ technology. However, it is our expectation that we will be able to generate revenue from the Ceragenin™ technology prior to receiving FDA approvals in the form of upfront and milestone payments under development and sublicense agreements.

~~· Director~~Since ~~fees;~~our inception in February 2002, we have incurred significant cash and operating losses and as of December 31, 2009, we had a stockholders’ deficit of $19,631,693 and a working capital deficit of $3,631,833. We have relied upon proceeds from the sale of convertible debt securities, proceeds received from the exercise of common stock purchase warrants, and milestone payments from the DRL Agreement to fund our operations. We will require additional capital to execute our business plan and continue as a going concern. As of December 31, 2009, we had $9,738,812 outstanding in secured convertible debt. Repayment of these obligations is secured by a first lien on all of our assets, including all of our intellectual property rights and intellectual property licenses. We have amended the terms of the debt several times but the convertible debt agreements still contain a number of provisions which new investors could find problematic and could deter investment. We do not believe it is possible to raise additional capital without further modification of the debt. If we default on any of the covenants or other requirements of our debt agreements, the debt holders will be able to foreclose on our assets by which their debts are secured which would likely cause you to lose your entire investment. Such foreclosure would likely force us out of business. Furthermore, if the debt holders choose to convert their debt into shares of common stock it is possible that the sale of such shares could have a depressive effect on the share price of our common stock.

~~· Consulting~~Our future success will be highly dependent on the commercial success of EpiCeram® as well as our ability to develop, test and commercialize our Ceragenin™ technology as an antimicrobial coating for medical devices. We plan on commercializing our Ceragenin™ through licensing agreements with device manufacturers. In order to control the timing and direction of the development of the Ceragenin™ technology, we will require capital resources beyond what we currently have on hand or expect to generate from EpiCeram® sales. Currently, we rely on the efforts of potential commercialization partners to advance the testing of the Ceragenin™ technology. Our ability to raise additional capital will be dependent upon many factors including, but not limited to, our ability to amend the terms of our convertible debt securities, the commercial success of EpiCeram®, successful testing of the Ceragenin™ technology and global market and economic conditions. If funding is not available when needed, or is available only on unfavorable terms, meeting our capital needs or otherwise taking advantage of business opportunities may become challenging, which could have a material adverse effect on our business plans.

~~Until November 2007,~~CERTAIN weEVENTS ~~did~~AND ~~not~~RESULTS ~~record~~OF revenue. During 2008, we commenced manufacturing (through a contract manufacturer) and shipment of EpiCeram® to DRL under the terms of the DRL Agreement. This has required us to expand our activities to include those related to procurement of raw materials, providing oversight of the third party manufacturer(s), managing the quality control and shipment processes, and billing and collection activities related to product shipments. Accordingly, during the three months ended September 30, 2008, we exited the “development stage” for financial reporting purposes.OPERATIONS

During ~~2007 and 2008~~2009, we announced the following significant events:

In ~~January~~February ~~2007~~2009, we ~~announced that~~entered ~~researchers~~into ~~at the University of Utah selected Cerashield™ as the product~~an itexclusive ~~planned~~distribution toand ~~test~~supply ~~pursuant~~agreement ~~to government grants to help find ways to reduce infections associated~~ with ~~artificial~~Hyphens ~~limbs.~~Marketing & ~~This~~Technical ~~testing~~Services ~~was completed in February 2009~~PTE. ~~The~~ ~~small,~~LTD ~~pilot study~~(“Hyphens”), ~~demonstrated~~to ~~that Cerashield™~~commercialize ~~treated~~EpiCeram® ~~surgical screws did not have any adverse biological,~~in ~~histological~~Singapore, ~~or hematological effects on bone tissue healing or remodeling compared to untreated screws. However~~Malaysia, ~~given~~ the ~~small~~Philippines, ~~number of animals (n=2)~~Vietnam, ~~the~~Indonesia ~~study~~and ~~did not allow for extended interpretations or provide statistically conclusive data~~Brunei.

In March 2007, we announced the development of a prototype contact lens disinfectant solution that demonstrated the ability to virtually eradicate the bacterial and fungal strains that the FDA specifies for testing pursuant to its published guidance document in in vitro testing. Given our focus on antimicrobial coatings, we currently do not view this as a strategic application and will not pursue further development in the foreseeable future.27

InTable ~~March 2007,~~of ~~we announced that Ceragenin™ treated hemodialysis catheters were able to virtually prevent bacterial colonization in a 21 day in vitro study.~~Contents

In ~~April 2007, we announced~~ the ~~results~~fourth ofquarter ~~the multicenter study comparing the efficacy~~ of ~~EpiCeram®~~ to2009, ~~Cutivate~~we inshipped ~~patients~~product ~~with moderate~~ to ~~severe~~Hyphens ~~eczema~~under this agreement. ~~The~~Hyphens ~~study~~has ~~found~~advised ~~that~~us ~~there was no~~that ~~statistically~~they ~~significant~~expect ~~difference~~to ~~between~~launch EpiCeram® ~~and Cutivate®~~ in ~~treating~~ the ~~symptoms~~second ~~associated~~quarter ~~with eczema after 28 days~~ of ~~therapy~~2010.

In ~~April~~February ~~2007~~2009, we ~~announced~~ ~~that~~entered weinto ~~had~~an exclusive ~~begun~~distribution ~~enrolling~~and ~~patients~~supply inagreement awith ~~multicenter~~Pediapharm ~~pediatric clinical~~Inc. ~~study designed~~ (“Pediapharm”), to ~~assess~~commercialize ~~the efficacy of~~ EpiCeram® ~~compared~~in toCanada. ~~Elidel®,~~During the ~~leading~~fourth ~~topical~~quarter ~~immunosuppressant~~of ~~prescribed for treating patients with mild-to-moderate eczema. The randomized~~2009, ~~double~~we ~~blind~~shipped ~~study~~product ~~was~~ to ~~consist~~Pediapharm ~~of 50 to 100 children between the ages of 2~~ and ~~18 years. Study enrollment~~ ~~was~~they ~~terminated~~launched atcommercialization ~~38 patients as the rate of enrollment at the two sites did not anticipate timely~~activities.

28In March 2009, the National Institutes of Health (“NIH”) awarded a $1.66 million grant to the University of Utah to fund research evaluating a Cerashield™ coating to reduce orthopedic implant infections. The grant will fund preclinical evaluation of orthopedic implants coated with CSA-13, the active ingredient in Cerashield™ coatings.

~~Table~~In April 2009, we entered into a Joint Development Agreement (“JDA”) with MAST BioSurgery Inc. (“MAST”) for the development of ~~Contents~~one or more new surgical products incorporating our CeraShield™ antimicrobial technology. Under the terms of the JDA, MAST has exclusive rights to develop specified products and negotiate commercialization terms for such products through June 2010, as extended.

~~completion~~In ofMay 2009, ~~the~~we ~~full~~entered ~~cohort~~into ofan ~~patients. The~~exclusive ~~study~~evaluation ~~demonstrated~~and ~~that there~~option ~~were~~to nolicense ~~statistically~~agreement ~~significant~~with ~~differences~~a ~~between~~global, multi-billion ~~the~~dollar ~~groups~~healthcare ~~treated with~~company ~~EpiCeram®~~covering ~~compared~~the touse ~~those~~of ~~treated~~our ~~with~~Cerashield™ antimicrobial ~~Elidel®~~technology asfor ~~measured~~a byspecific ~~EASI (Eczema~~medical ~~Area~~device ~~and~~associated ~~Severity~~with ~~Index)~~a ~~scores~~high incidence atof ~~Day~~hospital 28acquired infections. ~~There~~ ~~was~~For acompetitive ~~statistically~~reasons, ~~significant~~neither the ~~difference~~name inof ~~median~~the ~~EASI~~company ~~score~~nor ~~reduction~~the atprecise ~~Week~~area 2of ~~with~~interest ~~the~~was ~~Elidel®~~publicly ~~group~~disclosed. ~~showing~~Under ~~faster~~the ~~improvement~~terms atof ~~this~~the ~~timepoint. Both~~agreement, ~~EpiCeram®~~the ~~and~~company ~~Elidel®~~has ~~produced~~an ~~significant~~exclusive ~~relief~~period ~~from itching~~to ~~after~~evaluate, 28negotiate ~~days~~commercialization ofterms ~~treatment~~and ~~with~~license nothe ~~statistically~~specified ~~significant~~product application ~~difference~~through ~~between the~~April 2010, ~~two~~as ~~products~~extended.

In ~~June~~May ~~2007~~2009, we entered into an ~~announced~~exclusive ~~that~~distribution ~~the~~and ~~FDA’s~~supply ~~Office~~agreement ofwith ~~Combination~~Davi ~~Products,~~II in- ~~response~~Farmaceutica toS.A., a ~~formal~~Portuguese ~~request~~company, ~~had~~(“Davi ~~determined~~“), ~~that~~to ~~the~~commercialize ~~primary~~EpiCeram® ~~mode~~in ofEurope. Davi ~~action~~has ~~for~~advised ~~an antimicrobial~~us ~~wound dressing~~ that ~~was~~they ~~under~~expect ~~development by~~ the ~~Company was that~~ offirst acountry ~~device~~launch ~~and~~to ~~would~~occur bein ~~assigned to~~ the ~~FDA’s~~third ~~Center~~quarter ~~for Devices and Radiologic Health (“CDRH”) for lead review upon filing~~ of ~~a PMA~~2010.

In July ~~2007~~2009, we ~~announced~~ ~~that~~entered ~~researchers~~into ~~at the University of Pennsylvania in collaboration~~an ~~with~~exclusive ~~Dr. Paul~~evaluation B.and ~~Savage~~option ofto ~~Brigham~~license ~~Young~~agreement ~~University,~~with ~~had~~Nobel ~~demonstrated~~Biocare ~~in a~~(“Nobel”), ~~series of in vitro experiments that CSA-13 shows promise as~~ a ~~potential~~world ~~therapy to~~leader ~~treat~~in ~~multidrug~~innovative ~~resistant~~restorative ~~Pseudomonas~~and ~~aeuroginosa~~esthetic ~~infections~~dental ~~which~~solutions. ~~are a~~Under ~~leading~~terms ~~cause~~ of ~~morbidity~~the ~~and~~agreement, ~~mortality~~Nobel inwill ~~patients~~have ~~with~~an ~~cystic~~exclusive ~~fibrosis. However,~~period ~~given~~to ~~our focus on antimicrobial coatings~~evaluate, negotiate wecommercialization ~~currently~~terms doand ~~not~~license ~~view~~Cerashield™ ~~this~~for ascertain aoral ~~strategic application~~ and ~~will not~~ ~~pursue~~cranial ~~further~~maxillofacial ~~development~~applications inthrough ~~the~~October 6, ~~foreseeable future~~2010.

In ~~November~~July ~~2007~~2009, we entered into an ~~announced~~exclusive ~~that~~distribution weand ~~had~~supply ~~entered~~agreement ~~into~~with Megapharm Ltd., an Israeli company, (“Megapharm”), to commercialize EpiCeram® in Israel and the Palestinian ~~DRL~~territories. We ~~Agreement~~expect Megapharm to launch EpiCeram® in the latter half of 2010.

In ~~November~~August ~~2007~~2009, ~~the holders~~we ofannounced ~~the~~that pre-clinical ~~convertible~~testing ~~notes~~of ~~that~~a wesilicone ~~sold~~medical indevice ~~November 2005~~incorporating ~~agreed~~our toCeraShield™ ~~extend~~antimicrobial ~~the~~technology ~~maturity~~demonstrated ~~date~~224 days of ~~the~~continuous ~~notes~~antimicrobial efficacy ~~from~~in ~~November 28,~~preventing ~~2007~~bacterial tocolonization ~~June 30, 2008~~in an in ~~exchange~~vitro ~~for~~test ~~increasing~~using ~~their~~a ~~principal~~fresh inoculum ~~balance~~of byat ~~10%~~least ~~($282~~1,~~017). See~~000 ~~further~~colony ~~discussion~~forming inunits ~~the~~per ~~Notes~~ml ~~to Consolidated~~of ~~Financial~~E. ~~Statements~~coli ~~included~~on ~~elsewhere~~a daily basis in ~~this~~artificial ~~Form 10-K~~urine.

In ~~November~~September ~~2007~~2009, ~~the holders~~we ofannounced that the ~~2006~~NIH ~~Debentures~~awarded ~~agreed~~a $2.87 million grant to ~~extend~~fund ~~commencement~~the pre-clinical development of ~~the~~a Ceragenin™ ~~monthly~~based oral drug to treat two common and potentially deadly ~~redemption~~gastrointestinal ~~payments~~infections: ~~from~~Clostrdium ~~December 1,~~difficile ~~2007~~and toShigella. ~~June 30~~The grant will fund the preclinical development, ~~2008~~formulation, intoxicology and cGMP scale up to ~~exchange~~1 ~~for~~kilogram ~~increasing~~of ~~their~~CSA-13. ~~principal~~The ~~balance~~research grant has been awarded to a consortium of research institutions led by ~~10%~~Brigham Young University (~~$500,000~~“BYU”)~~. See~~ ~~further~~and ~~discussion~~including inSRI International ~~the~~(Menlo ~~Notes~~Park, toCA), Southwest Research Institute (SwRI, San ~~Consolidated~~Antonio, ~~Financial~~TX) ~~Statements~~and ~~included~~McMaster ~~elsewhere~~University in(Hamilton, ~~this~~Ontario, ~~Form 10-K~~Canada).

InCritical ~~December 2007, we~~Accounting announced that researchers at the Eugene Appelbaum College of Pharmacy at the Wayne State University, in collaboration with JMI Laboratories Brigham Young University, had demonstrated in a series of in vitro experiments that CSA-13 showed rapid killing activity and synergistic activity with conventional antibiotics against multidrug resistant Pseudomonas aeuroginosa bacterial strains. P. aeuroginosa is a leading cause of morbidity and mortality in patients with pneumonia and other respiratory diseases.Policies

InWe ~~March 2008,~~have ~~we announced~~identified ~~that~~the wepolicies ~~had~~described ~~entered~~below ~~into~~as acritical ~~license~~to ~~agreement~~our ~~with~~business and ~~FirstPoint~~results ~~Biotech, Inc~~of operations. For further ~~(“FPBT”)~~discussion ~~for~~on the ~~development~~application of ~~CSA-54~~these and other ~~members~~accounting ofpolicies, ~~the~~see ~~Ceragenix™~~Note ~~family~~3 ofto ~~preclinical~~the ~~compounds~~consolidated ~~for~~financial ~~use~~statements ascontained ~~potential~~elsewhere ~~systemic~~in ~~and~~this ~~topical therapies~~Form 10-K. Our inreported results are impacted by the ~~treatment~~application of ~~and~~the ~~prevention~~following accounting policies, certain of ~~HIV~~which ~~and~~require ~~sexually~~management ~~transmitted~~to ~~diseases. Under~~make ~~terms~~subjective ofor ~~the~~complex ~~agreement,~~judgments. ~~FPBT~~These ~~has~~judgments ~~the~~involve ~~responsibility~~making toestimates ~~undertake~~about ~~clinical~~the ~~development~~effect anof dmatters ~~commercialization~~that ofare ~~these~~inherently ~~compounds~~uncertain ~~within~~and ~~the~~may ~~fields~~significantly impact quarterly or annual results of ~~use~~operations. ~~The~~For ~~agreement~~all ~~provides~~of ~~for~~these policies, ~~payment~~management ~~of milestones~~cautions ~~and~~that ~~royalties~~future toevents ~~Ceragenix.~~ rarely develop exactly as Asexpected, ofand the ~~date~~best ofestimates ~~this~~routinely ~~Report,~~require weadjustment. Specific ~~have~~risks ~~not~~associated ~~earned~~with ~~any~~these ~~payments~~critical accounting ~~from~~policies ~~FPBT under~~are described in the ~~agreement~~following paragraphs.

~~In April 2008, we~~Revenue announced that preclinical testing of Cerashield™ coated silicone urinary catheters demonstrated the ability to provide complete protection against E.Coli bacterial colonization for the entire duration of the 21 day study when challenged with daily inocula of 1,000 colony forming units of E. Coli.Recognition

InWe ~~September 2008,~~recognize ~~we announced~~revenue ~~that~~when wethere ~~had~~is ~~negotiated amendments with the holders of our convertible~~persuasive ~~debt~~evidence ~~securities~~that ~~which~~an ~~extended~~arrangement ~~the~~exists, ~~maturity~~when ~~dates~~title ofhas ~~such instruments to December 31~~passed, ~~2011. See~~ ~~further discussion in~~ the ~~Notes~~ toprice ~~Consolidated~~is ~~Financial~~fixed ~~Statements included elsewhere in this Form 10-K.~~

~~In October 2008, we announced that Promius Pharma, LLC, a wholly owned subsidiary of DRL, launched EpiCeram®.~~28

~~Critical Accounting~~Table ~~Policies~~of Contents

~~We have identified the~~or ~~policies~~determinable, ~~described~~and ~~below~~we asare ~~critical~~reasonably toassured ~~our~~of ~~business~~collecting ~~and~~the ~~results of~~resulting ~~operations~~receivable. ~~For~~Revenue ~~further~~arrangements ~~discussion on~~that ~~the~~include ~~application~~multiple ofdeliverables ~~these~~are ~~and~~divided ~~other~~into ~~accounting~~separate ~~policies,~~units ~~see~~of ~~Note~~accounting ~~3 to our~~if ~~audited~~the ~~financial~~deliverables ~~statements~~meet ascertain ofcriteria. To ~~and~~date, ~~for~~we ~~the~~have ~~years~~not ~~ended~~recognized ~~December 31, 2008~~product asrevenues ~~filed~~net onof ~~this~~revenue ~~Form 10-K.~~ reserves ~~Our~~such ~~reported~~as ~~results~~sales ~~are~~returns ~~impacted~~and byallowances ~~the~~as ~~application~~we ofhave ~~the~~not ~~following accounting policies~~experienced, ~~certain~~nor ofdo ~~which~~we ~~require management to make subjective or~~anticipate ~~complex~~experiencing, ~~judgments~~such returns. ~~These~~ In ~~judgments~~the ~~involve~~event ~~making~~that ~~estimates~~our ~~about~~future ~~the~~experience ~~effect~~with ofreturns ~~matters~~differs ~~that~~from ~~are~~our ~~inherently~~historical ~~uncertain~~experience, ~~and~~we ~~may~~will ~~significantly~~modify ~~impact~~our ~~quarterly~~revenue orrecognition ~~annual results of operations~~practice. ~~For~~This ~~all~~accounting ofpolicy ~~these~~for ~~policies,~~revenue ~~management~~recognition ~~cautions~~may ~~that~~have ~~future~~a ~~events~~substantial ~~rarely~~impact ~~develop~~on ~~exactly~~our asreported ~~expected,~~results and ~~the~~ ~~best~~relies on certain estimates ~~routinely~~that can require ~~adjustment. Specific~~difficult, ~~risks~~subjective ~~associated~~and ~~with~~complex ~~these critical~~judgments ~~accounting~~on ~~policies~~the part of management.

29For the year ended December 31, 2008, our sole source of revenue was the sale of EpiCeram® in the United States pursuant to the DRL Agreement. For the year ended December 31, 2009, sale of EpiCeram® under the DRL Agreement was our primary source of revenue, however, we also recognized revenue under the Canadian and Asian Agreements. We record (or will record) revenue under our supply and distribution agreements for EpiCeram® as follows:

~~Table~~Advance Fees — Certain of our agreements call for non-sales milestone payments based on the accomplishment of ~~Contents~~specific events including the launch of the product or regulatory approval. We believe that the payment of these fees and our continuing performance obligation related to supplying EpiCeram® are an integrated package. Accordingly, we record receipt of advance fees as deferred revenue and recognize revenue systematically over the periods that the fees are earned. We are recognizing revenue on a straight-line basis over the period of our performance obligations under these agreements which range from 15 to 20 years.

~~are~~Product ~~described~~Sales —We recognize revenue for product sales when title passes to our customers. Under certain agreements, the supply price of EpiCeram® includes a percentage of the net sales realized by our customers (as defined in the ~~following~~agreements) ~~paragraphs~~(“Net Sales Component Revenue”). We recognize Net Sales Component Revenue during the period our customers’ sales occur based upon reports provided by our customers, subject to minor true-up adjustments.

~~Revenue~~Net Sales Milestones — Certain agreements ~~Recognition~~provide for the payment of milestone payments based on cumulative net sales over the life of the agreement. We will recognize revenue from net sales milestones once the amount can be reliably estimated based upon reports provided by our customer or when our customer communicates to us that an additional milestone payment has been triggered if reliable estimates cannot be provided.

WeOther ~~recognize~~Nonrefundable ~~revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101 as modified by SAB No. 104, “Revenue Recognition in Financial Statements,” EITF Issue 00~~Fees -21 ~~“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), and SAB Topic 13A1.~~ We recognize revenue ~~when there~~from isnon ~~persuasive evidence that an arrangement exists, when title has passed,~~refundable ~~the~~up-front ~~price~~fees ison ~~fixed~~a orstraight-line ~~determinable,~~basis ~~and~~over ~~we are reasonably assured of collecting~~ the ~~resulting~~contractual ~~receivable. Revenue arrangements~~term ~~that include multiple deliverables are divided into separate units~~ of ~~accounting if~~ the ~~deliverables meet certain criteria. We will recognize product revenues net of~~ ~~revenue reserves which consist of allowances for discounts, returns, rebates and chargebacks~~arrangement. This accounting policy for revenue recognition may have a substantial impact on our reported results and relies on certain estimates that can require difficult, subjective and complex judgments on the part of management.

For the years ended December 31, 2008 and 2007, our sole source of revenue was the sale of EpiCeram® in the United States pursuant to the DRL Agreement. We record (or will record) revenue under the DRL Agreement as follows:Derivatives

~~Advance Fees~~Our —derivative ~~The~~instruments ~~DRL~~(including ~~Agreement~~certain ~~calls~~derivative ~~for~~instruments ~~non-sales~~embedded ~~milestone~~in other ~~payments~~contracts) ~~based~~are onrecorded in the balance sheet as either an asset or ~~accomplishment~~liability ofmeasured ~~certain~~at ~~events~~its ~~including~~fair ~~the~~value, ~~launch~~with ofchanges in the ~~product~~derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. We ~~believe~~value ~~that~~these derivative securities under the ~~payment~~fair value method at the end of ~~these~~each ~~fees~~reporting period (quarter), and ~~our~~ ~~continuing~~their ~~performance~~value ~~obligation~~is ~~related~~marked to ~~supplying~~market ~~EpiCeram®~~at ~~are~~the anend of each ~~integrated~~reporting ~~package~~period with the gain or loss recorded against earnings. ~~Accordingly,~~We ~~we record~~continue ~~receipt~~to ofrevalue ~~advance~~these ~~fees~~instruments aseach quarter ~~deferred~~to ~~revenue~~reflect ~~and~~their ~~recognize~~current ~~revenue systematically~~value ~~over~~in light of the ~~periods~~current ~~that~~market ~~the~~price ~~fees~~of our ~~are~~common ~~earned~~stock. We ~~are~~utilize ~~recognizing~~the Black-Scholes ~~revenue~~option-pricing onmodel ato ~~straight~~estimate fair value. Key assumptions of the Black-~~line~~Scholes ~~basis~~option-pricing ~~over~~model ~~the~~include ~~period~~applicable ofvolatility ~~our~~rates, ~~performance~~risk-free ~~obligations~~interest rates ~~under~~and the ~~DRL~~instrument’s ~~Agreement~~expected remaining life. These assumptions require significant ~~(20~~management ~~years)~~judgment.

~~Product Sales~~Share-Based — Our supply price under the DRL Agreement consists of two components; (i) our cost of producing EpiCeram® (the “Cost Component”) and (ii) a percentage of EpiCeram® “net sales” (as defined in the DRL Agreement) (the “Net Sales Component”). We recognize revenue for the Cost Component when title passes to DRL (upon delivery) subject to certain true up adjustments as provided for in the DRL Agreement. We recognize the Net Sales Component once the amount can be reliably estimated based upon reports provided by DRL or when payment is received if reliable estimates cannot be provided.Payments

~~Net~~We ~~Sales Milestones~~account —for ~~The~~stock ~~DRL~~option ~~Agreement~~compensation ~~provides~~costs ~~for~~at fair value on the ~~payment~~date of ~~milestone~~ ~~payments~~grant ~~based~~and onrecognition ~~cumulative~~of ~~net~~compensation ~~sales~~ over the service ~~life~~period offor awards expected to vest, using the modified prospective ~~agreement~~method. We The estimation of stock awards that will ~~recognize~~ultimately ~~revenue~~vest requires ~~from~~judgment, ~~net~~and ~~sales~~to ~~milestones~~the ~~once~~extent ~~the~~actual ~~amount~~results ~~can~~differ from our estimates, such amounts will be ~~reliably~~recorded ~~estimated~~as ~~based~~a ~~upon reports~~cumulative ~~provided~~adjustment byin ~~DRL~~the orperiod ~~when~~estimates ~~DRL~~are revised. ~~communicates~~We toconsider usvarious ~~that~~factors anwhen ~~additional~~estimating ~~milestone~~expected forfeitures, ~~payment~~including ~~has~~historical ~~been~~experience. ~~triggered~~Actual ifresults ~~reliable~~may ~~estimates~~differ ~~cannot~~substantially befrom these ~~provided~~estimates.

~~Derivatives~~We determine the fair value of stock options granted to employees and directors using the Black-Scholes valuation model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised. Had we made different assumptions about our stock price volatility or the estimated time option and warrant grants will be outstanding before they are ultimately exercised, the related stock based compensation expense and our net loss and net loss per share amounts could have been significantly different in 2009 and 2008.

We follow the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with related interpretations EITF No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”) and EITF No. 05-2 “The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19” (“EITF 05-2”). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. We value these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked to market at the end of each reporting period with the gain or loss recognition recorded against earnings. We continue to revalue these instruments each quarter to reflect their current value in light of the current market price of our common stock. We utilize the Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.29

~~Share-Based Payments~~Table of Contents

WeYEAR ~~account~~ENDED ~~for~~DECEMBER ~~stock option compensation in accordance with SFAS No. 123 (revised)~~31, ~~“Share-Based Payment”~~2009 ~~(“SFAS~~COMPARED ~~123R”). SFAS No. 123R requires~~TO ~~measurement~~YEAR ofENDED ~~compensation~~DECEMBER ~~cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest~~31, using the modified prospective method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.2008

30Revenue

~~Table~~For the years ended December 31, 2009 and 2008, revenue consists of ~~Contents~~the following components:

We determine the fair value of stock options granted to employees and directors using the Black-Scholes valuation model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised. Had we made different assumptions about our stock price volatility or the estimated time option and warrant grants will be outstanding before they are ultimately exercised, the related stock based compensation expense and our net loss and net loss per share amounts could have been significantly different, in 2008 and 2007.

	2009		2008
Product revenue	$	1,840,285	$	642,037
Milestone recognition	258,020		114,187
Other	8,000		—
	$	2,106,305	$	756,224

~~YEAR~~The ~~ENDED~~increase ~~DECEMBER~~in revenue between years is primarily the result of a complete year of EpiCeram® sales in the United States during the year ended December 31, 2009 compared to a partial year for the year ended December 31, 2008. EpiCeram® ~~COMPARED~~was TOlaunched ~~YEAR~~in ~~ENDED~~the ~~DECEMBER~~United 31States in late September 2008. Further, ~~2007~~during the fourth quarter of 2009, we commenced shipment of EpiCeram® to Canada and certain Southeast Asian countries which also contributed to the increase in revenue between years.

~~Revenue~~Cost of Goods Sold

For the years ended December 31, 2009 ~~2008~~ and ~~2007~~2008, ~~our~~cost ~~sole source~~ of ~~revenue~~ ~~was~~goods ~~the~~sold ~~DRL~~as ~~Agreement. Revenue consists~~a percentage of ~~the~~revenue ~~following~~was ~~components~~as follows:

	2008			2007
	2009		2008
Product revenue	$	642,037		$	—
	60.5	%	73.9	%
Milestone recognition	114,187			9,375
	$	756,224		$	9,375

~~Cost~~The reduction in cost of ~~Goods~~goods ~~Sold~~sold as a percentage of revenue between periods is primarily the result of (1) an increase in the proportion of EpiCeram® Net Sales Component revenue which has no associated cost and (2) the introduction of international revenue during 2009 which had a higher gross margin associated with it than domestic revenue.

~~For~~Licensing ~~the~~Fees ~~year~~and ~~ended December 31, 2008, cost of goods sold was $558,857 compared to $0 for 2007.~~Royalties

~~Licensing~~We pay licensing fees and ~~Fees~~royalties under separate license agreements with two entities: The Regents of the University of California (for Barrier Repair technology) and ~~Royalties~~Brigham Young University (for Ceragenin™ technology). For the years ended December 31, 2009 and 2008, licensing fees and royalties were as follows:

We pay licensing fees and royalties under separate license agreements with two entities: The Regents of the University of California (for Barrier Repair technology) and Brigham Young University (for Ceragenin™ technology). For the years ended December 31, 2008 and 2007, licensing fees and royalties were as follows:

	2009		2008
Ceragenin™ Technology	$	290,000	$	206,667
Barrier Repair Technology	92,014		36,269
	$	382,014	$	242,936

	2008		2007
Ceragenin™ Technology	$	206,667	$	140,000
Barrier Repair Technology	36,269		25,000
	$	242,936	$	165,000

The increase in fees paid for the Ceragenin™ technology is the result of an increase in the minimum amount due under the Brigham Young University license agreement during 2009. The increase in Barrier Repair technology royalties is due to the increase in product revenue between years.

~~The~~Research ~~increase~~and in fees paid for the Ceragenin™ technology is the result of an increase in the minimum amount due under the Brigham Young University license agreement during 2008. The increase in Barrier Repair technology royalties is the result of the launch of EpiCeram® during 2008.Development

Research and development expense was approximately the same for the years ended December 31, 2009 and ~~Development~~2008. Our ability to conduct research and development activities is greatly dependent upon our financial resources. Because of our limited financial resources, we do not expect to incur significant research and development costs during 2010. In order to develop Cerashield™ and NeoCeram® in a more timely manner, we will require additional financial resources. No assurance can be given that necessary additional financing will be available on terms acceptable to us, if at all. If adequate additional funds are not available when required, we may have to delay, scale-back or eliminate certain aspects of our research, testing and/or development activities.

~~Research~~General and development expense for the year ended December 31, 2008, decreased by $490,352 or approximately 68% compared to the year ended 2007. The decrease is the result of two clinical trials that took place during 2007 for EpiCeram®. There were no comparable clinical trials during 2008. Our ability to conduct research and development activities is greatly dependent upon our financial resources. Because of our limited financial resources, we do not expect to incur significant research and development costs during 2009. In order to develop Cerashield™ and NeoCeram™ in a more timely manner, we will require additional financial resources. No assurance can be given that necessary additional financing will be available on terms acceptable to us, if at all. If adequate additional funds are not available when required, we may have to delay, scale-back or eliminate certain aspects of our research, testing and/or development activities.Administrative

General and administrative expenses for the year ended December 31, 2009, decreased by $1,167,891 or approximately 25% compared to the year ended December 31, 2008. The decrease in expense between years was primarily due to decreases in bonuses, stock compensation, investor relations, legal, and ~~Administrative~~travel and entertainment expenses. There were no bonuses awarded during 2009. Stock compensation expense decreased as the result of certain stock options issued in prior years becoming fully vested during 2008 combined with no new grants during 2009. Investor relations expense decreased primarily due to a reduction in stock compensation expense related to investor relations services combined with a reduction in monthly cash retainers paid for these services. Legal and travel expenses decreased as a result of our focus on reducing such expenditures.

General and administrative expenses for the year ended December 31, 2008, increased by $380,912 or approximately 9% compared to the year ended 2007. The increase in expense between years was primarily due to increases in legal and compensation related costs.30

~~Loss~~Table ~~from Operations~~of Contents

AsLoss ~~a result of the factors described above, the loss~~ from ~~operations for the year ended December 31, 2008 decreased by $219,496 compared to 2007.~~Operations

As a result of the factors described above, the loss from operations for the year ended December 31, 2009 decreased by $1,670,995 compared to the year ended December 31, 2008.

~~Table of~~Other ~~Contents~~Expense

Other Expense expense for the year ended December 31, 2009 increased by $3,746,055 compared to the year ended December 31, 2008. The increase in other expense between years is the net result of recording a loss on fair value of derivative liabilities during 2009 compared to a gain during 2008, partially offset by a reduction in interest expense during 2009 compared to 2008. Included in interest expense for the year ended December 31, 2008, are charges for recording the fair value of consideration paid to the holders of our convertible debt securities in exchange for amending the terms of the debt.

~~Other~~Net expense for the years ended December 31, 2008 and 2007 was approximately the same. This was the net result of an increase in interest expense between years offset by an increase in the gain on value of derivative liabilities.Loss

~~Net~~As ~~Loss~~a result of the factors described above, the net loss for year ended December 31, 2009 increased by $2,075,060 compared to the year ended December 31, 2008.

AsPreferred aStock ~~result of the factors described above, the net loss for year ended December 31, 2008 decreased by $227,885 compared to the prior year.~~Dividends

~~Preferred~~We did not record preferred stock dividends during the year ended December 31, 2009 as a result of the conversion of Series A Preferred Stock ~~Dividends~~into common shares during the second quarter of 2008. Preferred stock dividends were $80,000 for the year ended December 31, 2008.

~~Preferred~~Loss ~~stock~~Attributable ~~dividends for the year ended December 31, 2008 decreased by $160,000 compared~~ to ~~2007. The~~ ~~decrease~~Common ~~in dividends between years is the result of the conversion of Series A Preferred Stock into common shares during 2008.~~Shareholders

~~Loss~~As a result of the factors described above, ~~Attributable~~the loss attributable to ~~Common~~common ~~Shareholders~~shareholders increased by $1,995,060 for the year ended December 31, 2009 compared to the year ended December 31, 2008.

AsHistorical aCash ~~result of the factors described above, the loss attributable to common shareholders decreased by $387,885 for the year ended December 31, 2008 compared to the prior year.~~Flows

~~LIQUIDITY~~Operating ~~AND CAPITAL RESOURCES~~Activities

~~Raising~~As ~~sufficient capital~~of toDecember 31, ~~fund our business activities has historically been~~2009, ~~and~~we ~~continues to~~had be$104,442 ~~our~~of ~~most~~cash ~~significant~~and ~~challenge~~cash equivalents. ~~Typically,~~During wethe ~~have~~year ~~never~~ended ~~had~~December 31, ~~more~~2009, ~~than~~$445,360 ~~12 to 15 months~~ of cash onwas ~~hand~~used atin ~~any~~operating ~~given~~activities ~~time~~compared ~~and~~to ~~often~~$1,574,156 weused ~~have~~in ~~had~~the ~~much~~year ~~less~~ended December 31, 2008. The ~~costs~~decrease ~~and~~in ~~time~~cash ~~associated~~used ~~with~~in ~~developing~~operating aactivities ~~technology~~between ~~into~~years anis ~~FDA~~the ~~cleared~~result ~~medical~~of ~~device~~a ordecrease ~~new~~in ~~drug~~the isCompany’s ~~substantial. Because~~cash ofoperating ~~our~~loss ~~limited capital~~which ~~resources~~ we ~~have~~define ~~not been able to advance development of our technologies~~ as ~~broadly~~the ornet asloss ~~rapidly~~adjusted asfor ~~otherwise~~all ~~possible with greater~~non-cash ~~resources~~items. ~~Our capital resource constraints have also impacted our business strategy as follows:~~

~~· We~~Investing ~~are focusing our development efforts on products that can be regulated as medical devices instead of new drugs;~~Activities

~~· We~~During ~~plan~~the ~~to commercialize~~year ~~our~~ended ~~products~~December 31, 2009, ~~primarily~~there ~~through~~was ~~out-license~~no ~~and/or~~cash ~~supply~~used ~~and distribution~~in ~~agreements~~or ~~with~~provided ~~third~~by ~~parties~~investing ~~instead~~activities. As of ~~fielding~~December 31, an2009, ~~internal~~we had no ~~sales~~material ~~force;~~commitments ~~and~~for capital expenditures.

~~· We~~Financing ~~are willing to enter into out-license agreements or collaboration arrangements at early stages of development.~~Activities

~~While~~During ~~this~~the ~~strategy~~year ~~will~~ended December 31, ~~serve~~2009, to$64,655 ~~reduce the amount~~ of ~~capital~~cash ~~required~~was byused ~~the~~in ~~Company,~~financing itactivities ~~also~~primarily ~~may~~representing ~~serve~~principal topayments ~~limit~~made ~~the~~to ~~value~~Osmotics weunder ~~create~~a ~~for~~promissory ~~our~~note ~~shareholders from our technologies~~agreement.

~~Our~~LIQUIDITY ~~ability~~AND toCAPITAL ~~raise additional capital is constrained by the following factors related to our capital structure and market for our common stock:~~RESOURCES

~~· The~~Our ~~existence~~consolidated financial statements for 2009 have been prepared on a going concern basis, which contemplates the realization of assets and ~~terms~~the settlement of ~~our~~liabilities ~~convertible~~and commitments ~~debt~~in ~~securities~~the ~~(see~~normal ~~discussion~~course ~~provided~~of ~~under Note~~business. 5 The toReport of our ~~audited~~Independent Registered Public Accounting Firm on our consolidated financial statements ~~included~~as ~~elsewhere~~of inand ~~this~~for ~~Form~~each of the years ended December ~~10-K)~~31, ~~contain~~2009 and 2008, includes a ~~number~~“going ofconcern” ~~provisions~~emphasis ~~which~~paragraph ~~many~~describing ~~new~~that conditions ~~investors~~exist ~~may~~that ~~find~~raise ~~problematic including~~substantial doubt about the ~~following:~~Company’s ability to continue as a going concern.

~~· The~~Raising ~~conversion~~sufficient capital ~~price~~to offund ~~the~~our ~~debt~~business ~~and~~activities ~~warrants~~has ishistorically been, and continues to be, ~~adjusted~~our most ~~downward~~significant ~~under~~challenge. Typically, we ahave ~~number~~never had more than 12 to 15 months of cash on hand at any given time ~~circumstances~~and ~~which~~often ~~creates~~we ~~uncertainty~~have ~~for~~had much less. The costs and time associated with developing a technology into an FDA cleared medical device or new ~~investors;~~drug is substantial. Because of our limited capital resources we have not been able to advance development of our technologies as broadly or as rapidly as otherwise possible with greater resources. Our capital resource constraints have also impacted our business strategy as follows:

· We are required to utilize a significant portion of our future revenue streams to service and retire debt. New investors would likely prefer that these cash flows be retained by the Company to defray or fund our operating costs;31

~~· As~~Table of December 31, 2008, there were 20,218,618 common shares underlying the conversion of the debt and exercise of warrants held by the debtholders. This represents a significant overhang and creates uncertainty for new investors;Contents

· ~~There~~ We are focusing our ~~several~~development ~~circumstances~~efforts inon ~~which~~products wethat ~~would~~can be ~~required~~regulated toas ~~obtain~~medical ~~approval from the~~devices ~~debtholders~~instead inof ~~order~~new ~~to execute a future funding transaction~~drugs; ~~and~~

· ~~Any,~~ We orplan ~~all,~~to ofcommercialize our ~~these~~products ~~provisions~~primarily ~~could~~through ~~result~~out-license ~~in a new investor seeking a waiver,~~ and/or ~~permanent amendment,~~supply toand ~~the debt~~ distribution agreements inwith ~~order~~third toparties ~~consummate~~instead aof ~~funding transaction. There~~fielding isan nointernal ~~assurance~~sales ~~that the~~force; ~~debtholders would agree to a waiver or any change to the terms of the debt agreements.~~and

· ~~The~~ We ~~overhang~~are ~~of 12,004,569~~willing ~~shares~~to ofenter ~~our common stock held by Osmotics for exchange with their~~into ~~shareholders~~out-license ~~and~~agreements ~~debtholders~~or ~~creates~~collaboration ~~uncertainty~~arrangements ~~for~~at ~~new~~early ~~investors~~stages ~~particularly~~of ~~as to how the market for our common stock~~ development.

32While this strategy will serve to reduce the amount of capital required by the Company, it also may serve to limit the value we create for our shareholders from our technologies.

~~Table~~Our ofability ~~Contents~~to raise additional capital is constrained by the following factors related to our capital structure and market for our common stock:

~~will~~· The beexistence ~~impacted when~~and ~~that~~terms ~~exchange~~of our ~~transaction~~convertible ~~takes~~debt ~~place~~securities (see discussion provided ~~above~~ under Note 5 to the ~~Risk~~consolidated ~~Factors~~financial statements “Aincluded ~~substantial~~elsewhere in this Form-10K) contain a number of provisions ~~our~~which ~~outstanding common~~many ~~shares~~new ~~are~~investors ~~controlled~~may byfind ~~one~~problematic ~~shareholder”);~~including the following:

· The ~~recent trading~~conversion price of ~~our~~the debt ~~common~~and ~~stock~~warrants is atto orbe ~~near~~adjusted andownward ~~all~~under ~~time~~a ~~low~~number ~~creating~~of ~~the~~circumstances ~~following~~which ~~issues:~~creates uncertainty for new investors;

· ~~Any~~ We ~~transaction at~~are orrequired ~~near~~to ~~market~~utilize ~~price~~a significant ~~would~~portion ~~result~~of inour anfuture ~~adjustment~~revenue streams to ~~the~~service ~~conversion~~and ~~price~~retire ofdebt. New ~~the~~investors ~~convertible~~would ~~debt~~likely ~~securities~~prefer that ~~and~~these ~~warrants~~cash ~~resulting~~flows inbe ~~immediate substantial~~retained ~~dilution~~by tothe ~~our~~Company ~~current~~to ~~shareholders~~defray ~~and~~or ~~new~~fund ~~investors;~~our operating ~~and~~costs;

· We As ~~would~~of ~~likely~~December 31, ~~have~~2009, tothere ~~issue~~were a21,032,725 ~~number~~common of shares ~~that~~underlying ~~would/could~~the ~~result~~conversion inof the ~~new investors~~debt ~~owning~~and aexercise ~~significant percentage~~ of ~~our~~warrants ~~common~~held ~~shares,~~by ifthe ~~not~~debt ~~result in a change of control~~holders. ~~Many~~This ~~investors~~represents ~~do not want, or are prohibited from, owning such~~ a significant ~~percentage~~overhang ofand creates anuncertainty ~~investee.~~for new investors;

· ~~Recent interpretations~~ Under ofmost ~~Rule 415(a)(1)(x) by~~circumstances, ~~the SEC have limited the number of shares of common stock that~~ we ~~can register for new investors that~~ ~~are~~would ~~sold~~be ~~pursuant~~required to ~~private~~obtain ~~placement~~approval ~~transactions. Until~~from ~~such time that Osmotics completes its planned exchange transaction,~~ the ~~shares~~debtholders ~~they hold~~ in ~~escrow~~order ~~are~~to ~~excluded~~execute ~~from~~a ~~our~~future ~~float~~funding ~~for purposes of Rule 415 calculations which further exacerbates this limitation~~transaction; and

· ~~The~~ Any, ~~average trading~~or ~~volume~~all, of ~~our~~these provisions ~~common~~could ~~stock~~result onin ~~the~~a ~~OTC~~new ~~Bulletin~~investor ~~Board~~seeking isa ~~not significant. Our~~waiver, ~~common~~or ~~stock is subject~~permanent amendment, to ~~rules adopted by~~ the ~~SEC~~debt ~~regulating~~agreements ~~broker dealer practices~~ in ~~connection~~ ~~with~~order ~~transactions in “penny stocks.” These rules make it more difficult~~ to ~~buy~~consummate ~~and sell shares of our common stock. Additionally, we have~~ a ~~limited~~ ~~public float which has also contributed to the limited trading~~funding ~~volume~~transaction. ~~Further,~~There ~~many~~is ~~retail~~no ~~investors will~~assurance ~~not, and many institutional investors cannot, invest in stocks~~ that ~~trade~~ on the ~~OTC~~debtholders ~~Bulletin~~would ~~Board. Investors typically~~agree ~~want~~ to bea ~~assured~~waiver ~~that~~or ~~they~~any ~~can~~change ~~sell~~to ~~their~~the ~~shares~~terms of ~~common stock without adversely impacting~~ the ~~market for such common stock and we currently~~debt ~~cannot provide such assurances~~agreements.

~~All~~· The existence of ~~the~~12,004,569 shares ~~above~~of ~~factors~~our common stock held by Osmotics for exchange with their ~~serve~~shareholders toand ~~limit~~debtholders ~~the~~creates ~~number~~uncertainty offor ~~potential~~new investors ~~available~~particularly as to how the ~~Company. We~~market dofor ~~not~~our ~~see~~common ~~these~~stock ~~conditions~~will ~~changing~~be inimpacted when that exchange ~~the~~transaction ~~near~~takes ~~term.~~place;

~~Operating~~· The ~~Activities~~recent trading price of our common stock is below the conversion price of the convertible debt creating the following issues:

As· Any oftransaction ~~December 31, 2008,~~at weor ~~had $614,457 of cash and cash equivalents. During the year ended December 31, 2008,~~near ~~$1,574,156~~market ofprice ~~cash~~would ~~was~~result ~~used~~ in ~~operating~~an ~~activities~~adjustment ~~compared~~ to ~~$2,799,664 being~~the ~~used~~conversion inprice ~~2007. The~~of ~~decrease in cash~~the ~~used~~convertible indebt ~~operating~~securities ~~activities~~and ~~between~~warrants ~~years~~(unless iswaived ~~the~~by ~~result of an increase in non-sales milestones received under~~ the ~~DRL~~existing ~~Agreement during 2008 partially~~debt ~~offset~~holders) byresulting ~~an increase~~ in ~~use~~immediate ofsubstantial ~~working~~dilution ~~capital. We~~to ~~expect that~~ our ~~manufacturing obligations~~current ~~under~~shareholders ~~the DRL Agreement will result in an increasing near-term~~ and ~~long-term use~~new ofinvestors; ~~working capital compared to our historical operations.~~and

~~Investing~~· We would likely have to ~~Activities~~issue a number of shares that would/could result in the new investors owning a significant percentage of our common shares, which may result in a change of control. Many investors do not want, or are prohibited from, owning such a significant percentage of an investee.

~~During~~· Changes in the ~~year~~interpretation ~~ended~~of ~~December~~Rule ~~31,~~415(a)(1)(x) by ~~2008,~~the weSEC ~~used~~have ~~$7,577~~limited inthe ~~investing~~number ~~activities~~of ~~representing~~shares ~~certain capital expenditures. As~~ of ~~December 31, 2008,~~common westock ~~had~~that ~~no material commitments for capital expenditures.~~

~~Financing~~we can register for new ~~Activities~~investors that are sold pursuant to private placement transactions. Until such time that Osmotics completes its planned exchange transaction, the shares they hold in escrow are excluded from our float for purposes of Rule 415 calculations which further exacerbates this limitation; and

~~During~~· The average trading volume of our common stock on the ~~year~~OTC ~~ended~~Bulletin ~~December~~Board is not significant. Our common stock is subject to rules 31adopted by the SEC regulating broker dealer practices in connection with transactions in “penny stocks.” These rules make it more difficult to buy and sell shares of our common stock. Additionally, we have a limited public float ~~2008~~which has also contributed to the limited trading volume. Further, ~~$17~~many retail investors will not,~~464~~ ofand many ~~cash~~institutional ~~was~~investors ~~used~~cannot, invest in ~~financing~~stocks ~~activities~~that ~~primarily~~trade ~~representing~~on athe OTC ~~net~~Bulletin ~~loan~~Board. Investors typically want to ~~Osmotics~~be ~~during~~assured ~~2008.~~that they can sell their shares of common stock without adversely impacting the market for such common stock

We have two series of convertible debt instruments which may affect our future liquidity. For more information on the Convertible Notes and the Convertible Debentures, see the descriptions in Note 5 to our audited financial statements included elsewhere in this Form 10-K.32

~~Outlook~~Table of Contents

~~As of December 31, 2008, we had cash~~ and ~~cash equivalents of $614,457. As previously noted, in November 2007,~~ we ~~entered~~currently ~~into the DRL Agreement for the commercialization of EpiCeram® in the~~cannot ~~United~~provide ~~States. Upon~~such ~~execution of the DRL Agreement, we received $1,500,000~~assurances. Additionally, the DRL Agreement called for DRL to pay us certain non-sales based milestone payments upon the accomplishment of three specified events (the “Non-Sales Milestones”) of up to $3,500,000 which amount was inclusive of certain product launch specific considerations. As of December 31, 2008, we had received $2,500,000 in Non-Sales Milestone payments. Subsequent to December 31, 2008, we received the remaining $1,000,000 Non-Sales Milestone payment. Additionally, under the DRL Agreement, we can earn up to $21,250,000 in milestone payments based on cumulative net sales of EpiCeram® (the “Net Sales Milestones”). However, we did not earn any Net Sales Milestone payments during 2008 nor do we anticipate earning any payments during 2009.

33All of the above factors serve to limit the number of potential investors available to the Company. We do not see these conditions changing in the near term.

~~Table~~ We have two series of ~~Contents~~convertible debt instruments which may affect our future liquidity. For more information on the Convertible Notes and the Convertible Debentures, see the descriptions in Note 5 to our audited financial statements included elsewhere in this Form 10-K.

Additionally, as described further in Note 5 to our audited financial statements included elsewhere in this Form 10-K, during the quarter ended September 30, 2008, we negotiated amendments to our existing convertible debt securities (collectively the “Amended Convertible Debt Agreements”). These debt agreements were previously in technical default. Among other things, the Amended Convertible Debt Agreements extend the maturity date of the debt to December 31, 2011 and require that we make minimum quarterly payments to the holders commencing June 30, 2009 (the “Amended Amortization Schedule”) solely from the following revenue streams (the “Dedicated Revenue Streams”):Outlook

·As of ~~100%~~December 31, 2009, we had cash of ~~net~~$104,442. We ~~revenues~~believe ~~(as~~that ~~defined~~we can maintain a positive cash balance into April 2010 based on expected cash receipts and by delaying payments to certain vendors including those critical to our ability to manufacture EpiCeram® and the universities from which we have licensed our proprietary technologies. The Company will require additional funding by April 30, 2010 in order to remain a viable business. The Company has been actively pursuing funding alternatives and believes that it has reached an agreement in principal with a third party for a $3 million secured note (the ~~amendment~~“Note Transaction”). The ~~paid~~Company orbelieves ~~owed~~that the proceeds from the Note Transaction should be adequate to usfund ~~under~~the Company’s activities through the ~~DRL~~end ~~Agreement~~of ~~subsequent~~2010 and allow sufficient time for the Company to ~~April~~attempt 1to raise additional capital. However, ~~2009;~~in ·order ~~100%~~to consummate the Note Transaction, the holders of ~~net~~the ~~revenue~~Company’s ~~received~~convertible ~~from~~debt ~~any~~securities ~~other~~(the “Secured Creditors”) will be required to release certain liens related to the manufacture and sale of EpiCeram® ~~commercialization~~in ~~arrangements;~~the ·United ~~50%~~States. The ofCompany has been in active dialog with the ~~net~~Secured ~~revenue~~Creditors ~~received~~regarding ~~from~~this transaction but the ~~sale~~Secured ofCreditors ~~NeoCeram™;~~have not ·yet ~~33%~~agreed to the transaction. Additionally, the Company is aware of ~~any~~certain ~~net~~third ~~revenue~~parties ~~received~~(the ~~from~~“Third Parties”) ~~Ceragenin™~~who ~~commercialization~~are ~~arrangements;~~attempting ~~and~~to ·acquire ~~33%~~the of“Convertible ~~any~~Notes” ~~net~~(defined ~~revenue~~below) and ~~received~~the by“2006 usDebentures” (defined below”) in ~~excess~~order to consummate an effective acquisition of ~~$250,000~~the inCompany. Based ~~aggregate~~on the ~~excluding~~Company’s ~~any~~limited ~~capital~~understanding ~~raised~~of the proposal being made by the Third Parties, the Company’s ~~through~~Board ~~equity~~of ~~investment~~Directors orbelieves that it significantly undervalues the ~~issuance~~Company and it would not be in the best interest of the Company’s shareholders for such a transaction to be consummated. The Company believes that the efforts by these Third Parties to purchase the Company’s convertible debt from the Secured Creditors has served to delay and hinder its ability to execute the Note Transaction.

InThe ~~the~~Company ~~event~~is ~~that the~~in ~~Dedicated~~discussions ~~Revenue~~with ~~Streams~~several ~~are~~parties ~~insufficient~~regarding ~~to make~~ a ~~quarterly~~financing ~~interest~~transaction ~~payment~~that would infund ~~full,~~ the ~~only~~Company’s ~~remedies~~activities tobeyond ~~the~~2010 ~~holders~~and ~~are~~provide tofor ~~add~~ the ~~unpaid~~retirement ~~accrued interest~~of to the convertible ~~outstanding~~ debt ~~balance~~on orterms ~~receive~~the ~~shares~~Company ofbelieves ~~our~~are ~~common~~more ~~stock in~~favorable ~~lieu~~than ofthose being ~~cash~~proposed ~~payment. Additionally, in~~by the ~~event~~Third ~~that~~Parties to the ~~Dedicated~~Secured ~~Revenue~~Creditors. The ~~Streams~~Company ~~are~~is ~~not~~working ~~sufficient~~vigorously to demonstrate ~~make~~to the ~~cumulative~~ ~~payments~~Secured ~~required~~Creditors bythat the ~~Amended~~Company’s ~~Amortization~~strategy ~~Schedule~~is ~~with respect~~credible tobut ~~the 12-month periods ending June 30th~~ultimately, ~~then~~ the ~~only~~Secured ~~remedy~~Creditors towill ~~the holders~~make istheir toown ~~have~~determination. There ~~the~~is ~~conversion~~no ~~price~~assurance ofthat the ~~debt~~Company ~~and~~will be ~~exercise~~successful ~~price~~in ofconvincing ~~their warrants~~the ~~adjusted~~Secured ~~downward. See~~Creditors ~~Note~~to ~~5 for~~pursue athe ~~more~~plan ~~detailed discussion. Accordingly,~~being ~~until~~proposed ~~December 31,~~by ~~2011,~~ the ~~failure~~Company tonor ~~make~~is ~~scheduled~~there ~~interest~~any ~~and/or principal~~assurance ~~payments~~that inthe ~~full~~Company’s ~~does~~financing efforts ~~not~~will ~~provide~~be ~~the~~successful ~~holders~~assuming the ~~ability~~Secured Creditors consent to ~~declare~~ the ~~Company in default~~Note Transaction.

~~While~~As wea ~~believe~~result ~~that~~of the ~~Amended~~actions ~~Convertible~~taken ~~Debt Agreements are more favorable~~ to ~~the~~extend ~~Company~~its ~~than~~cash ~~the original convertible debt agreements~~balance, ~~there are a number of factors which could inhibit~~ the Company’s ~~ability~~is tocurrently ~~raise~~facing ~~additional capital. These may include, but are not necessarily~~the ~~limited~~following ~~to,~~risks ~~the~~and ~~following~~uncertainties:

· As ~~The presence~~ of $9December 31,~~087~~ 2009,~~525~~ ~~in secured convertible debt with most favored nation and other pricing protection; · The Dedicated Revenue Streams will reduce future cash flows retained by~~ the Company owed ~~for~~Brigham ~~operations;~~Young ·University 12(“BYU”) $339,~~004,569~~663 ~~shares~~in oflicense, ~~our~~maintenance ~~common~~and legal ~~stock~~fees ~~(or~~the ~~approximately~~majority ~~67%~~ of ~~our~~which ~~issued~~are ~~and~~delinquent. These ~~outstanding~~delinquent ~~shares)~~fees ~~are~~constitute ~~currently~~grounds ~~held~~for BYU into ~~escrow~~terminate ~~for~~the ~~Osmotics~~patent ~~Corporation~~sublicense ~~(“Osmotics”)~~agreement ~~awaiting~~between ~~exchange~~BYU ~~with~~and ~~its shareholders~~the Company. On ~~Osmotics~~April 7, ~~has~~2010, ~~advised~~BYU declared us ~~that it must complete its exchange transaction by November 2010~~ in ~~order~~breach ~~to preserve the tax free nature~~ of the ~~transaction;~~BYU ·license ~~Limitations~~with on30 ~~our~~days ~~ability~~ to ~~register~~cure ~~common~~the ~~shares~~breach. A ~~and~~loss ~~common shares underlying convertible debt securities sold in private placement transactions; · Our lack~~ of anthe ~~operating~~BYU ~~history~~license ~~and~~would ~~profitable~~have ~~operations;~~a material ~~and~~adverse ·affect ~~The~~on ~~recent turbulence and uncertainty in~~ the ~~U.S.~~Company’s ~~financial~~business ~~markets~~prospects.

34· The Company is also delinquent in making its 2010 minimum annual royalty payment as well as the December 31, 2009 quarterly royalty payment to the Regents of the University of California (the “Regents”) under its patent sublicense agreement. The delinquent payments aggregate to approximately $78,656. In the event that the Regents declare the Company to be in breach of the agreement, the Company will have 60 days to cure the breach. A loss of the license agreement with the University of California would have a material adverse affect on the Company’s operations, liquidity and business prospects.

~~Table~~· The Company is also at risk of ~~Contents~~not meeting certain commercial obligations related to outstanding purchase orders for EpiCeram®. Further, future international launch dates for EpiCeram® could also be in jeopardy as a result of the Company’s current lack of liquidity. There is no assurance that even if the Note Transaction is consummated that we will be able to meet our commercial obligations within the required timeframes. This could result in a disruption of supply for EpiCeram®.

~~We believe that existing~~As cash on hand in combination with projected operating cash flows should be sufficient to fund our planned corporate activities, all current contractual obligations and planned development activities through at least the early part of the ~~third quarter of 2009. Accordingly, we will require additional funding within the next six months. As of the~~ date of this Form 10-K, we have no firm commitments for ~~raising~~funding ~~additional capital~~ and ~~as described~~ ~~above,~~ our ability to access the capital markets may be severely limited. due to the following reasons:

~~There are several potential sources of capital that we may or will pursue. They are as follows:~~33

~~· Upfront~~Table ~~payments from development or licensing transactions~~ of ~~our Ceragenin™ technology. However, as noted above, 33% of any such payments received would have to be remitted to our convertible debt holders unless the holders waived the requirement;~~Contents

· ~~Sale~~ The ofexistence ~~the~~and ~~future revenue streams from the DRL Agreement. Under the~~ terms of ~~the Amended Convertible Debt Agreements, we are required to~~ ~~attempt~~our toconvertible ~~monetize~~debt ~~this~~securities ~~revenue~~(see ~~stream~~discussion ~~within~~provided 12under ~~months~~Note of5 ~~the amendments. However, if the proceeds received were not sufficient~~below) tocontain ~~repay the then outstanding convertible debt balance, we would require~~ a ~~waiver~~ ~~from~~number ~~the~~of ~~debt~~provisions ~~holders~~which tocould ~~keep~~deter ~~any~~new ofinvestment ~~the~~including ~~proceeds;~~the following:

· The ~~sale~~conversion price of the debt orand ~~equity securities~~warrants is to ~~new~~be oradjusted ~~existing~~downward ~~investors. As~~under ~~described~~a ~~above,~~number ~~the terms~~ of ~~our~~circumstances ~~convertible debt securities and/or~~which ~~the~~creates ~~current~~uncertainty ~~trading~~for ~~price~~new ~~of our common stock may make this option very difficult to execute.~~investors;

~~There~~· We isare norequired ~~assurance~~to ~~that~~utilize a wesignificant ~~will~~portion beof ~~able~~our tofuture ~~raise~~revenue ~~additional~~streams ~~capital~~to ~~within~~service ~~the~~and ~~timeframe described~~retire ~~above~~debt. ~~Even~~New ifinvestors wewould ~~are~~likely ~~successful, it~~prefer ~~could be on terms~~ that ~~substantially~~these ~~dilute~~cash ~~our~~flows ~~current~~be ~~shareholders. In~~retained ~~the~~by ~~event that we cannot raise sufficient capital within~~ the ~~required~~Company ~~timeframe,~~to itdefray ~~will~~or ~~have~~fund ~~a material adverse effect~~our onoperating ~~the Company’s liquidity, financial condition and business prospects.~~costs;

~~Contractual~~· As ~~Obligations~~of December 31, 2009, there were 21,032,726 common shares underlying the conversion of the debt and exercise of warrants held by the debt holders. This represents a significant overhang and creates uncertainty for new investors;

We· Under ~~had~~most ~~the~~circumstances, ~~following~~we ~~contractual~~would ~~obligations~~be atrequired ~~December 31, 2008, which require us~~ to ~~raise additional~~obtain ~~capital~~approval tofrom ~~meet~~ the ~~obligations~~debtholders ~~that~~in ~~exceed~~order ~~the~~to ~~current~~execute ~~capital~~a ~~resources~~future offunding ~~the~~transaction; ~~Company:~~and

Contractual Obligations	Less Than 1 Year		1-3 years		3-5 years		Over 5 years		Total
Convertible Debt	$	—	$	9,087,525	$	—	$	—	$	9,087,525
License Agreements	340,000		880,000		880,000		3,792,500		5,892,500
Clinical Study Funding Obligation	140,000		—		—		—		140,000
Triceram Purchase Obligation	488,067		—		—		—		488,067
Purchase Commitments	155,772		—		—		—		155,772
	$	1,123,839	$	9,967,525	$	880,000	$	3,792,500	$	15,763,864

· Any, or all, of these provisions could result in a new investor seeking a waiver, or permanent amendment, to the debt agreements in order to consummate a funding transaction. There is no assurance that the debtholders would agree to a waiver or any change to the terms of the debt agreements.

~~OFF-BALANCE~~· The existence of 12,004,569 ~~SHEET~~shares ~~ARRANGEMENTS~~of our common stock held by Osmotics for exchange with their shareholders creates uncertainty for new investors particularly as to how the market for our common stock will be impacted when that exchange transaction takes place;

We· The dorecent ~~not~~trading ~~have~~price ~~any~~of ~~off-balance~~our ~~sheet~~common ~~arrangements~~stock ~~(as that term~~ is ~~defined~~below inthe ~~Item~~conversion ~~303~~price of ~~Regulation~~ ~~S-K)~~the ~~that~~convertible ~~are~~debt ~~reasonably likely to have a current or future material~~creating ~~effect~~the onfollowing ~~our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.~~issues:

~~RECENT~~· Any transaction at or near ~~ACCOUNTING~~market ~~PRONOUNCEMENTS~~price would result in an adjustment to the conversion price of the convertible debt securities and warrants (unless waived by the existing debt holders) resulting in immediate substantial dilution to our current shareholders and new investors; and

~~For~~· We awould ~~discussion~~likely have to issue a number of ~~the~~shares ~~recent~~that ~~accounting~~would/could ~~pronouncements~~result ~~relevant~~in tothe ~~our~~new ~~operations,~~investors ~~please~~owning a ~~refer~~significant topercentage ~~the~~of ~~information~~our ~~provided~~common ~~under~~shares, ~~Note 3~~which tomay ~~our~~result ~~audited~~in ~~financial~~a change of ~~statements~~control. Many ~~included~~investors ~~elsewhere~~do innot ~~this~~want, ~~Form 10-K~~or are prohibited from, ~~which~~owning ~~information~~such ~~is incorporated~~a ~~herein~~significant bypercentage ~~reference~~of an investee.

~~Item~~· Changes 7Ain the interpretation of Rule 415(a)(1)(x) by the SEC have limited the number of shares of common stock that we can register for new investors that are sold pursuant to private placement transactions. Until ~~Quantitative~~such ~~and~~time ~~Qualitative~~that ~~Disclosures~~Osmotics ~~about~~completes ~~Market~~its planned ~~Risk~~exchange transaction, the shares they hold in escrow are excluded from our float for purposes of Rule 415 calculations which further exacerbates this limitation; and

~~Market~~· The ~~risk~~average trading volume ~~represents~~of our common stock on the ~~risk~~OTC ofBulletin ~~loss~~Board ~~that~~is ~~may~~not ~~impact~~significant. Our ~~our~~common ~~consolidated~~stock ~~financial~~is subject to rules adopted ~~position,~~by ~~consolidated~~the ~~results~~SEC ofregulating ~~operations,~~broker ordealer ~~consolidated~~practices ~~cash~~in ~~flows~~connection ~~due~~with totransactions ~~adverse~~in ~~changes~~“penny instocks.” These ~~financial~~rules make it ~~and~~more ~~commodity~~difficult ~~market~~to ~~prices~~buy and ~~rates.~~sell Asshares of ~~December 31~~our common stock. Additionally, ~~2008~~ we dohave ~~not~~a ~~believe~~limited wepublic ~~are~~float which ~~exposed~~has also contributed to ~~significant~~the ~~market~~limited ~~risks~~trading ~~due~~volume. Further, tomany retail investors will not, and ~~changes~~many institutional investors cannot, invest in ~~U.S. interest~~stocks ~~rates~~that ortrade ~~foreign~~on ~~currency~~the ~~exchange~~OTC Bulletin ~~rates~~Board. Investors astypically want ~~measured~~to ~~against~~be assured that they can sell their shares of common stock without adversely impacting the Umarket for such common stock and we currently cannot provide such assurances.~~S. dollar.~~

35· Our limited operating history and lack of profitable operations; and

~~Table~~· The economic downturn and ofuncertainty ~~Contents~~in the U.S. financial markets.

~~Item~~There 8is no assurance that we will be able to raise additional capital within the timeframe described above. Even ~~Financial~~if ~~Statements~~we are successful, it will likely be on terms that substantially dilute our current shareholders. In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company’s liquidity, financial condition and ~~Supplementary~~business ~~Data~~prospects or force the company out of business.

~~CONTENTS~~34

		Page
Consolidated Financial statements for the years ended December 31, 2008 and December 31, 2007:
Report of Management on Internal Control over Financial Reporting		37
Report of Independent Registered Public Accounting Firm		38
Consolidated Balance Sheets		39
Consolidated Statements of Operations		40
Consolidated Statements of Cash Flows		41
Consolidated Statements of Stockholders’ Equity (Deficit)		42
Notes to Consolidated Financial Statements		43

Table of Contents

36Contractual Obligations

~~Table~~We had the following contractual obligations at December 31, 2009, which require us to raise additional capital to meet the obligations that exceed the current capital resources of ~~Contents~~the Company:

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Contractual Obligations	Less Than 1 Year		1-3 years		3-5 years		Over 5 years		Total
Debt	$	1,190,898	$	8,941,944	$	12,724	$	—	$	10,145,566
License Agreements	685,000		880,000		830,000		3,120,000		5,515,000
Purchase Commitments	868,831		—		—		—		868,831
	$	2,744,729	$	9,821,944	$	842,724	$	3,120,000	$	16,529,397

~~The~~OFF-BALANCE ~~Board~~SHEET ~~of Directors Ceragenix Pharmaceuticals, Inc.:~~ARRANGEMENTS

~~Management~~We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of ~~responsible~~Regulation ~~for~~S-K) ~~establishing~~that ~~and~~are ~~maintaining~~reasonably ~~adequate~~likely ~~internal~~to ~~control~~have ~~over~~a current or future material effect on our financial ~~reporting~~condition, asrevenue ~~such~~or ~~term~~expenses, isresults ~~defined~~of inoperations, liquidity, ~~Exchange~~capital ~~Act~~expenditures ~~Rules 13a-15(f) and 15d-15(f)~~or capital resources.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.OTHER

~~This~~We ~~Form 10-K~~have entered into ~~does~~employment ~~not~~agreements ~~include~~with anvarious ~~attestation~~executives. These ofagreements ~~the~~provide ~~Company’s~~for ~~registered~~severance ~~public~~arrangements ~~accounting~~and accelerated ~~firm~~vesting ~~regarding~~of ~~internal~~equity ~~control~~compensation ~~over~~awards ~~financial~~in ~~reporting. Management’s~~the ~~report~~event ~~was~~that ~~not~~the ~~subject~~executive tois ~~attestation~~terminated by ~~the~~us ~~Company’s~~other ~~registered~~than ~~public~~for ~~accounting~~cause ~~firm~~or ~~pursuant~~disability ~~to temporary~~or ~~rules of~~if the ~~Securities~~executive ~~and Exchange Commission that permit the~~resigns ~~Company~~for togood ~~provide only management’s report in this Form 10-K~~reason.

/s/ STEVEN S. PORTER		/s/ JEFFREY S. SPERBER
Steven S. Porter		Jeffrey S. Sperber.
Chief Executive Officer		Chief Financial Officer
March 25, 2009		March 25, 2009

RECENT ACCOUNTING PRONOUNCEMENTS

37For a discussion of the recent accounting pronouncements relevant to our operations, please refer to the information provided under Note 3 to our audited consolidated financial statements included elsewhere in this Form 10-K.

~~Table of~~Item ~~Contents~~7A. Quantitative and Qualitative Disclosures about Market Risk

~~REPORT~~Market OFrisk ~~INDEPENDENT~~represents ~~REGISTERED~~the risk ~~PUBLIC~~of ~~ACCOUNTING~~loss that may impact our consolidated financial position, consolidated ~~FIRM~~results of operations, or consolidated cash flows due to adverse changes in financial and commodity market prices and rates. As of December 31, 2009 we do not believe we are exposed to significant market risks due to changes in U.S. interest rates or foreign currency exchange rates as measured against the U.S. dollar.

WeItem ~~have audited the accompanying consolidated balance sheets of Ceragenix Pharmaceuticals, Inc~~8. ~~and~~ Financial ~~subsidiary~~Statements ~~as of December 31, 2008~~ and ~~2007, and the related~~ ~~consolidated~~Supplementary statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.Data

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.CONTENTS

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ceragenix Pharmaceuticals, Inc. and its subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States.

	Page
Consolidated Financial statements for the years ended December 31, 2009 and December 31, 2008:
Report of Independent Registered Public Accounting Firm	36
Consolidated Balance Sheets	37
Consolidated Statements of Operations	38
Consolidated Statements of Cash Flows	39
Consolidated Statements of Stockholders’ Equity (Deficit)	40
Notes to Consolidated Financial Statements	41

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has not generated cash flow from operations since inception, has incurred continuing losses and has a stockholders’ deficit at December 31, 2008. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.35

~~/s/~~Table ~~GHP Horwath, P.C. GHP Horwath, P.C. Denver, Colorado March 24, 2009~~of Contents

38REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~Table~~We have audited the accompanying consolidated balance sheets of ~~Contents~~Ceragenix Pharmaceuticals, Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

~~CERAGENIX~~We ~~PHARMACEUTICALS~~conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, ~~INC~~on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~CONSOLIDATED~~In ~~BALANCE~~our ~~SHEETS~~opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ceragenix Pharmaceuticals, Inc. and its subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States.

ASThe OFaccompanying ~~DECEMBER~~consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has not generated cash flows from operations since inception, has incurred continuing losses and has a stockholders’ deficit at December 31, ~~2008~~2009. In ~~AND~~addition, ~~2007~~the Company is in technical default under the terms of a significant license agreement related to one of the Company’s primary technologies, and the licensor has declared the Company in breach of the agreement. If the Company cannot cure this breach, the license may be terminated, which could have a material adverse effect on the Company. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	614,457		$	2,213,654
Accounts receivable	261,615			—
Related party receivables	44,135			—
Inventory	164,628			—
Prepaid expenses and other	91,768			667,197
Total current assets	1,176,603			2,880,851
Property and equipment, net	11,927			16,210
Total assets	$	1,188,530		$	2,897,061
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES:
Current liabilities:
Trade accounts payable	$	159,403		$	146,560
Accrued compensation	591,000			263,750
Other accrued liabilities	289,131			446,211
Deferred revenue	205,663			75,000
Convertible Notes, net of discount of $428,491 at December 31, 2007	—			2,673,698
Derivative liabilities	—			385,262
Current portion of 2006 Debentures, net of discount of $634,483 at December 31, 2007	—			685,517
Total current liabilities	1,245,197			4,675,998
Derivative liabilities	819,226			1,372,987
Deferred revenue, less current portion	3,670,775			1,415,625
Convertible Notes	3,252,575			—
2006 Debentures, less current portion, net of discount of $1,586,210 and $2,009,197, respectively	4,248,740			2,170,803
Total liabilities	13,236,513			9,635,413
STOCKHOLDERS’ EQUITY (DEFICIT):
Series A Preferred stock, no par value, 0 and 1,000,000 shares issued and outstanding, respectively; $4,000,000 liquidation preference; net of discount of $4,000,000	—			—
Series B Preferred stock, no par value, 315,000 and 375,000 shares issued and outstanding, respectively; $ liquidation preference of $708,750 and $843,750, respectively	708,750			843,750
Common stock, $.0001 par value; 100,000,000 shares authorized; 17,808,293 and 16,393,724 shares, respectively, issued and outstanding	1,781			1,639
Additional paid-in capital	18,459,423			17,299,917
Accumulated deficit	(31,217,937		)	(24,883,658		)
Total stockholders’ deficit	(12,047,983		)	(6,738,352		)
Total liabilities and stockholders’ deficit	$	1,188,530		$	2,897,061

/s/ GHP Horwath, P.C.

GHP Horwath, P.C.
Denver, Colorado
April 14, 2010

~~The accompanying notes are an integral part of these financial statements.~~36

39Table of Contents

~~Table of~~CERAGENIX ~~Contents~~PHARMACEUTICALS, INC.

~~CERAGENIX PHARMACEUTICALS,~~CONSOLIDATED ~~INC.~~BALANCE SHEETS

~~CONSOLIDATED STATEMENTS~~AS OF DECEMBER ~~OPERATIONS~~31, 2009 AND 2008

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

	2009			2008
ASSETS

Current assets:
Cash	$	104,442		$	614,457
Accounts receivable	264,363			261,615
Inventory	431,824			164,628
Related party receivables	5,829			44,135
Prepaid expenses, deposits and other	253,029			91,768
Total current assets	1,059,487			1,176,603

Property and equipment, net	5,042			11,927
Other asset	435,375			—
Total assets	$	1,499,904		$	1,188,530

LIABILITIES AND STOCKHOLDERS’ DEFICIT

LIABILITIES:
Current liabilities:
Trade accounts payable	$	339,633		$	159,403
Customer deposits	776,881			—
Accrued compensation	591,000			591,000
Accrued interest	334,082			11,694
Accrued licensing fees	245,000			—
Other accrued liabilities	532,326			277,437
Current portion of deferred revenue	304,869			205,663
Current portion of note payable, related party	84,996			—
Current portion of Convertible Notes	395,782			—
Current portion of 2006 Debentures, net of discount of $120,083	590,037			—
Derivative liabilities	496,714			—
Total current liabilities	4,691,320			1,245,197

Deferred revenue, less current portion	4,545,543			3,670,775
Note payable, related party, less current portion	321,758			—
Convertible Notes, less current portion	3,089,562			3,252,575
2006 Debentures, less current portion, net of discount of $937,390 (2009) and $1,586,210 (2008)	4,605,958			4,248,740
Derivative liabilities	3,877,456			819,226
Total liabilities	21,131,597			13,236,513

STOCKHOLDERS’ DEFICIT:

Series B Preferred stock, no par value, 495,000 shares authorized; 60,000 (2009) and 315,000 (2008) shares issued and outstanding; liquidation preference of $135,000 (2009) and $708,750 (2008)	135,000			708,750
Common stock, $.0001 par value; 100,000,000 shares authorized; 18,183,293 (2009) and 17,808,293 (2008) shares issued and outstanding	1,819			1,781
Additional paid-in capital	19,858,764			18,459,423
Accumulated deficit	(39,627,276		)	(31,217,937		)
Total stockholders’ deficit	(19,631,693		)	(12,047,983		)
Total liabilities and stockholders’ deficit	$	1,499,904		$	1,188,530

	2008			2007
REVENUE	$	756,224		$	9,375
COST OF GOODS SOLD	558,857			—
GROSS MARGIN	197,367			9,375
OPERATING EXPENSES:
Licensing fees and royalties	242,936			165,000
Research and development	231,781			722,133
General and administrative	4,608,497			4,227,585
	5,083,214			5,114,718
Loss from operations	(4,885,847		)	(5,105,343		)
OTHER INCOME (EXPENSE):
Interest and other, net	(9,757,931		)	(6,204,318		)
Gain on value of derivative liabilities	8,309,499			6,528,028
Loss on extinguishment of debt	—			(1,780,531		)
	(1,448,432		)	(1,456,821		)
NET LOSS	(6,334,279		)	(6,562,164		)
PREFERRED STOCK DIVIDENDS	(80,000		)	(240,000		)
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(6,414,279	)	$	(6,802,164	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted	17,255,582			16,329,371
LOSS PER BASIC AND DILUTED SHARE:
Basic and diluted	$	(0.37	)	$	(0.42	)

The accompanying notes are an integral part of these financial statements.

~~The accompanying notes are an integral part of these financial statements.~~37

40Table of Contents

~~Table of~~CERAGENIX ~~Contents~~PHARMACEUTICALS, INC.

~~CERAGENIX~~CONSOLIDATED STATEMENTS ~~PHARMACEUTICALS,~~OF ~~INC.~~OPERATIONS

~~CONSOLIDATED~~FOR THE ~~STATEMENTS~~YEARS OFENDED ~~CASH~~DECEMBER ~~FLOWS~~31, 2009 AND 2008

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

	2009			2008

REVENUE:
Product	$	1,840,285		$	642,037
Milestone recognition	258,020			114,187
Other	8,000			—
Total revenue	2,106,305			756,224

COST OF GOODS SOLD	1,273,993			558,857

GROSS MARGIN	832,312			197,367

OPERATING EXPENSES:
Licensing fees and royalties	382,014			242,936
Research and development	224,544			231,781
General and administrative	3,440,606			4,608,497
	4,047,164			5,083,214

Loss from operations	(3,214,852		)	(4,885,847		)

OTHER INCOME (EXPENSE):
Interest and other, net	(1,639,543		)	(9,757,931		)
(Loss) gain on value of derivative liabilities	(3,554,944		)	8,309,499
	(5,194,487		)	(1,448,432		)

NET LOSS	(8,409,339		)	(6,334,279		)

PREFERRED STOCK DIVIDENDS	—			(80,000		)

LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(8,409,339	)	$	(6,414,279	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted	18,032,430			17,255,582

LOSS PER SHARE:
Basic and diluted	$	(0.47	)	$	(0. 37)

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,334,279	)	$	(6,562,164	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount	1,485,961			2,808,205
Noncash stock compensation expense	1,392,712			991,377
Gain on value of derivative liability	(8,309,499		)	(6,528,028		)
Fair value of adjustment to exercise price of convertible debt and warrants	6,450,384			1,958,987
Fair value of warrants issued for amending debt agreements	920,091			275,600
Warrants issued for services	1,467			—
Loss on extinguishment of debt	—			1,780,531
Amortization of debt placement costs	—			526,369
Interest expense added to convertible debt balance	485,336			—
Depreciation expense	11,860			10,236
Increase in accounts receivable	(261,615		)	—
Increase in inventory	(164,628		)	—
(Increase) decrease in prepaid expenses and other	(13,236		)	239,960
Increase in accounts payable and accrued liabilities	375,477			208,638
Increase in deferred revenue	2,385,813			1,490,625
Net cash used in operating activities	(1,574,156		)	(2,799,664		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(7,577		)	(4,027		)
Net cash used in investing activities	(7,577		)	(4,027		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under promissory note to Osmotics	(50,000		)	—
Repayments from Osmotics under promissory note	25,000			—
Net proceeds from the exercise of warrants	—			16,883
Borrowings under insurance financing agreement	84,434			88,974
Payments under insurance financing agreement	(76,898		)	(86,457		)
Net cash provided by (used in) financing activities	(17,464		)	19,400
Net decrease in cash	(1,599,197		)	(2,784,291		)
Cash and cash equivalents at the beginning of year	2,213,654			4,997,945
Cash and cash equivalents at the end of year	$	614,457		$	2,213,654

The accompanying notes are an integral part of these financial statements.

~~The accompanying notes are an integral part of these financial statements.~~38

41Table of Contents

~~Table~~CERAGENIX ofPHARMACEUTICALS, ~~Contents~~INC.

~~CERAGENIX~~CONSOLIDATED STATEMENTS ~~PHARMACEUTICALS,~~OF ~~INC.~~CASH FLOWS

~~CONSOLIDATED~~FOR ~~STATEMENTS OF~~THE ~~STOCKHOLDERS’~~YEARS ~~EQUITY~~ENDED ~~(DEFICIT)~~DECEMBER 31, 2009 AND 2008

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,409,339	)	$	(6,334,279	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss (gain) on value of derivative liability	3,554,944			(8,309,499		)
Amortization of debt discount	528,737			1,485,961
Stock-based compensation expense	831,992			1,392,712
Interest expense added to convertible debt balance	651,288			485,336
Fair value of adjustment to exercise price of convertible debt and warrants	—			6,450,384
Fair value of warrants issued for amending debt agreements	—			920,091
Warrants issued for services	16,137			1,467
Depreciation and amortization expense	87,510			11,860
Inventory obsolescence expense	3,589			—
Increase in accounts receivable	(2,748		)	(261,615		)
Increase in inventory	(270,785		)	(164,628		)
Increase in prepaid expenses, deposits and other	(54,243		)	(13,236		)
Increase in accounts payable and accrued liabilities	866,703			375,477
Increase in customer deposits	776,881			—
Increase in deferred revenue	973,974			2,385,813
Net cash used in operating activities	(445,360		)	(1,574,156		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	—			(7,577		)
Net cash used in investing activities	—			(7,577		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under promissory note to Osmotics	(65,459		)	(50,000		)
Repayments from Osmotics under promissory note	—			25,000
Borrowings under insurance financing agreement	88,454			84,434
Payments under insurance financing agreement	(87,650		)	(76,898		)
Net cash used in financing activities	(64,655		)	(17,464		)
Net decrease in cash	(510,015		)	(1,599,197		)
Cash at the beginning of year	614,457			2,213,654
Cash at the end of year	$	104,442		$	614,457

	Preferred Stock				Preferred Stock
	Series A				Series B					Common Stock						Accumulated
	Shares		Amount		Shares		Amount			Shares	Amount		APIC			Deficit			Total
BALANCES, December 31, 2006	1,000,000		$	—	—		$	—		16,169,591	$	1,617	$	16,266,656		$	(18,321,494	)	$	(2,053,221	)
Conversion of Convertible Notes	—		—		—		—			115,664	11		189,093			—			189,104
Conversion of accrued interest to common stock	—		—		—		—			41,586	4		75,915			—			75,919
Exercise of warrants	—		—		—		—			16,883	2		16,881			—			16,883
Stock option compensation expense	—		—		—		—			—	—		804,687			—			804,687
Warrants issued for services	—		—		—		—			—	—		64,690			—			64,690
Common stock issued for services	—		—		—		—			50,000	5		121,995			—			122,000
Preferred stock issued for services	—		—		375,000		843,750			—	—		—			—			843,750
Net loss	—		—		—		—			—	—		—			(6,562,164		)	(6,562,164		)
Preferred stock dividends	—		—		—		—			—	—		(240,000		)	—			(240,000		)
BALANCES, December 31, 2007	1,000,000		—		375,000		843,750			16,393,724	1,639		17,299,917			(24,883,658		)	(6,738,352		)
Stock option compensation expense.	—		—		—		—			—	—		823,181			—			823,181
Conversion of preferred stock and accrued dividends into common stock	(1,000,000	)	—		(60,000	)	(135,000		)	1,364,569	137		374,863			—			240,000
Conversion of accrued interest into common stock.	—		—		—		—			50,000	5		39,995			—			40,000
Warrants issued for services	—		—		—		—			—	—		1,467			—			1,467
Net loss	—		—		—		—			—	—		—			(6,334,279		)	(6,334,279		)
Preferred stock dividends			—		—		—			—	—		(80,000		)	—			(80,000		)
BALANCES, December 31, 2008	—		$	—	315,000		$	708,750		17,808,293	$	1,781	$	18,459,423		$	(31,217,937	)	$	(12,047,983	)

The accompanying notes are an integral part of these financial statements.

~~The accompanying notes are an integral part of these financial statements.~~39

42Table of Contents

~~Table~~CERAGENIX PHARMACEUTICALS, ~~of Contents~~INC.

~~CERAGENIX~~CONSOLIDATED ~~PHARMACEUTICALS,~~STATEMENTS ~~INC.~~OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

	Preferred Stock				Preferred Stock
	Series A				Series B					Common Stock			Additional			Accumulated
	Shares		Amount		Shares		Amount			Shares	Amount		Paid in Capital			Deficit			Total

BALANCES, December 31, 2007	1,000,000		$	—	375,000		$	843,750		16,393,724	$	1,639	$	17,299,917		$	(24,883,658	)	$	(6,738,352	)

Stock-based compensation expense	—		—		—		—			—	—		823,181			—			823,181
Conversion of preferred shares and accrued dividends into common shares	(1,000,000	)	—		(60,000	)	(135,000		)	1,364,569	137		374,863			—			240,000
Conversion of accrued interest into common stock	—		—		—		—			50,000	5		39,995			—			40,000
Warrants issued for services	—		—		—		—			—	—		1,467			—			1,467
Net loss	—		—		—		—			—	—		—			(6,334,279		)	(6,334,279		)
Preferred stock dividends			—		—		—			—	—		(80,000		)	—			(80,000		)
BALANCES, December 31, 2008	—		—		315,000		708,750			17,808,293	1,781		18,459,423			(31,217,937		)	(12,047,983		)

Stock-based compensation expense	—		—		—		—			—	—		539,496			—			539,496
Conversion of preferred shares to common shares	—		—		(375,000	)	(843,750		)	375,000	38		843,712			—			—
Issuance of preferred shares for services	—		—		120,000		270,000			—	—		—			—			270,000
Warrants issued for services	—		—		—		—			—	—		16,133			—			16,133
Net loss	—		—		—		—			—	—		—			(8,409,339		)	(8,409,339		)
BALANCES, December 31, 2009	—		$	—	60,000		$	135,000		18,183,293	$	1,819	$	19,858,764		$	(39,627,276	)	$	(19,631,693	)

The accompanying notes are an integral part of these financial statements.

Table of Contents

CERAGENIX PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 20082009

(1) BUSINESS AND OVERVIEW

Ceragenix Pharmaceuticals, Inc. (the “Company”) is an emerging medical device company focused on dermatology and infectious disease. We have two base technology platforms each with multiple applications: Barrier Repair and Ceragenins™ (also known as cationic steroid antibiotics or “CSAs”). WeOur ~~believe that the~~ Barrier Repair platform represents near term revenue opportunities for prescription skin care products to treat a variety of skin disorders all characterized by a disrupted skin barrier. In April 2006, we received ~~clearance~~ clearance from the United States Food and Drug Administration (“FDA”) to market EpiCeram® our first commercial product using the Barrier Repair technology. EpiCeram® is a prescription-only topical cream intended to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatoses including eczema, irritant contact dermatitis, and radiation dermatitis. All of these conditions share in common a defective or incomplete skin barrier function. In November 2007, we entered into an exclusive distribution and supply agreement with Dr. Reddy’s Laboratories, Inc. (“DRL”) for the commercialization of EpiCeram® in the United States (the “DRL Agreement”). Under the terms of the DRL Agreement, we are responsible for manufacturing (through a contract manufacturer) and supplying the product while DRL is responsible for distribution, marketing and sales. DRL launched sales and marketing efforts ~~During~~during ~~September~~October 2008,. During 2009, we ~~shipped~~entered into supply and distribution agreements to commercialize EpiCeram® in Canada (the ~~first~~“Canadian ~~commercial~~Agreement”), ~~quantities~~certain Southeast Asian countries (the “Asian Agreement”), the European Union (the “EU Agreement”), and Israel (collectively the “International Agreements”). Sales and marketing efforts under the Canadian Agreement commenced during the fourth quarter of 2009. In January and February 2010, we entered into supply and distribution agreements to commercialize EpiCeram® in toHong ~~DRL~~Kong, Taiwan and ~~DRL~~South ~~officially~~Korea, ~~launched~~and ~~sales~~we ~~and~~expect ~~marketing~~to ~~efforts~~consummate additional international agreements during ~~October 2008~~the remainder of 2010.

Our Ceragenin™ technology represents near, mid and long-term revenue opportunities for treating infectious disease. Ceragenins™ are small molecule, positively charged, aminosterol compounds that have shown activity against both gram negative and gram positive bacteria, certain viruses, certain fungi and certain cancers in preclinical testing. These patented compounds mimic the activity of the naturally occurring antimicrobial peptides that form the body’s innate immune system. We are initially pursuing activities in antimicrobial medical device coatings. We have not applied for, nor have we received, approval from the FDA to market any product using our Ceragenin™ technology. However, it is ~~our~~ our expectation that we will be able to generate revenue from the Ceragenin™ technology prior to receiving FDA approvals in the form of upfront and milestone payments under development and sublicense agreements.

(2) GOING CONCERN AND MANAGEMENT’S PLANS

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in February 2002, we have incurred significant cash and operating losses and atas of December 31, ~~2008~~2009, we had a stockholders’ deficit of $1219,~~047~~631,~~983~~693 and a working capital deficit of $683,~~594~~631,833. We have relied upon proceeds from the sale of convertible debt securities, proceeds received from the exercise of common stock purchase warrants, and milestone payments from the DRL Agreement to fund our operations. In order to commercialize the majority of our planned products in the United States, we will require marketing clearance from the FDA. To date, we have received clearance to market one product, EpiCeram®.

As of December 31, ~~2008~~ 2009, we had cash ~~and cash equivalents~~ of $~~614~~104,~~457~~442. AsWe ~~previously~~believe ~~noted,~~that inwe ~~November 2007,~~can maintain a positive wecash ~~entered~~balance into ~~the~~April 2010 ~~DRL~~based ~~Agreement~~on ~~for~~expected ~~the~~cash ~~commercialization~~receipts ofand by delaying payments to certain vendors including those critical to our ability to manufacture EpiCeram® inand the universities from which we have licensed our ~~United~~proprietary ~~States~~technologies. ~~Upon~~The ~~execution~~Company ofwill ~~the~~require ~~DRL~~additional ~~Agreement~~funding by April 30, we2010 ~~received~~in ~~$1,500,000.~~order ~~Additionally,~~to ~~the~~remain ~~DRL~~a ~~Agreement~~viable ~~called~~business. The ~~for~~Company has been actively pursuing ~~DRL~~funding toalternatives ~~pay~~and usbelieves ~~certain~~that ~~non-sales~~it ~~based~~has ~~milestone~~reached ~~payments~~an ~~upon~~agreement ~~the~~in principal ~~accomplishment~~with ofa ~~three~~third ~~specified~~party ~~events~~for a $3 million secured note (the “~~Non-Sales~~Note ~~Milestones~~Transaction”). The ofCompany upbelieves tothat the proceeds from ~~$3,500,000~~the ~~which~~Note ~~amount~~Transaction ~~was~~should ~~inclusive~~be ofadequate ~~certain~~to ~~product~~fund ~~launch~~the ~~specific~~Company’s activities ~~considerations.~~through Asthe end of ~~December 31,~~2010 ~~2008,~~and weallow ~~had~~sufficient ~~received~~time ~~$2,500,000~~for inthe Company to attempt to ~~Non-Sales~~raise ~~Milestone~~additional ~~payments~~capital. ~~Subsequent to~~ ~~December 31~~However, ~~2008,~~in weorder ~~received~~to consummate the ~~remaining~~Note $1Transaction,~~000,000~~ the ~~Non-Sales~~holders of the Company’s convertible debt securities (the “Secured ~~Milestone~~Creditors”) ~~payment~~will be required to release certain liens related to the manufacture and sale of EpiCeram® in the United States. ~~Additionally,~~The ~~under~~Company has been in active dialog with the ~~DRL~~Secured ~~Agreement~~Creditors regarding this transaction, webut ~~can~~the ~~earn~~Secured upCreditors have not yet agreed to ~~$21~~the transaction. Additionally,~~250,000~~ inthe ~~milestone~~Company ~~payments~~is ~~based~~aware onof certain third parties (the “Third ~~cumulative~~Parties”) ~~net~~who ~~sales~~are ofattempting ~~EpiCeram®~~to (acquire the “~~Net~~Convertible ~~Sales~~Notes” ~~Milestones~~(defined below) and the “2006 Debentures” (defined below) in order to consummate an effective acquisition of the Company. ~~However~~ Based on the Company’s limited understanding of the proposal being made by the Third Parties, wethe ~~did~~Company’s ~~not~~Board ~~earn~~of ~~any~~Directors ~~Net~~believes ~~Sales~~that it would not be in the ~~Milestone~~best ~~payments~~interest ~~during~~of ~~2008~~the ~~nor~~Company’s doshareholders wefor ~~anticipate~~such ~~earning~~a ~~any~~transaction ~~payments~~to ~~during~~be ~~2009~~consummated.

4341

Table of of Contents

~~Additionally,~~The asCompany ~~described~~is in ~~further~~discussions ~~below~~with inseveral ~~Note~~parties 5,regarding ~~during~~a financing transaction that would fund the ~~quarter~~Company’s ~~ended~~activities ~~September 30,~~beyond ~~2008,~~2010 ~~we negotiated~~and ~~amendments~~provide tofor ~~our~~the ~~existing~~retirement of the convertible debt ~~securities~~on ~~(collectively~~ terms the ~~“Amended~~Company ~~Convertible~~believes ~~Debt~~are ~~Agreements”).~~ more favorable than those ~~These~~being ~~debt~~proposed ~~agreements~~by ~~were~~the ~~previously~~Third inParties ~~technical~~to ~~default~~the Secured Creditors. ~~Among~~The ~~other~~Company ~~things,~~is ~~the~~working ~~Amended~~vigorously ~~Convertible~~to ~~Debt~~demonstrate ~~Agreements~~to ~~extend~~ the ~~maturity~~Secured ~~date~~Creditors ofthat the ~~debt~~Company’s tostrategy ~~December 31,~~is ~~2011~~credible ~~and~~but ~~require~~ultimately, ~~that~~the weSecured Creditors will make ~~minimum~~their ~~quarterly~~own ~~payments~~determination. There tois no assurance that the ~~holders~~Company ~~commencing~~will be ~~June 30,~~successful in convincing the Secured Creditors to pursue the plan being ~~2009~~proposed (by the ~~“Amended~~Company ~~Amortization~~nor ~~Schedule”)~~is ~~solely~~there ~~from~~any assurance that the ~~following~~Company’s ~~revenue~~financing ~~streams~~efforts (will be successful assuming the ~~“Dedicated~~Secured ~~Revenue~~Creditors ~~Streams”):~~consent to the Note Transaction.

~~· 100%~~As ofa ~~net~~result ~~revenues~~of ~~(as defined~~the inactions ~~the~~taken ~~amendment)~~to ~~paid~~extend orits ~~owed~~cash tobalance, ~~us under~~ the ~~DRL~~Company ~~Agreement~~is ~~subsequent~~currently tofacing ~~April 1,~~the ~~2009;~~following risks and uncertainties:

· ~~100%~~As of ~~net~~December 31, ~~revenue~~2009, ~~received~~the ~~from~~Company ~~any~~owed ~~other~~Brigham ~~EpiCeram®~~Young ~~commercialization~~University ~~arrangements;~~(“BYU”) $339,663 in license, maintenance and legal fees, the majority of which are delinquent. These delinquent fees constitute grounds for BYU to terminate the patent sublicense agreement between BYU and the Company. On April 7, 2010, BYU declared us in breach of the BYU license with 30 days to cure the breach. A loss of the BYU license would have a material adverse affect on the Company’s business prospects.

· ~~50%~~The Company is also delinquent in making its 2010 minimum annual royalty payment as well as the December 31, 2009 quarterly royalty payment to the Regents of the ~~net~~University ~~revenue~~of ~~received~~California (the “Regents”) ~~from~~under its patent sublicense agreement. The delinquent payments aggregate to approximately $78,656. In the ~~sale~~event that the Regents declare the Company to be in breach of ~~NeoCeram™;~~the agreement, the Company will have 60 days to cure the breach. A loss of the license agreement with the University of California would have a material adverse affect on the Company’s operations, liquidity and business prospects.

· ~~33%~~The Company is also at risk of ~~any~~not ~~net~~meeting ~~revenue~~certain ~~received~~commercial ~~from~~obligations ~~Ceragenin™~~related ~~commercialization~~to ~~arrangements;~~outstanding ~~and~~purchase orders for EpiCeram®. Further, future international launch dates for EpiCeram® could also be in jeopardy as a result of the Company’s current lack of liquidity. There is no assurance that even if the Note Transaction is consummated that we will be able to meet our commercial obligations within the required timeframes. This could result in a disruption of supply for EpiCeram®.

~~· 33%~~ As of ~~any~~the ~~net~~date ~~revenue~~of ~~received by~~this usForm 10-K, inwe ~~excess~~have ofno ~~$250,000~~firm incommitments ~~aggregate~~for ~~excluding~~funding ~~any~~and our ~~capital~~ability ~~raised~~to byaccess the ~~Company~~ ~~through~~capital ~~equity~~markets ~~investment~~may orbe ~~the~~severely ~~issuance~~limited ofdue ~~debt.~~to the following reasons:

In· The ~~the~~existence ~~event~~and ~~that~~terms the Dedicated Revenue Streams are insufficient to make a quarterly interest payment in full, the only remedies to the holders are to add the unpaid accrued interest to the outstanding debt balance or receive shares of our ~~common stock~~convertible in lieu of cash payment. Additionally, in the event that the Dedicated Revenue Streams are not sufficient to make the cumulative payments required by the Amended Amortization Schedule with respect to the 12-month periods ending June 30th, then the only remedy to the holders is to have the conversion price of the debt ~~and~~securities ~~exercise~~(see ~~price~~discussion ofprovided ~~their warrants~~under ~~adjusted downward. See~~ Note 5 ~~for~~ abelow) ~~more~~contain ~~detailed~~a ~~discussion.~~ number ~~Accordingly,~~of ~~until~~provisions ~~December 31,~~which ~~2011,~~could ~~the~~deter ~~failure~~new toinvestment ~~make~~including ~~scheduled interest and/or principal payments in full does not provide~~ the ~~holders the ability to declare the Company in default.~~following:

~~While~~· The weconversion price ~~believe~~of ~~that~~ the ~~Amended~~ ~~Convertible~~debt ~~Debt~~and ~~Agreements~~warrants ~~are~~is ~~more favorable~~ to ~~the~~be ~~Company~~adjusted ~~than~~downward ~~the original~~under ~~convertible debt agreements, there are~~ a number of circumstances ~~factors~~ which ~~could inhibit~~creates ~~the~~uncertainty ~~Company’s~~for ~~ability~~new ~~to raise additional capital. These may include, but are not necessarily limited to, the following:~~investors;

· ~~The~~We ~~presence~~are ofrequired ~~$9,087,525~~to inutilize a ~~secured~~significant ~~convertible~~portion ~~debt~~of ~~with~~our ~~most~~future ~~favored~~revenue ~~nation~~streams to service and ~~other~~retire debt. New ~~pricing~~investors ~~protection~~would likely prefer that these cash flows be retained by the Company to defray or fund our operating costs;

· ~~The~~As ~~Dedicated~~of ~~Revenue Streams~~December 31, ~~will~~2009, ~~reduce~~there ~~future~~were ~~cash~~21,032,726 ~~flows~~common ~~retained~~shares underlying the conversion of the debt and exercise of warrants held by the ~~Company~~debt holders. This represents a significant overhang and creates uncertainty for ~~operations~~new investors;

· ~~12,004,569~~Under ~~shares~~most ofcircumstances, ~~our common~~we ~~stock~~would ~~(or~~be ~~approximately~~required ~~67%~~to ofobtain ~~our~~approval ~~issued~~from ~~and~~the ~~outstanding~~debtholders ~~shares) are currently held~~ in ~~escrow~~order ~~for~~to ~~Osmotics~~execute ~~Corporation (“Osmotics”) awaiting exchange with its~~a ~~shareholders. Osmotics~~future ~~has~~funding ~~advised us that it must complete its exchange~~ transaction ~~by November 2010 in order to preserve the tax free nature of the transaction~~; and

· ~~Limitations~~Any, onor ~~our~~all, ~~ability~~of tothese ~~register~~provisions ~~common~~could ~~shares~~result ~~and~~in ~~common~~a ~~shares~~new ~~underlying~~investor ~~convertible~~seeking ~~debt~~a ~~securities~~waiver, or permanent ~~sold~~amendment, to the debt agreements in ~~private~~order ~~placement~~to ~~transactions;~~consummate a funding transaction. There is no assurance that the debtholders would agree to a waiver or any change to the terms of the debt agreements.

· ~~Our~~The ~~lack~~existence of 12,004,569 shares of anour ~~operating~~common ~~history~~stock held by Osmotics for exchange with ~~and~~their ~~profitable~~shareholders ~~operations;~~creates ~~and~~uncertainty for new investors, particularly as to how the market for our common stock will be impacted when that exchange transaction takes place;

· The ~~economic~~recent ~~downturn~~trading ~~and~~price of ~~uncertainty~~our incommon stock is below the ~~U.S.~~conversion ~~financial~~price ~~markets.~~of the convertible debt creating the following issues:

44· Any transaction at or near market price would result in an adjustment to the conversion price of the convertible

~~Table of Contents~~42

WeTable believe that existing cash on hand in combination with projected operating cash flows should be sufficient to fund our planned corporate activities, all current contractual obligations and planned development activities through at least the early part of ~~the third quarter of 2009. Accordingly,~~ we will require additional funding within the next six months. As of the date of this Form 10-K, we have no firm commitments for raising additional capital and as described above, our ability to access the capital markets may be severely limited.Contents

~~There~~debt ~~are~~securities ~~several~~and ~~potential~~warrants (unless waived by the ~~sources~~existing ofdebt ~~capital~~holders) ~~that~~resulting wein ~~may~~immediate orsubstantial ~~will~~dilution ~~pursue.~~ to our current ~~They~~shareholders ~~are~~and asnew ~~follows:~~investors; and

· ~~Upfront~~We ~~payments~~would ~~from~~likely ~~development~~have to orissue ~~licensing~~a ~~transactions~~number of ~~our~~shares ~~Ceragenin™~~that ~~technology. However,~~would/could asresult ~~noted~~in ~~above,~~the ~~33%~~new ofinvestors ~~any~~owning ~~such~~a ~~payments~~significant ~~received~~percentage ~~would~~of ~~have~~our tocommon beshares, ~~remitted~~which tomay ~~our~~result ~~convertible~~in ~~debt~~a ~~holders~~change of ~~unless~~control. Many ~~the~~investors ~~holders~~do ~~waived~~not ~~the~~want, ~~requirement;~~or are prohibited from, owning such a significant percentage of an investee.

· ~~Sale~~Changes ofin the ~~future~~interpretation ~~revenue~~of Rule 415(a)(1)(x) by ~~streams~~the ~~from~~SEC ~~the~~have ~~DRL~~limited ~~Agreement. Under~~ the ~~terms~~number of ~~the~~shares ~~Amended~~of ~~Convertible~~common ~~Debt~~stock ~~Agreements,~~that we ~~are~~can ~~required to~~register ~~attempt~~for tonew ~~monetize~~investors ~~this~~that ~~revenue~~are ~~stream~~sold ~~within~~pursuant 12to ~~months~~private ofplacement ~~the amendments~~transactions. ~~However,~~ Until ifsuch ~~the~~time ~~proceeds~~that ~~received~~Osmotics ~~were~~completes ~~not~~its ~~sufficient~~planned toexchange ~~repay~~transaction, the ~~then~~shares ~~outstanding~~they ~~convertible~~hold ~~debt~~in ~~balance,~~escrow weare ~~would require~~excluded ~~a waiver~~ from our ~~the~~float ~~debt~~for ~~holders~~purposes toof ~~keep~~Rule 415 ~~any~~calculations ofwhich ~~the~~further ~~proceeds~~exacerbates this limitation; and

· The ~~sale~~average oftrading ~~debt~~volume orof ~~equity~~our common ~~securities~~stock toon ~~new~~the orOTC ~~existing~~Bulletin ~~investors~~Board is not significant. Our common stock is subject to rules adopted Asby ~~described~~the ~~above~~SEC inregulating ~~Management’s~~broker ~~Discussion~~dealer ~~and~~practices ~~Analysis~~in ~~included~~connection ~~elsewhere~~with transactions in ~~the~~“penny ~~Form~~stocks.” These rules ~~10-K,~~make ~~the~~it ~~terms~~more difficult to buy and sell shares of our ~~convertible~~common ~~debt~~stock. Additionally, ~~securities~~we ~~and/or~~have a limited public float which has also contributed to the ~~current~~limited trading ~~price~~volume. Further, many retail investors will not, and of

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