Intellect Neurosciences 10Q 2008 Q4 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended December 31, 2008

	Or

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

	For the transition period from to

Commission File Number: 333-128226

INTELLECT NEUROSCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-2777006
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation)	Identification Number)

7 West 18th Street
New York, New York	10011
(Address of Principal Executive Offices)	(Zip Code)

(212) 448-9300

(Registrant’s Telephone Number, Including Area Code)

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 R No £

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. (Check one):

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	Smaller reporting company R
		(Do not check if a smaller reporting company)

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

The registrant had 30,843,873 shares of Common Stock, par value $.001 par value per share, outstanding as of January 31, 2008.

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Index

		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements: (Unaudited)

	Consolidated Condensed Balance Sheet as of June 30, 2008 and December 31, 2008	3

	Consolidated Condensed Statements of Operations for the three and six months ended December 31, 2008 and 2007 and for the period April 25, 2005 (inception) through December 31, 2008.	4

	Consolidated Condensed Statement of Changes in Capital Deficiency for the period ended December 31, 2008	6

	Consolidated Condensed Statements of Cash Flows for the six months ended December 31, 2008 and 2007 and for the period April 25, 2005 (inception) through December 31, 2008	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A	Risk Factors	34

Item 3.	Defaults upon Senior Securities	37

Item 5	Other Information	37

Item 6.	Exhibits	38

SIGNATURES		39

CERTIFICATIONS		40

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Consolidated Condensed Balance Sheet

	December 31, 2008			June 30, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,644,426		$	210,758
Prepaid expenses & other current assets		23,740			18,203
Deferred debt costs, net		24,048			22,622
Total current assets	$	1,692,214		$	251,583

Fixed assets, net		265,361			367,962
Fixed assets held for sale					22,057
Security deposits		78,264			78,264
Restricted cash		46,115			34,056
Total Assets	$	2,081,954		$	753,922

LIABILITIES AND CAPITAL DEFICIENCY

Current Liabilities:
Accounts payable and accrued expenses	$	4,110,615		$	4,624,030
Convertible promissory notes (current; net of debt discount of $5,300)		122,028			182,363
Convertible promissory notes (past due)		5,499,328			5,644,604
Accrued interest - convertible promissory notes		1,526,716			993,869
Derivative instruments		205,087			2,001,556
Preferred stock liability		643,033			2,434,383
Preferred stock dividend payable		1,326,662			1,085,062
Deferred credit		-			100,000
Total Current liabilities	$	13,433,468		$	17,065,867

Commitments and Contingencies

Notes payable (long term; net of debt discount of $142,955)		2,083,217			1,275,000
Notes payable, due to shareholder		3,498,828			3,423,828
Deferred lease liability		14,731			17,612
Deferred credit		-			900,000
Other long-term liabilities		26,028			46,049
Total Liabilities	$	19,056,272		$	22,728,356

Capital deficiency:

Preferred stock, $0.001 per share, 1,000,000 shares authorized
Series B Convertible Preferred stock - 459,309 shares designated and 459,309 shares issued (classified as liability above) (liquidation preference $9,369,468)
Common stock, par value $0.001 per share, 100,000,000 shares authorized; 30,843,873 issued and outstanding	$	30,844		$	30,844
Additional paid in capital		22,343,163			22,017,778
Deficit accumulated during the development stage		(39,348,325	)		(44,023,056	)

Total Capital Deficiency	$	(16,974,318	)	$	(21,974,434	)

Total Liabilities and Capital Deficiency	$	2,081,954		$	753,922

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	December 31,
	2008			2007

Revenues:
License fees	$	3,016,667			-
Total revenue	$	3,016,667

Costs and Expenses:
Research and development	$	37,938			707,207
General and administrative		934,520			886,288
Total cost and expenses	$	972,457		$	1,593,495

Net income /(loss) from operations	$	2,044,210		$	(1,593,495	)

Other income/(expenses):

Interest expense	$	(457,526	)	$	(1,444,901	)
Interest income		(148	)		-
Changes in value of derivative instruments and preferred stock liability		1,365,139			2,101,680
Loss on extinguishment of debt		-
Other		(691	)		44,228
Write off of investment					-

Total other income/(expense):	$	906,774		$	701,007

Net income/(loss)	$	2,950,983		$	(892,488	)

Basic income per share	$	0.10		$	(0.03	)

Diluted income per share	$	0.10		$	(0.03	)

Weighted average number of shares outstanding:
Basic		30,843,873			30,862,656
Diluted		30,843,873			30,862,656

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Consolidated Statements of Operations

(Unaudited)

	Six Months Ended
	December 31,						April 25, 2005 (inception) through December 31, 2008
	2008			2007

Revenues:
License fees	$	4,016,667			-		$	4,016,667
Total revenue	$	4,016,667					$	4,016,667

Costs and Expenses:
Research and development	$	364,997			1,540,356		$	13,191,866
General and administrative		1,885,670			2,203,988			26,913,857
Total cost and expenses	$	2,250,667		$	3,744,344		$	40,105,723

Net income/ (loss) from operations	$	1,766,000		$	(3,744,344	)	$	(36,089,056	)

Other income/(expenses):

Interest expense	$	(860,624	)	$	(3,250,523	)	$	(10,693,646	)
Interest income		210			741		$	17,145
Changes in value of derivative instruments and preferred stock liability		4,438,261			34,938,119		$	14,843,711
Loss on extinguishment of debt		(701,869	)				$	(701,869	)
Other		32,752			(19,837	)	$	(6,573,890	)
Write off of investment					-		$	(150,000	)

Total other income/(expense):	$	2,908,730		$	31,668,500		$	(3,258,549	)

Net income/(loss)	$	4,674,730		$	27,924,156		$	(39,347,605	)

Basic income per share	$	0.15		$	0.91

Diluted income per share	$	0.11		$	0.68

Weighted average number of shares outstanding:
Basic		30,843,873			30,815,816
Diluted		41,621,819			42,030,763

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Consolidated Statement of Changes in Capital Deficiency

(Unaudited)

	Common Stock
	Number of Shares		Amount		Additional paid in capital		Deficit accumulated during the development stage			Total

Balance as of June 30, 2008	$	30,843,873	$	30,844	$	22,017,778	$	(44,023,056	)	$	(21,974,434	)

Stock based compensation
- Clinical and Advisory Board						19,913					19,913
- Extension of Director options						87,653					87,653
- Employees and Directors						217,819					217,819

Net income for the period								4,674,731			4,674,731

Balance as of December 31, 2008	$	30,843,873	$	30,844	$	22,343,163	$	(39,348,325	)	$	(16,974,318	)

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidiary

(a development stage company)

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended
	December 31,
							April 25, 2005
							(inception) through
	2008			2007			December 31, 2008
Cashflows from operating activities:
Net cash used by operating activities:		644,846			(1,885,436	)		(15,039,680	)

Cashflows from investing activities:
Security deposit		-			(11,390	)		(78,261	)
Acquistion of property and equipment		(12,619	)		(21,022	)		(1,059,699	)
Restricted cash		(12,059	)		(4,468	)		(46,115	)
Investment in Ceptor		-			-			(150,000	)
					-
Net cash used by investing activities:		(24,678	)		(25,490	)		(1,334,075	)

Cashflows from financing activities:
Borrowings from stockholders		75,000			1,069,500			5,069,828
Proceeds from sale of common stock		-			-			21,353
Proceeds from sale of preferred stock		-						6,761,150
Preferred stock issuance costs		-			165,000			(814,550	)
Proceeds from sale of Convertible Promissory Notes		843,500			(108,000	)		10,021,500
Repayment of borrowings from stockholder		-						(1,571,000	)
Convertible Promissory Notes issuance cost		-			(25,000	)		(466,100	)
Repayment of borrowings from noteholders		(105,000	)					(1,004,000	)
Warrants issued for extensions		-			-			-

Net cash provided by financing activities:		813,500			1,101,500			18,018,181

Net increase in cash and cash equivalents		1,433,668			(809,426	)		1,644,426

Cash and cash equivalents beginning of period		210,758			902,848			-

Cash and cash equivalents end of period	$	1,644,426		$	93,422		$	1,644,426

Supplemental disclosure of cash flow informations:
Cash paid during the period for:
Interest	$	-		$	31,583		$	71,737
Non-cash investing and financing tranactions:
Common Stock Subscription Receivable								-
Conversion of Convertible Notes payable and accrued interest into Series B preferred stock					31,733
Conversion of Series B preferred into common								3,114,115
Conversion of Series A preferred into common								198,868
Accrued dividend on Series B prefs treated as capital contribution								387,104
Exchange of common stock for note								23,400

1. Nature of Operations and Liquidity

Intellect Neurosciences, Inc. a Delaware corporation, (“Intellect”, “our”, “us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) is a biopharmaceutical company, which together with its subsidiaries Intellect Neurosciences, USA, Inc. (“Intellect USA”) and Intellect Neurosciences, (Israel) Ltd. (“Intellect Israel”), is conducting research and developing proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic approaches for treating AD. Since inception of Intellect USA in 2005, we have devoted substantially all of our efforts and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal year end is June 30. We have had no product sales through December 31, 2008 but we have received $2,050,000 in license fees during the three months ended on December 31, 2008. Our losses from operations have been funded primarily with the proceeds of equity and debt financings and fees from license arrangements.

As of December 31, 2008, we had approximately $1.6 million in cash and investments, a capital deficit of approximately $16.9 million and a deficit accumulated during the development stage of our Company of approximately $39.3 million. Our income/(loss) before other income/(expense) from operations for the three months ended December 31, 2008 and 2007 was approximately $2.0 million (which reflects $3.0 million of license fee revenue) and ($1.6) million, respectively. We anticipate that our existing capital resources will not enable us to continue operations past July of 2009, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. These conditions raise substantial doubt about our ability to continue as a going concern. If we fail to raise additional capital or obtain substantial cash inflows from potential partners or investors prior to July 2009, we may be forced to cease operations.

As described more fully below in Note 6, Convertible Promissory Notes, we are in default on convertible promissory notes with an aggregate carrying value of $5.5 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming that approximately $542,000 in damages consisting of principal and accrued interest alleged to be due under a promissory note, plus attorney’s fees, costs and disbursements. We responded to the complaint with various affirmative defenses, including the plaintiff’s failure to credit us for prior payments made. On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. The last day for the completion of discovery is April 17, 2009. The parties are currently exchanging documents and have scheduled a mediation conference to take place during early March.

As described more fully below in Note 5, Research and License Agreements, we are in default with respect to $100,000 in license payments and $50,000 in research payments owed to New York University (NYU) under our Option Agreement with NYU for an option to license certain NYU inventions and know-how relating to a vaccine for the mitigation, prophylaxis or treatment of AD (the “Beta-Vax Agreement”). As a result of the payment delinquencies and a decision by Intellect’s management to focus on its core programs, Intellect agreed with NYU on December 24, 2008 to the cancellation of the Beta-Vax Agreement, resulting in the termination of the license from NYU to Intellect.

We have taken action to reduce the rate of our cash burn and preserve our existing cash resources. We have closed our research laboratory in Israel and have terminated employees both in Israel and New York. We continue to incur rent on the facility and are attempting to sublet it to another tenant. We will continue to conduct research through outsourced facilities and arrangements. Currently, we have a total of four employees; one remaining employee at Intellect Israel and three remaining employees at Intellect USA.

We are seeking additional funding through various financing alternatives. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our existing stockholders. We cannot assure you that financing will be available on favorable terms or at all.

We are a development stage company and our core business strategy is to leverage our intellectual property estate through license arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications. As of December 31, 2008, we had no products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that any products developed by any of our future partners will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.

Our lead immunotherapy drug candidate is IN-N01, a monoclonal antibody that has completed the humanization process. Our drug candidate that is most advanced in clinical trials is OXIGON, a chemically synthesized form of a small, dual mode of action, naturally occurring molecule. We commenced human Phase I clinical trials for OXIGON on June 1, 2005 in the Netherlands and completed Phase I clinical trials on November 15, 2006.

Intellect USA was incorporated on April 25, 2005 under the name Eidetic Biosciences, Inc. It changed its name to Mindset Neurosciences, Inc. on April 28, 2005, to Lucid Neurosciences, Inc. on May 17, 2005 and finally to Intellect Neurosciences, Inc. on May 20, 2005. Intellect Israel was incorporated in Israel as a private limited company in July 2005 for the purpose of conducting research relating to our proprietary compounds. We conduct our research activities at Intellect Israel through third party outsourcing arrangements.

2. Basis of Presentation

The unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Current Report on Form 10KSB/A for the fiscal year ended June 30, 2008 filed with the Securities and Exchange Commission (the “SEC”) on November 7, 2008. The consolidated financial statements include the accounts of our wholly owned subsidiary, Intellect Israel and the accounts of Mindgenix, Inc. (“Mindgenix”), a wholly-owned subsidiary of Mindset Biopharmaceuticals, Inc. (“Mindset”). We consolidate Mindgenix because we have agreed to absorb certain costs and expenses incurred that are attributable to their research. Dr. Chain, our CEO, is a controlling shareholder of Mindset and the President of Mindgenix. All inter-company transactions have been eliminated in consolidation.

In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for fair presentation. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities based on the going concern uncertainty.

3. Reverse Merger

On January 25, 2007, GlobePan Resources, Inc. entered into an agreement and plan of merger with Intellect Neurosciences, Inc., a privately held Delaware corporation, and INS Acquisition, Inc., a newly formed, wholly-owned Delaware subsidiary of GlobePan Resources, Inc. which we refer to as Acquisition Sub. Pursuant to this agreement and plan of merger, on January 25, 2007, Acquisition Sub merged with and into Intellect Neurosciences, Inc., Acquisition Sub ceased to exist and Intellect Neurosciences, Inc. survived the merger and became the wholly-owned subsidiary of GlobePan Resources, Inc. We refer to this transaction as the merger. Intellect Neurosciences, Inc., the surviving entity in the merger, then changed its name to Intellect USA, Inc. and GlobePan Resources, Inc. changed its name to Intellect Neurosciences, Inc. Therefore, as of January 26, 2007, our name is Intellect Neurosciences, Inc. and the name of our wholly-owned subsidiary is Intellect USA, Inc., which wholly-owns Intellect Neurosciences (Israel) Ltd., an Israeli company. We refer to Intellect USA, Inc. as Intellect USA and we refer to Intellect Neurosciences (Israel) Ltd. as Intellect Israel.

Following the merger and after giving effect to the options we issued immediately following the merger, there were 35,075,442 shares of our common stock issued and outstanding on an actual basis and 55,244,385 shares of our common stock issued and outstanding on a fully diluted basis. In our determination of the number of shares of our common stock issued and outstanding on a fully diluted basis, we (i) include the aggregate 9,000,000 shares of our common stock retained by existing GlobePan stockholders, (ii) include the aggregate 26,075,442 shares of our common stock received by former holders of Intellect USA capital stock, including the former holders of Intellect USA’s Series B Preferred stock, (iii) assume the issuance of all shares potentially available for issuance under our 2005 plan and our 2006 plan, regardless of whether such shares are currently covered by options, and (iv) assume the conversion of all outstanding warrants and convertible notes into shares of our common stock.

In connection with the merger, we reflected a charge for the fiscal year ended June 30, 2007 in the amount of $7,020,000, representing the shares issued to the Globepan shareholders. We incurred this charge due to the fact that the Globepan shareholders obtained shares of the shell company prior to the reverse merger date.

Following the merger, we exchanged the shares of our common stock received by the former holders of Intellect USA’s Series B Preferred stock in the merger for shares of a new series of our preferred stock. The new Series B Preferred stock has the same designations, preferences, special rights and qualifications, limitations and restrictions with respect to our capital stock as the designations, preferences, special rights and qualifications, limitations and restrictions that the Intellect USA Series B Preferred stock had with respect to Intellect USA’s capital stock. (See Note 7, Series B Convertible Preferred Stock.)

4. Stock-Based Compensation Plans

Total compensation expense recorded during the three months ended December 31, 2008 and 2007 for share-based payment awards was $107,753 and $207,482, respectively, of which $57,442 and $108,663, respectively, is shown in research and development and $50,311 and $98,819, respectively, is shown in general and administrative expenses in the condensed statement of operations.

At December 31, 2008, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was approximately $215,494, which is expected to be recognized over a weighted-average period of 1.65 years. No tax benefit was realized due to a continued pattern of operating losses. No stock options were issued during the quarter ended December 31, 2008.

Summary of all option plans at December 31, 2008:

	Year Ended June 30, 2008			Weighted Average Exercise Price		Instrinisic value		Weighted Average Remaining Contractual Life

Options outstanding at June 30, 2008		12,703,373		$	0.70	$	-
Granted		-
Cancelled/Forfeited		(516,566	)	$	0.71		-
Expired
Balance at the end of period		12,186,807		$	0.70		-		7.812
Options excercisable at the end of period		11,815,929		$	0.71		-		7.781

Options vested or expected to vest		12,186,807		$	0.76		-		7.812

A summary of the status of the Company’s non-vested shares as of December 31, 2008, and changes during the three months ended on such date is presented below

	Number of Awards			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Amortization Period

Balance, beginning of the period		607,783		$	0.66	$	0.59
Vested		(226,405	)	$	0.71		0.63
Cancelled/Forfeited		(10,500	)	$	0.64		0.58
Balance, end of the period		370,878		$	0.64		0.57	1.20

A summary of the Company’s stock options at December 31, 2008 is as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price

$0.40 - $0.65		1,571,333		6.00	$	0.62		1,249,208	$	0.63
$0.66 - $0.78		10,601,475		8.07	$	0.78		10,555,848	$	0.78
$0.79 - $3.10		13,999		8.48	$	3.10		10,873	$	3.10
		12,186,807		7.81		0.76		11,815,929		0.77

On September 4, 2008, our Board of Directors approved an extension of the exercise period of the stock options held by former directors, Messrs. Eliezer Sandberg and David Woo. Under the extension period approved by the Board, the options will expire 5 years following the termination dates of March 19, 2008 in the case of Mr. Sandberg and March 20, 2008 in the case of Mr. Woo, respectively. In connection with the extensions, we recorded a charge of $83,479, calculated using a Black Scholes option pricing model.

5. Research and License and Assignment Agreements

South Alabama Medical Science Foundation Research and License Agreement - OXIGON. Effective August 10, 1998 and as amended as of September 1, 2002, Mindset entered into a Research and License Agreement with the South Alabama Medical Science Foundation (the "SAMS Foundation"). On June 17, 2005, SAMS Foundation consented to Mindset's assignment of the Research and License Agreement to Intellect USA. Under the Research and License Agreement, we have an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patents and know-how relating to the use of melatonin and melatonin analogs in the prevention or treatment of amyloid-related disorders and in the use of melatonin analogs as antioxidants and to the use of indole-3-propionic acid to prevent a cytotoxic effect of amyloid-beta protein to treat a fibrillogenic disease, including AD, or generally to treat a disease or condition where free radicals and/or oxidative stress contribute to pathogenesis. Under the Research and License Agreement, we have the first right to enforce the underlying intellectual property against unauthorized third parties. We are obligated to make future payments to the SAMS Foundation totaling approximately $1,500,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay the SAMS Foundation a royalty on the sales, net of various customary deductible items, subject to certain minimum royalties, attributable to each product utilizing the licensed technology. We have yet to achieve the clinical development or FDA approval milestones that trigger our obligation to make future payments.

Under the September 2002 amendment to the Research and License Agreement, the initiation of a Phase I trial of an AD licensed product anywhere in the world triggered a milestone payment obligation of $50,000. On December 1, 2005, Intellect USA commenced a Phase I trial for OXIGON in The Netherlands and thus triggered this payment obligation. On January 11, 2006, the SAMS Foundation agreed to amend the Research and License Agreement to provide that the $50,000 milestone payment would be payable in five equal monthly installments of $10,000, the first of which was payable on February 1, 2006. Intellect USA paid the $50,000 to the SAMS Foundation during the year ended June 30, 2006 in monthly installments when due.

New York University Research and License Agreement - OXIGON. Effective August 10, 1998 and as amended in 2002, Mindset entered into a license agreement with New York University ("NYU") with terms similar to the terms described above with respect to the research and License Agreement with the SAMS Foundation. On June 17, 2005, NYU consented to Mindset's assignment of the license agreement with NYU to Intellect USA. Under the license agreement with NYU, we have an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patents and know-how relating to the use of melatonin and melatonin analogs in the prevention or treatment of amyloid-related disorders and in the use of melatonin analogs as antioxidants and to the use of indole-3-propionic acid to prevent a cytotoxic effect of amyloid-beta protein, treat a fibrillogenic disease, including AD, or generally to treat a disease or condition where free radicals and/or oxidative stress contribute to pathogenesis. In addition, we have the first right to enforce the underlying intellectual property against unauthorized third parties. We are obligated to make future payments totaling approximately $1,500,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay NYU a royalty on the sales, net of various customary discounts subject to certain minimum royalty payments, attributable to each product utilizing the licensed technology and a percentage of sales of sublicenses. We have yet to achieve the clinical development or FDA approval milestones that trigger our obligation to make future payments.

Under the September 2002 amendment to the Research and License Agreement, the initiation of a Phase I trial of an AD licensed product anywhere in the world triggered a milestone payment obligation of $50,000. On December 1, 2005, Intellect USA commenced a Phase I trial for OXIGON in The Netherlands and thus triggered this payment obligation. On January 11, 2006, NYU agreed to amend the Research and License Agreement to provide that the $50,000 milestone payment would be payable in five equal monthly installments of $10,000, the first of which was payable on February 1, 2006. Intellect USA paid the $50,000 to NYU during the year ended June 30, 2006 in monthly installments when due.

New York University Option Agreement and License Agreement – BETA-VAX (terminated). On August 31, 2005, Intellect USA entered into an Option Agreement with New York University for an option to license certain NYU inventions and know-how relating to a vaccine for the mitigation, prophylaxis or treatment of AD. Under the Option Agreement, we were entitled to acquire an exclusive, worldwide license to commercially use NYU's inventions and know-how in the development of products for use in the mitigation, prophylaxis or treatment of AD. NYU retained the right to use the inventions and know-how for its own academic and research purposes and to allow other academic institutions to use the inventions and know-how for their academic and research purposes other than clinical trials, as well as any rights of the United States government. In addition, we agreed to reimburse NYU for certain patent protection costs and expenses incurred by NYU. Patent costs are expensed as incurred to general and administrative costs. Intellect USA exercised the option to acquire the license on April 1, 2006 and entered into a License Agreement with NYU on April 21, 2006.

Under the terms of the License Agreement, we are obligated to pay non-refundable, non-creditable license fees totaling $200,000, payable in five installments as follows: $25,000 on each of May 1 and June 1, 2006 and $50,000 payable on each of April 1, 2007, 2008 and 2009. We have not paid the license payments due on April 1, 2007 or April 1, 2008. Under the Agreement, NYU may cancel the Agreement for non-payment upon 30 days’ notice. The Agreement does not provide for interest payments; consequently, the principal payments have been discounted to their present value at an annual interest rate of 10%, resulting in a principal amount of approximately $172,700 and imputed interest of approximately $27,300 at the time of execution of the License Agreement. As of December 31, 2008, the approximate remaining balance due to NYU in respect of the License Agreement, including accrued interest for 2007 and 2008 is $145,260, which is included in Accounts Payable and Accrued Expenses as Due to Licensors on our Consolidated Balance Sheet.

In addition, we are obligated to pay NYU non-refundable research payments for performance by NYU of certain ongoing research activities totaling $200,000, payable in eight equal installments of $25,000 every three-months beginning on April 1, 2006. We paid $150,000 of such payments and are delinquent with respect to the balance. Also, we are obligated to make future payments totaling approximately $2,000,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay NYU a royalty on the sales, net of various customary discounts, attributable to each licensed product. As a result of the payment delinquencies and a decision by Intellect’s management to focus on its core programs, Intellect agreed with NYU on December 24, 2008 to the cancellation of the Licensing Agreement, resulting in the termination of the license from NYU to Intellect. We remain obligated to pay NYU the outstanding amounts due under the License Agreement through the date of termination.

Mayo Foundation for Medical Education and Research License and Sponsored Research Agreement. Effective October 24, 1997 as amended on September 1, 2001 and February 1, 2005, Mindset acquired from the Mayo Foundation for Medical Education and Research (“Mayo”) a non-exclusive license to use certain transgenic mice and related technologies as models for AD and other neurodegenerative diseases. Under the amended agreement with Mayo, Mindset is obligated to pay Mayo a royalty of 2.5 % of any net revenue that Mindset receives from the sale or licensing of a drug product for AD in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMS Foundation to conduct research with respect to OXIGON. Pursuant to the Consent to Assignment that Intellect USA executed with the SAMS Foundation in June 2005, Intellect USA agreed to assume all of Mindset’s obligations with respect to the License with the SAMS Foundation, which includes Mindset’s obligations to pay royalties to Mayo. Neither Mindset nor Intellect has received any net revenue that would trigger a payment obligation to Mayo.

Chimeric Peptide Assignment Agreement – RECALL-VAX. Effective as of June 6, 2000, Dr. Benjamin Chain assigned to Mindset all of his right, title and interest in certain of his inventions and patent applications related to the use of chimeric peptides for the treatment of AD. Dr. Benjamin Chain is the brother of our Chairman and Chief Executive Officer. In exchange for such assignment, Mindset agreed to pay a royalty to Dr. Benjamin Chain equal to 1.5% of net sales of any drug products sold or licensed by Mindset utilizing the chimeric peptide technology. Intellect USA acquired these inventions and patent applications as part of the asset estate that we acquired from Mindset and we are obligated to make royalty payments to Dr. Benjamin Chain upon successful development of a drug utilizing this chimeric peptide technology. We have yet to develop any drug product that would trigger our obligation to make future payments to Dr. Benjamin Chain.

Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement - ANTISENILIN. Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement (the "IBL Agreement") effective as of December 26, 2006 by and between Intellect USA and Immuno-Biological Laboratories Co., Ltd. ("IBL"), we acquired a beta amyloid specific monoclonal antibody ready for humanization, referred to as 82E1, including all lines and DNA sequences pertaining to it, and the IBL patents or applications relating to this antibody. We also acquired a second monoclonal antibody referred to as 1A10, the DNA sequence pertaining to it and the IBL patents or applications relating to this antibody. The Agreement requires an upfront payment of $50,000, which was subsequently reduced to $40,000, which we paid in March 2008.

In consideration for the purchase, we agreed to pay IBL a total of $2,125,000 (including the $40,000 referred to above) upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82El or 1A10 antibodies. Also, we granted to IBL a worldwide, exclusive, paid-up license under certain Intellect granted patents and pending applications in Japan, to make, use and sell certain beta amyloid specific monoclonal antibodies solely for diagnostic and/or laboratory research purposes. The IBL Agreement expires upon the last to expire of the relevant Intellect patents, unless earlier terminated as the result of a material breach by or certain bankruptcy related events of either party to the agreement.

MRCT Research Collaboration Agreement. Effective as of August 6, 2007 and as amended on June 19, 2008, MRCT and Intellect entered into a Research Collaboration Agreement (the “Collaboration Agreement”) pursuant to which MRCT agreed to conduct a project to humanize 82E1, our beta-amyloid specific, monoclonal antibody for the treatment of Alzheimer’s disease. Humanization is an essential step in making antibodies safe for use in humans.

Under the terms of the Collaboration Agreement as amended, we are obligated to pay MRCT up-front fees and research milestone payments related to the development of the 82E1 humanized antibody and additional commercialization milestones and sales based royalties related to the resulting drug products. As of December 31, 2008, we have paid to MRCT a total of $200,000 of up-front fees, and none of the research milestones. Under the June 19, 2008 amendment, we may deliver warrants to purchase our common stock in lieu of cash payments under certain circumstances related to our future financing activities as payment for research milestone payment obligations. Three of the five research milestones have been achieved and as a result, a liability reflecting research milestone payment obligations outstanding is included in Accounts Payable and Accrued Expenses.

CHDI. On September 5, 2007, we entered into an agreement with CHDI, Inc., a non-profit organization pursuing the discovery and development of drugs to prevent or slow the progression of Huntington disease (HD). CHDI will assess Intellect's OXIGON as a potential therapy for HD. Under the agreement, Intellect will provide to CHDI the compound, OXIGON, necessary for animal studies. Results of preliminary studies based on pharmacokinetic measurements have failed to meet certain of CHDI’s criteria for testing in transgenic mouse models of HD. The agreement remains in force while other potential models of HD are explored.

Élan Pharma International Limited and Wyeth License Agreement. In May, 2008, we entered into a License Agreement (the “Agreement”) by and among Intellect and AHP MANUFACTURING BV, acting through its Wyeth Medica Ireland Branch, (“Wyeth”) and ELAN PHARMA INTERNATIONAL LIMITED (“Elan”) to provide Wyeth and Elan (collectively, the “Licensees”) with certain license rights under certain of our patents and patent applications (the “Licensed Patents”) relating to certain antibodies that may serve as potential therapeutic products for the treatment for Alzheimer’s Disease (the “Licensed Products”) and for the research, development, manufacture and commercialization of Licensed Products.

Pursuant to the Agreement, we granted the Licensees a co-exclusive license (co-exclusive as to each Licensee) under the Licensed Patents to research, develop, manufacture and commercialize certain Products in the Field in the Territory (all as defined in the Agreement) and a non-exclusive license under the Licensed Patents to research, develop, manufacture and commercialize certain other Licensed Products in the Field in the Territory. We received $1 million as of June 30, 2008 and an additional $1 million in August, 2008 pursuant to this Agreement. In addition, we are eligible to receive certain milestones and royalties based on sale of Licensed Products as set forth in the Agreement.

Under the terms of the License Agreement, the Licensees have an option to receive ownership of all of our right, title and interest in and to the Licensed Patents if at any time during the term of the Agreement (i) Licensor and its sublicensees have abandoned all activities related to research, development and commercialization of all Intellect Products that are covered by the Licensed Patents and (ii) no licenses granted by Licensor under the Licensed Patents (other than the licenses granted to Licensees under the Agreement) remain in force. Abandonment includes a failure by Intellect to incur $50,000 in patent or program research related expenses during any six month period that the Agreement is in effect. Accordingly, we have recorded the up-front payment of $1 million received from the Licensees as a Deferred Credit on our Consolidated Balance Sheet, representing our obligation to fund such future patent or program research related expenses. We will amortize the deferred credit over the remaining life of the License, which approximates the remaining life of the underlying patents.

On July 31 2008, we obtained a European patent relating to our ANTISENILIN monoclonal antibody platform for the treatment of Alzheimer’s disease. The grant of the patent triggered a $1 million milestone payment under the License Agreement. We have accounted for this payment as revenue for the three months ended September 30, 2008.

As described more fully below in “ANTISENILIN Option and License Agreement”, in October 2008, we entered into an Option & License Agreement (the “Option Agreement”) with a top-tier global pharmaceutical company (“Option Holder”) regarding an option to purchase a license under certain patents (defined as “Licensed Patents” in the Option Agreement). The patents are the same patents and patent applications as the Licensed Patents arising from the Agreement with Elan and Wyeth described above. Effective as of December 19, 2008, the Option Holder became the Licensee of the patents by paying the Exercise Fee described in the Option Agreement as adjusted by subsequent discussions between the parties to the Option Agreement. As a result, the Licensees’ option to receive ownership of all of our right, title and interest in and to the Licensed Patents described above has terminated as of December 19, 2008.

PharmaSeed Transaction. Effective as of July 15, 2008, Mindgenix and PharmaSeed Ltd., an Israeli company that provides drug testing services (“Pharmaseed”), entered into an Operating and Marketing Agreement under which Pharmaseed will manage MindGenix’ third party testing business, which involves the testing of compounds using APP/PS1 transgenic mice (the “Testing Business”). Pharmaseed will operate, at its expense, all aspects of the Testing Business, including invoicing and collecting client payments. MindGenix will be entitled to receive a portion of the revenue earned by Pharmaseed from the Testing Business. In addition, Pharmaseed will pay to MindGenix the portion of gross revenue due as royalty payments to USFRF and Mayo under their respective licenses, which are used to conduct the Testing Business. MindGenix would pay that money over to USFRF and Mayo. Pharmaseed has yet to make any payments to Mindgenix under this Agreement.

The term of the agreement is three years and is renewable every year for five years, at Pharmaseed’s sole discretion. Pharmaseed may terminate the agreement with 90 days’ prior notice MindGenix may terminate the agreement in the event that Pharmaseed has not used commercially reasonable efforts to maintain and develop the Testing Business. Also, the agreement may be terminated upon certain bankruptcy and insolvency events.

Pursuant to the agreement, Pharmaseed will manage all aspects of the Testing Business (facilities, personnel, etc.) at its own cost; market the Testing business at its own cost and discretion; invoice and collect payment from customers; purchase supplies and third-party services; and pay facilities utility costs for space/utilities used for the Testing Business. In addition, Pharmaseed will pay to MindGenix the amounts due to USFRF and Mayo per the terms of their respective license agreements on Testing Business revenue.

MindGenix’ retained obligations are to pay to USFRF and Mayo all amounts due per the terms of their respective license agreements on Testing Business revenue and forward Pharmaseed all documentation evidencing such payments; pay all liabilities incurred related to personnel and facilities not related to the Testing Business and all liabilities incurred prior to the effective date of the agreement; maintain responsibility for all corporate related permits, filings, tax returns and tax liabilities; maintain insurance naming Pharmaseed as an additional insured; and maintain all licenses required in order for Pharmaseed to conduct the Testing Business, including performance of all obligations towards Mayo and USFRF under the applicable license agreements.

From the revenue received from the Testing Business, Pharmaseed will pay the operating costs of the Testing Business (comprising its facilities and personnel overhead and consumables related to the Testing Business) and will pay MindGenix a quarterly fee equal to 10% of the difference between Pharmaseed’s revenues actually received directly from the Testing Business (other than revenues accepted from Intellect) less the Testing Costs. Also, Pharmaseed will pay to MindGenix, the license fees payable to USFRF and Mayo and MindGenix will pay such money over to the licensors and provide Pharmaseed with proper documentation of such payment.

Pursuant to the agreement, Pharmaseed will provide Intellect with preferred pricing and priority for testing services, equivalent to Testing Costs and license fees related to the Intellect projects plus 7% and will not pay MindGenix any fees with respect to such revenues.

We continue to consolidate the accounts of Mindgenix because we have agreed to absorb certain costs and expenses incurred that are attributable to their research.

ANTISENILIN Option and License Agreement. In October 2008, we entered into an Option Agreement (the “Option Agreement”) with a top-tier global pharmaceutical company (“Option Holder”) regarding an option to purchase a license under certain patents related to antibodies and methods of treatment for Alzheimer’s disease (the “Subject Patents”) and to make, have made, use, sell, offer to sell and import certain Licensed Products (both as defined in the Option Agreement). The Subject Patents are the same patents and patent applications as the Licensed Patents described above.

Pursuant to the Option Agreement, we granted the Option Holder an irrevocable option to acquire a non-exclusive, royalty bearing license under the Subject Patents with the right to grant sublicenses, to develop, have developed, make, have made, use, offer to sell, sell, import and have imported Licensed Products in the Territory in the Field (the “Option”).

In consideration of the Option, the Option Holder paid us a non-refundable fee of five hundred thousand dollars ($500,000) (the “Option Fee”). In consideration of the exercise of the Option, the Option Holder will pay us two million dollars ($2,000,000) (the “Exercise Fee”). Two hundred and fifty thousand dollars ($250,000) of the Option Fee is creditable against the Exercise Fee.

In addition, upon the later of (1) exercise of the Option, and (2) grant in the United States of a Licensed Patent with at least one Valid Claim that covers a Licensed Product in the Territory in the Field (as such terms are defined in the Agreement), we will receive two million U.S. dollars (U.S. $2,000,000). An additional milestone payment shall be made to us should the Option Holder achieve certain thresholds for aggregate annual Net Sales for any Licensed Product in countries in which there are then existing one or more Valid Claims covering the Licensed Product.

The Agreement also provides that we will be eligible to receive certain royalty payments from the Option Holder in connection with Net Sales of Licensed Products by the Option Holder, its affiliates and its permitted sublicensees. The term during which such royalties would be payable begins upon launch of a Licensed Product in a country (or upon issuance of a Valid Claim, whichever is later) and ending upon the date on which such Licensed Product is no longer covered by a Valid Claim in such country (as such terms are defined in the Agreement).

Effective as of December 19, 2008, the Option Holder became the Licensee of the Subject Patents by paying $1,550,000, which is the Exercise Fee described in the Option Agreement as adjusted by subsequent discussions between the parties to the Option Agreement

6. Convertible Promissory Notes Payable

Convertible Promissory Notes and Warrants issued through the fiscal year ended June 30, 2006.

During the period beginning on May 10, 2005 through January 10, 2006, Intellect USA issued Convertible Promissory Notes in a private placement to accredited investors. Each investor purchased an investment unit consisting of a convertible promissory note (the "2006 Notes") and a warrant to purchase shares of our common stock (the "2006 Warrants"). The 2006 Notes were due on the earlier of May 10, 2006 or the closing of an equity financing or financings with one or more third parties with gross proceeds to us of not less than $5,000,000 (the "Next Equity Financing") except for the Note issued to HCP Intellect Neurosciences, LLC, with a face amount of $250,000, which was due on the earlier of January 5, 2006 or the closing of the Next Equity Financing. This Note was repaid on February 16, 2006. The Next Equity Financing occurred on or about May 12, 2006.

The 2006 Notes bear interest at 10% and are unsecured obligations. At the option of the holder, principal and all accrued but unpaid interest on the Notes are convertible into the class of equity securities that we issue in the Next Equity Financing at a price per share equal to 100% of the price per equity security issued in the Next Equity Financing. There is no cash payment obligation related to the conversion feature and there is no obligation to register the common shares underlying the 2006 Notes.

The Notes essentially contain a call option on our common stock. APB 14 generally provides that debt securities which are convertible into common stock of the issuer or an affiliated company at a specified price at the option of the holder and which are sold at a price or have a value at issuance not significantly in excess of the face amount are not bifurcated into separate obligations. The terms of such securities generally include (1) an interest rate which is lower than the issuer could establish for nonconvertible debt, (2) an initial conversion price which is greater than the market value of the common stock at time of issuance, and (3) a conversion price which does not decrease except pursuant to anti-dilution provisions. The Notes do not satisfy these conditions, and accordingly the determination of whether the conversion feature should be accounted for separately should be governed by FASB Statement 133, “Accounting for Derivative Instruments and Hedging Activities”.

We have determined that based on the provisions of FASB Statement 133, the embedded conversion feature present in the 2006 Notes should not be valued separately at the commitment date. Under FASB 133, a contract that contains an “embedded” derivative instrument; i.e., implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by the contract in a manner similar to a derivative instrument, must, under certain circumstances, be bifurcated into a host contract and the embedded derivative, with each component accounted for separately. The issuer's accounting depends on whether a separate instrument with the same terms as the embedded written option would be a derivative instrument pursuant to paragraphs 6–11 of this Statement. Because the option is indexed to the our own stock and a separate instrument with the same terms as the option would be classified in stockholders' equity in the statement of financial position, the written option is not considered to be a derivative instrument under paragraph 11(a) and should not be separated from the host contract.

Under the terms of the 2006 Warrants, the number of shares underlying each 2006 Warrant is the quotient of the face amount of the related 2006 Note divided by 50% of the price per equity security issued in the Next Equity Financing. The 2006 Warrant exercise price is 50% of the price per equity security issued in the Next Equity Financing. The maximum number of shares available for purchase by an investor is equal to the principal amount of such holder's 2006 Note divided by the warrant exercise price. We recorded the liability for the 2006 Notes at an amount equal to the full consideration received upon issuance, without considering the 2006 Warrant value because the determination of the number of warrants and the exercise price of the warrants is dependent on the stock price issued in the Next Equity Financing, which did not take place until May 12, 2006, subsequent to the issue date of the 2006 Notes. On May 12, 2006, Intellect USA issued the 2006 Warrants, entitling the holders to purchase up to 2,171,424 shares of our common stock. The 2006 Warrants expire five years from date of issuance of the related 2006 Note. We valued the 2006 Warrants as of May 12, 2006, the measurement date, and recorded a charge to interest expense and a corresponding derivative liability of $746,972. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the 2006 Warrants.

On December 1, 2006, holders of 2006 Notes with an aggregate face amount of $250,000 agreed to extend the maturity date of the Notes to December 20, 2006 and waive any event of default with respect to the Notes in exchange for the issuance of 111,150 warrants to purchase our common stock at an exercise price of $2.50 per share.

On July 13, 2007, we repaid a 2006 Note with a principal amount of $25,000 and accrued interest of $3,715 and entered into an agreement with the holder of the remaining outstanding 2006 Note with a face amount of $25,000 to extend the maturity date to September 30, 2007 and to waive an event of default in exchange for our agreement to issue 11,522 shares of our common stock. On November 6, 2007 we entered into another extension agreement with this note holder to extend the maturity date to the earlier of December 15, 2007 or our next equity financing and agreed to issue 30,000 shares of our common stock, which we issued on December 10, 2007. We recorded interest expense of $11,100 related to the issuance of the shares. In February 2008, we rescinded the issuance of the 30,000 shares of common stock and the Note holder agreed to extend the maturity date of the Note to the earlier of March 31, 2008 or our next financing of not less than $5,000,000 and to waive any prior events of default. In exchange, we issued to the Note holder an additional note with a principal amount of $75,000 for no additional consideration. We recorded the fair value of the common stock that was cancelled as a liability. The additional note will be accreted up to its face value of $75,000. The additional note bears interest at 10%, is an unsecured obligation and is due not later than February 15, 2009. Principal and all accrued but unpaid interest on the additional note is convertible into our common stock at a conversion price of $1.75 per share. In addition, principal and all accrued but unpaid interest on the additional note is convertible into the class of securities that we issue in the next financing. We repaid the remaining 2006 Note with the face amount of $25,000 together with accrued interest of $6,132 on June 12, 2008.

As a result of the above, as of December 31, 2008, all of the original 2006 Notes have been repaid or converted into shares of our Series B Preferred Stock and warrants to purchase up to 2,282,574 shares of our common stock are issued and outstanding. Also, an additional note with a face amount of $75,000 and a carrying amount of $69,062 is outstanding.

Convertible Promissory Notes and Warrants issued during the fiscal year ended June 30, 2007 (“2007 Notes”).

During the fiscal year ended June 30, 2007, we issued $5,678,000 aggregate face amount of Convertible Promissory Notes (the “2007 Notes”) together with warrants to purchase up to 3,236,000 shares of our common stock at a price of $1.75 per share. All of the 2007 Notes bear interest at 10% and are unsecured obligations. Certain of the 2007 Notes are due no later than 6 months from the date of issuance and others are due no later than one year from the date of issuance. The 2007 Notes are repayable before that time if we close an equity financing with gross proceeds of not less than $5 million or a licensing transaction with a collaborative partner that results in an upfront payment to us of not less than $4 million. At the option of the holders of the 2007 Notes, principal and all accrued but unpaid interest are convertible into common stock of the Company. The number of shares of common stock to be issued is calculated by dividing the outstanding principal amount plus accrued interest on the date of conversion by 1.75. There is no cash payment obligation related to the conversion feature and there is no obligation to register the common shares underlying the 2007 Notes except for standard “Piggyback registration” obligations.

We determined the initial fair value of the warrants issued to the purchasers of the 2007 Notes to be $3,425,861 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the 2007 Notes. This difference has been amortized over the term of the 2007 Notes as interest expense, calculated using an effective interest method. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the warrants.

During the fiscal year ended June 30, 2007, we incurred placement fees of $340,000 and issued 485,714 warrants to a placement agent in connection with the issuance of 2007 Notes with an aggregate face amount of $3.4 million. We recorded the $340,000 placement fee and the value of the warrants as deferred financing costs, which have been amortized over the term of these 2007 Notes, without regard to any extension of the maturity date of such Notes. We determined the initial fair value of the warrants on the closing date of July 5, 2007 to be $1,116,250 using the Black Scholes option pricing model. This amount was recorded as a warrant liability with an offset to deferred financing costs. The warrant liability will be marked to market at each future reporting date. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the 2007 Warrants.

In July 2007, we entered into Extension Agreements with certain holders of 2007 Notes due in June and July 2007 to extend the maturity date of such Notes to not later than September 30, 2007 and October 31, 2007, respectively, and issued to such holders an aggregate amount of 300,000 shares of our common stock and 107,003 warrants to purchase our common stock, at an exercise price of $1.75 per share.

Also, in July 2007, Notes with an aggregate face amount of $30,000 were past due. We entered into extension agreements with the holders of these Notes and cancelled the 8,571 warrants that we issued to them at the time of original issuance of the Notes and issued to these holders 17,400 replacement warrants. The extension warrants are accounted for as a liability with an offset to interest expense. Subsequently, in July 2007, these holders converted their 2007 Notes into 18,240 common shares at a conversion price of $1.75. On April 8, 2008, we rescinded the conversion of the Notes into common shares and reinstated the Notes and agreed with the holders to extend the maturity date to June 30, 2008.

As a result of the above, as of December 31, 2008, we are in default with respect to all of the remaining 2007 Notes, which have an aggregate carrying value of $5,502,123. In addition, warrants to purchase 3,837,546 shares of our common stock are issued and outstanding in connection with the issuance of the 2007 Notes.

On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming approximately $542,000 in damages, consisting of principal and accrued interest alleged to be due under a promissory note, plus attorney’s fees, costs and disbursements. David Blech and Margie Chassman, one of our principal shareholders, provided personal guarantees to this note holder guaranteeing all of our obligations under the Brauser promissory note and are also named in the lawsuit. We responded to the complaint with various affirmative defenses, including the plaintiff’s failure to credit us for prior payments made. On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. The last day for the completion of discovery is April 17, 2009. The parties are currently exchanging documents and have scheduled a mediation conference to take place during early March.

Convertible Promissory Notes and Warrants issued during the fiscal year ended June 30, 2008 (“2008 Notes”).

During the fiscal year ended June 30, 2008, we issued convertible promissory notes with an aggregate face amount of $325,000 (“the 2008 Notes”) due 12 months from date of issuance. The 2008 Notes bear interest at 10% and are unsecured liabilities, except for one Note with a face amount of $100,000 that bears interest at 17% and is due six months form the date of issuance. At the option of the holder, the principal and all accrued but unpaid interest are convertible into common stock of the Company. The number of shares of common stock to be issued is calculated by dividing the outstanding principal amount plus accrued interest on the date of conversion by 1.75. In connection with the 2008 Notes, we issued 185,744 warrants.

We determined the initial fair value of the warrants issued with the 2008 Notes to be $52,740 based on the Black-Scholes option pricing model, which has been treated as a liability with a corresponding decrease in the carrying value of the 2008 Notes. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the warrants. This difference will be amortized over the term of the 2008 Notes as interest expense calculated using an effective interest method.

The carrying value of the outstanding 2008 Notes as of December 31, 2008 is approximately $217,966. As of December 31, 2008, we are in default with respect to 2008 Notes with an aggregate face amount of $165,000. The maturity dates of 2008 Notes with an aggregate face amount of $135,000 have been extended until July 31, 2013 pursuant to the royalty transaction described below and are now included as part of the Notes Payable described below.

Convertible Promissory Notes Issued Without Warrants.

Through the fiscal year ended June 30, 2008, we issued Convertible Promissory Notes without warrants with an aggregate face amount of $5,984,828 that are due one year from date of issuance (the “Warrantless Notes”). The notes bear interest at 8% and are unsecured obligations. At the option of the holder, principal and all accrued but unpaid interest with respect to the notes are convertible into our common stock. The number of shares of common stock to be issued is calculated by dividing the outstanding principal amount plus accrued interest on the date of conversion by 1.75. There is no cash payment obligation related to the conversion feature and there is no obligation to register the common shares underlying the notes except for “Piggyback registration” obligations. Through the fiscal year ended June 30, 2008, we repaid Warrantless Notes with an aggregate principal amount of $1,286,000.

During July 2008, we issued additional Warrantless Notes with identical terms and an aggregate principal amount of $268,500, of which $75,000 was provided by related parties. As of December 31, 2008, the outstanding principal balance of the Warrantless Notes was $4,967,328, of which $3,498,828 was owed to a related party. As more fully described below, on July 31, 2008, the Warrantless Notes effectively were exchanged for Notes Payable.

Royalty Participation Transaction

On May 2, 2008, our Board approved a term sheet (the “Term Sheet”) containing the material terms of a transaction (the “Transaction”) to be entered into among the Company, as obligor, and certain existing shareholders of and lenders to the Company (the “Existing Investors”) and any other lenders who participate in the Transaction (together with the Existing Investors, the “Lenders”).

Pursuant to the Term Sheet, the Existing Investors, who held convertible promissory notes with an aggregate face amount of approximately $3,633,500 plus accrued interest (the “Convertible Notes”) as of March 2008, and other Lenders agreed to lend an additional $1,500,000 to $2,225,000 to the Company during the period commencing April 15, 2008 and ending on September 1, 2008. As consideration for the loans, we agreed to exchange the outstanding Convertible Notes for a new senior note (the “Senior Note Payable”), 3,271,429 warrants to purchase our common stock and the right to participate in future royalties, if any, received by us from the license of our ANTISENILIN patents and patent applications (the “Royalty Participation”).

The Senior Note Payable will have a maturity date of five years from execution of final documentation and will bear interest at 10% per annum payable in registered common stock of the Company or cash, at the Company’s option. The warrants will have an exercise price of $1.75 per common share and contain full anti-dilution protection. The Royalty Participation will entitle the Lenders to 25% of royalties received by the Company from a license of the ANTISENILIN patent estate in perpetuity.

Effective as of July 31, 2008, holders of Warrantless Notes with an aggregate face amount of $4,967,328 and holders of 2008 Notes with an aggregate face amount of $107,672 exchanged their Warrantless Notes and Convertible Notes, respectively, for a Senior Notes Payable pursuant to the term sheet described above. In addition, unrelated party lenders advanced $650,000 to us in exchange for a Senior Note Payable. Accordingly, we issued to the holders of the Warrantless Notes and the other lenders new Senior Notes Payable with an aggregate face amount of $5,725,000 dated as of July 31, 2008, together with 3,271,429 warrants, and granted these holders and lenders the right to receive 25% of future royalties that we receive from the license of our ANTISENILIN patent estate.

We accounted for the exchange of the Convertible Promissory Notes, as described above, as an extinguishment of debt in accordance with EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” We determined that the net present value of the cash flows under the terms of the exchange was more than 10% different from the present value of the remaining cash flows under the terms of the original Convertible Promissory Notes. Due to the substantial difference, we determined an extinguishment of debt had occurred as a result of the exchange, and, as such, we concluded that it was necessary to reflect the Convertible Promissory Notes at fair market value and record a loss on extinguishment of debt of approximately $702,000 in the three-month period ended September 30, 2008.

We have accounted for the issuance of a Senior Note Payable with a face amount of $650,000 to an unrelated party as a new issuance. We have accounted for the 371,429 Royalty Warrants issued to this holder as a liability, measured at fair value, which has been offset by a reduction in the carrying value of the associated Senior Note Payable. See Note 8, Derivative Instrument Liability.)

At December 31, 2008, Senior Notes Payable to related parties of $3,498,828 and Senior Notes Payable to unrelated parties with a carrying value of $2,083,217 remain outstanding.

7. Series B Convertible Preferred Stock

In February 2006, Intellect USA’s Board of Directors authorized the issuance of up to 7,164,445 shares of convertible preferred stock to be designated as "Series B Convertible Preferred Stock" ("Old Series B Preferred") with a par value per share of $0.001. The shares carry a cumulative dividend of 6% per annum. The initial conversion price of the Old Series B Preferred is $1.75 and is subject to certain anti-dilution adjustments to protect the holders of the Old Series B Preferred in the event that we subsequently issue share of common stock or warrants with a price per share or exercise price less than the conversion price of the Old Series B Preferred. The amount of additional common shares underlying potential future conversions of Old Series B Preferred is indeterminate. A holder of Old Series B Preferred is entitled to vote with holders of our common stock as if such holder held the underlying common stock. In the event of liquidation, dissolution or winding up of the Company, the Old Series B Preferred stockholders are entitled to receive, after payment of liabilities and satisfaction of Series A Convertible Preferred Stock but before the holders of common stock have been paid, $1.75 per share subject to adjustment for stock splits and dividends in certain other circumstances, plus accrued but unpaid preferred dividends. In addition, Intellect USA’s Board of Directors authorized the issuance of warrants to purchase our common stock in connection with each sale of Series B Preferred.

During the period February 8, 2006 through December 31, 2006, Intellect USA issued 4,593,091 shares of Old Series B Preferred in a private placement to accredited investors. Each investor purchased an investment unit consisting of a share of Old Series B Preferred and a warrant to purchase 0.5 shares of our common stock (the "Series B Warrants"). Total proceeds from issuance of the Old Series B Preferred for the year ended June 30, 2006 were $6,384,794, which included the cancellation of Notes with an aggregate face amount of $1,100,000 and accrued interest of $67,294 and for the year ended June 30, 2007 was $1,653,122, which included the cancellation of Notes with an aggregate face amount of $100,000 and accrued interest of $9,472. In connection with the issuance of the Old Series B Preferred, we issued warrants to purchase up to 3,046,756 shares of our common stock. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the Series B Warrants.

On the closing date of the reverse merger, the Holders of Series A Preferred, Old Series B Preferred and common stock of Intellect exchanged all of their shares in Intellect USA for the right to receive, in the aggregate, 26,075,442 shares of our common stock, $0.001 par value per share. The outstanding shares of Intellect USA Series B Preferred stock converted into 4,593,091 shares of our common stock. Accordingly, the liability of $3,114,115 related to the Series B Preferred stock was reclassified to preferred stock and additional paid in capital. As further described below, in May 2007 we exchanged the 4,593,091 shares of common stock for 459,309 shares of new Series B Preferred Stock.

Exchange of Series B Convertible Preferred Stock. Certain stockholders of the Company (each a “Holder” and collectively, the “Holders”) owned, prior to the Merger, an aggregate of 4,593,091 shares of Old Series B Preferred. Pursuant to the Certificate of Incorporation of Intellect, as in effect prior to the Merger, such Old Series B Preferred had certain anti-dilution and other rights and privileges. As a result of the Merger, each share of Old Series B Preferred issued and outstanding prior to the Merger was converted into one share of the Company’s common stock. Pursuant to discussions with the Holders at the time of the Merger, we agreed to exchange the Common Stock received by the Holders in the Merger for shares of a new series of preferred stock of the Company, designated as Series B Convertible Preferred Stock of the Company, $0.001 par value per share (“New Series B Preferred”). In order to provide such Holders with the same designations, preferences, special rights and qualifications, limitations or restrictions with respect to our capital stock that the Holders of Old Series B Preferred previously had in relation to Intellect USA’s capital stock, based on the capitalization of the Company, which includes 1 million authorized shares of preferred stock, rather than the 10 million authorized preferred shares prior to the merger, we exchanged each share of Common Stock issued to the Holders pursuant to the Merger for one-tenth (1/10) of a share of New Series B Preferred.

In May, 2007, pursuant to separate exchange agreements with the Holders (the “Exchange Agreements”), we completed the Exchange whereby 4,593,091 shares of Common Stock were exchanged for 459,309 shares of New Series B Preferred in an exchange offering pursuant to Section 3(a)(9) under the Securities Act of 1933, as amended (the “Securities Act”). Upon the consummation of the Exchange and the execution and delivery of the Exchange Agreements, each Holder received approximately 1 share of New Series B Preferred in exchange for 10 shares of Common Stock. The Company took a charge of $6,606,532 to other expense which represents the difference in the fair value of the New Series B Preferred over the Old Series B Preferred at the date of the Merger.

The New Series B Preferred contains the same anti-dilution features as in the Old Series B Preferred. As a result, the amount of additional common shares underlying potential future conversions of New Series B Preferred is indeterminate. Accordingly we have accounted for the New Series B Preferred as derivative liabilities at the time of issuance using the Black Scholes Option pricing model. We recorded the amount received in consideration for the New Series B Preferred as a liability with an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the New Series B Preferred will be marked to market for all future periods the shares remain outstanding and changes in fair value will be recognized as other income or expense. At September 30, 2008 the Series B Preferred stock liability was $1,194,204 with a change (decrease) in fair value of $1,240,180 for the three months ended September 30, 2008, recorded in other income. See Note 8, Derivative Instrument Liability, for a further discussion of the liability related to the issuance of the Series B Preferred Warrants.

The Old and New Series B Preferred carry a cumulative dividend of 6% per annum because we have failed to satisfy the conditions for resetting the dividend amount to zero. Under the Certificate of Designation of the New Series B Preferred Shares, dividends accrue from the date specified for payment in the Certificate of Designation of the Old Series B Preferred Shares. The dividend is payable semi-annually in arrears on January 1 and July 1 of each year, commencing July 1, 2006. The amount of dividends payable for the period ending on July 1, 2006 (and for any dividend payment period shorter than a full semi-annual dividend period) is computed on the basis of a 360-day year of twelve 30-day months. As of December 31, 2008, we have accrued Series B Preferred Stock dividends payable of $1,326,662 which are recognized as interest expense.

8. Derivative Instrument Liability

Derivative instruments consist of the following:

	December 31, 2008
Warrants issued with Convertible Promissory Notes:	$	166,810
Warrants issued with Series B Convertible Preferred Stock:		38,277
Total	$	205,087

Warrants issued with Convertible Promissory Notes.

As described above in Note 6. Convertible Promissory Notes Payable, in connection with the issuance of Convertible Promissory Notes, we issued warrants to purchase up to 6,677,267 shares of our common stock, of which 2,282,574 were issued in connection with Notes issued during fiscal year ended June 30, 2006; 3,837,546 were issued in connection with Notes issued during fiscal year June 30, 2007; 185,714 were issued in connection with Notes issued during fiscal year June 30, 2008; and 371,429 were issued in connection with a Note issued during fiscal year ended June 30, 2009.

The Convertible Note Warrants provide the holder with “piggyback registration rights”, which obligate the Company to register the common shares underlying the Warrants in the event that the Company decides to register any of its common stock either for its own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the Warrants fail to specify a penalty if the Company fails to satisfy its obligations under these piggyback registration rights. Presumably, the Company would be obligated to make a cash payment to the holder to compensate for such failure. EITF 00-19 requires liability treatment for a contract that may be settled in cash. Accordingly we have accounted for the Convertible Note Warrants as liabilities. The liability for the Convertible Note Warrants, measured at fair value as determined in the manner described below, has been offset by a reduction in the carrying value of the Notes. The liability for the Convertible Note Warrants will be marked to market for each future period they remain outstanding.

The weighted average exercise price of the outstanding Warrants is $1.47 per common share and the weighted average remaining life of the warrants is 2.84 years. At December 31, 2008, the Convertible Note Warrant liability was $166,810 with a change (decrease) in fair value of the warrants that were outstanding on December 31, 2008 of $692,563 and $1,236,952 for the three months and six months ended December 31, 2008, recorded in other income.

Warrants issued with the Series B Convertible Preferred Stock (the “Series B Warrants”).

In connection with the issuance of the old Series B Preferred stock described above, we issued warrants to purchase up to 3,046,756 shares of our common stock for the year ended June 30, 2006 and 186,692 shares of our common stock for the year ended June 30, 2007 (see Note 7, Series B Convertible Preferred Stock). The initial exercise price of the Series B Warrants was $2.50 per common share, subject to the anti dilution protection contained in the Old and New Series B Preferred Stock. During January 2007, we issued Convertible Notes with warrants that are convertible into common stock at an exercise price of $1.75. Accordingly, the strike price of the Series B Warrants has been reduced to $1.75 pursuant the anti-dilution adjustment described above.

The Series B Warrants contain certain anti-dilution adjustments to protect the holders of the Series B Warrants in the event that we subsequently issue shares of common stock or warrants with a price per share or exercise price less than the exercise price of the Series B Warrants. In addition, the Series B Warrants provide for cashless exercise under certain circumstances. Accordingly, the amount of additional shares underlying potential future issuances of Series B Warrants is indeterminate. There is no specified cash payment obligation related to the Series B Warrants and there is no obligation to register the common shares underlying the Series B Warrants except in the event that we decide to register any of our common stock for cash (“piggyback registration rights”). Presumably, the Company would be obligated to make a cash payment to the holder if we failed to satisfy our obligations under these piggyback registration rights.

EITF 00-19 requires liability treatment for a contract that may be settled in cash or that contains a provision for an indeterminate number of shares to be delivered in a share settlement. The Series B Warrants encompass both of these conditions. Accordingly we have accounted for the Series B Warrants as liabilities. The liability for the Series B Warrants, measured at fair value as determined in the manner described below, has been offset by a charge to earnings rather than as a discount from the carrying value of the Series B Preferred. The liability for the Series B Warrants will be marked to market for each future period they remain outstanding.

As of December 31, 2008, we had 3,046,756 Series B Warrants outstanding. The weighted average strike price of the Series B warrants is $1.75 per common share and the weighted average remaining life of the warrants is 2.15 years. At December 31, 2008 the Series B Warrant liability was $38,276 with a change (decrease) in fair value of $121,404 and $559,517 for the three months and six months ended December 31, 2008 recorded in other income.

Warrants issued in connection with the Royalty Participation Transaction (the “Senior Note Warrants”).

As described above in Note 6, Convertible Promissory Notes Payable, we issued warrants to purchase up to 3,271,429 of our common shares (the “Senior Note Warrants”) to the Lenders who participated in the Royalty Participation Transaction. We issued approximately 371,429 warrants to the Lender who advanced new funds of $650,000 to us and issued the remaining 2,900,000 warrants to the other Lenders. The Senior Note Warrants contain the same terms as the warrants issued together with the Convertible Notes described above.

We have accounted for the 371,429 Senior Note Warrants as a liability for the reasons described above. The carrying value of the associated Senior Note Payable has been reduced by the initial fair value of these Senior Note Warrants. The Senior Note Payable will be accreted back up to its face value over the term of the Note. The Senior Note Warrants have been valued at the date of the exchange and the resulting liability will be marked to market for each future period the Senior Note Warrants remain outstanding with the resulting gain or loss being recorded in the statement of operations. The weighted average exercise price of these outstanding Senior Note Warrants is $1.75 per common share and the weighted average remaining life of the warrants is 5 years. At December 31, 2008, the Warrant liability for these Senior Note Warrants was $43,512.

We have accounted for the remaining 2,900,000 Senior Note Warrants as interest expense incurred in exchange for an extension of the maturity dates of the Notes exchanged in the transaction. We calculated the fair value of these remaining warrants on the issue date of the warrants to be $1,172,062, using a Black Scholes pricing model. We recorded this amount as additional interest expense incurred in the period ending September 30, 2009.

9. Income Taxes

Effective July 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109”. The implementation of FIN 48 had no impact on our financial statements as we have no unrecognized tax benefits. We are primarily subject to U.S. Federal, New York State and Israeli income tax. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2008, we had no accruals for interest or penalties related to income tax matters. For all tax years since inception, we are open to review by the major tax jurisdictions that we are subject to.

10. Capital Deficiency

Common stock. In April and May 2005, we issued 12,078,253 and 9,175,247 shares of common stock at $0.001 per share to founders of Intellect USA, yielding proceeds of $12,078 and $9,175, respectively.

On March 10, 2006, we amended our Articles of Incorporation to provide for the issuance of up to 100,000,000 shares of common stock and up to 15,000,000 shares of preferred stock each with a par value of $.001 per share.

In June 2005, we issued to Goulston & Storrs, LLP a warrant to purchase 100,000 shares of our common stock at a purchase price of $0.001 per share, expiring June 20, 2008. In April 2006, Goulston & Storrs exercised the warrant and we subsequently delivered to them a share certificate representing 100,000 shares of our common stock.

Series A Convertible Preferred Stock. In January 2006, the Board of Directors of Intellect USA authorized the issuance of 2,225 shares of Series A Convertible Preferred Stock, par value per share of $0.001 (the "Series A Preferred"), to the Institute for the Study of Aging (the "ISOA") as partial consideration for settlement of an Annex IV claim equal to $570,000. In January 2006, Intellect USA entered into an Assignment of Claim Agreement, a Subscription Agreement and a Letter Agreement with the ISOA pursuant to which we issued the Series A Preferred to the ISOA and agreed to pay $193,297 in three equal monthly installments of $64,432 payable quarterly through July 28, 2006, and agreed to pay specific milestone payments totaling $225,500 as we develop our lead product candidate, OXIGON. We valued the Series A Preferred at $198,868 and charged such amount to research and development expenses during the year ended June 30, 2006. As described above, the "Next Equity Financing" occurred on or about May 12, 2006 when aggregate gross proceeds from the sale of Series B Convertible Preferred Stock exceeded $5 million. The conversion price of the convertible preferred stock issued in the Next Equity Financing and the price per share of the convertible preferred stock issued in that financing both were $1.75. Accordingly, the conversion price of the Series A Preferred as of May 12, 2006 is $1.75 per share of our common stock.

Based on FASB Statement No. 123R, "Share Based Payment" and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", we have recorded the value of the Series A Preferred as a research and development expense with a corresponding charge to Additional Paid In Capital on the issue date because all matters required to be attended to by the IOSA was completed as of that date. The fair value of the Series A Preferred has been estimated as $88.19 per share, for a total value of $198,868.

As a result of the merger described below, the Series A Preferred Stock was exchanged for 128,851 shares of our common stock.

On January 25, 2007, GlobePan Resources, Inc. entered into an agreement and plan of merger with Intellect and INS Acquisition, Inc., a newly formed, wholly-owned Delaware subsidiary of GlobePan Resources, Inc. also called Acquisition Sub. On January 25, 2007, Acquisition Sub merged with and into Intellect Neurosciences, Inc., Acquisition Sub ceased to exist and Intellect survived the merger and became the wholly-owned subsidiary of GlobePan Resources, Inc. GlobePan stockholders retained, in the aggregate, 9,000,000 shares of their common stock, which represents approximately 26% of the basic outstanding shares, in connection with the merger.

In January 2006, our Board of Directors authorized the issuance of 2,225 shares of Series A Convertible Preferred Stock, par value per share of $0.001, to the Institute for the Study of Aging. As a result of the Merger described above, the Series A Preferred Stock was exchanged for 128,851 shares of our common stock.

In July 2007, we issued a total of 329,762 shares of common stock to various note holders. We issued 311,522 shares as part of agreements with three note holders to extend the maturity date of their notes to September 30, 2007 and recorded a charge of $622,354 for interest expense in connection with the issuance of these shares. We issued 18,240 shares to three note holders who converted their Notes with an aggregate principal amount and accrued interest of $31,733. On April 8, 2008, we rescinded the conversion of these Notes into common shares and reinstated the Notes and agreed with the holders to cancel the shares and extend the maturity date of the Notes to June 30, 2008.

In December 2007, we issued 30,000 shares of common stock under a pre existing agreement with a note holder to extend the maturity date of his note to December 15, 2007. As discussed above in Note 8, Convertible Promissory Notes, in February 2008 we rescinded the issuance of the 30,000 shares of common stock and issued a note to the Note holder as additional consideration for the extension.

In July 2007, we entered into an agreement to issue 50,000 shares to a consultant for services rendered and recorded an expense of $120,000 representing the value of the shares based on the closing price of our common stock on that date. The Board of Directors approved the share issuance in November 2007 and the shares were issued in December 2007.

11. Related Party Transactions

During the fiscal year ending June 30, 2007, we borrowed a total of $1,279,000 from certain of our principal shareholders to fund our operating costs. The loans are evidenced by convertible notes that are payable within one year and bear interest annually at 8%. The number of shares of our common stock to be issued pursuant to these notes is equal to the outstanding principal and accrued interest on each note at the date of conversion divided by $1.75. As of June 30, 2007, notes with an aggregate face amount of $300,000 had been repaid.

During the fiscal year ended June 30, 2008, we borrowed an additional $3,338,828 from these shareholders evidenced by notes with the same terms as described above (including $104,244 described below). As of June 30, 2008, notes with an aggregate face amount of $894,000 had been repaid. The remaining balance of these shareholder loans as of June 30, 2008 was $3,423,828.

During the three months ended September 30, 2008, we borrowed an additional $75,000 from these shareholders evidenced by notes with the same terms as described above.

Effective as of July 31, 2008, these shareholders and certain other lenders exchanged their convertible notes for Senior Promissory Notes and warrants. (See Note 6, Convertible Promissory Notes Payable.)

University of South Florida Agreement. Our AD research activities require that we test our drug candidates in a certain type of transgenic mouse that exhibits the human AD pathology. Mindgenix, Inc., a wholly-owned subsidiary of Mindset, holds a license on the proprietary intellectual property related to these particular mice from the University of South Florida Research Foundation (“USFRF”). We have engaged Mindgenix to perform testing services for us using these transgenic mice. Dr. Chain, our CEO, is a controlling shareholder of Mindset. We consolidate the results of operations of Mindgenix with our results of operations because we have agreed to absorb certain costs and expenses incurred that are attributable to their research.

In December of 2006, we entered into an agreement with USFRF as a co-obligor with Mindgenix, pursuant to which USFRF agreed to reinstate the license with Mindgenix in exchange for our agreement to pay to USFRF $209,148 plus accrued interest of $50,870. This amount is in settlement of a previously outstanding promissory note issued by Mindgenix to the USFRF dated September 30, 2004. Our obligation to pay amounts due under the agreement are as follows: $109,148 was payable on January 15, 2007 and $100,000 is payable in six equal monthly installments of $16,667 beginning February 1, 2007 and ending with a final payment of $50,435 on August 1, 2007. We have paid $184,151 through June 30, 2008. We have recorded these amounts as research and development expense and established a liability for the remainder of the payments. In addition, we have incurred approximately $325,000 in operating costs on behalf of Mindgenix for the fiscal year ended June 30, 2008. These amounts have been included in our consolidated results of operations as research and development expense.

In April 2008, we paid $100,000 on behalf of Mindgenix and Mindgenix issued a promissory note with a face amount of $100,000 to Harlan Biotech, Israel, an unrelated third party (‘the “Harlan Note”), as partial payment for past due fees related to maintenance of Mindgenix’ mouse colony. The Harlan Note bears interest at 10% per annum and is due 40 days from the issue date of April 8, 2008. One of our principal shareholders posted with an escrow agent 215,000 shares of freely tradable Intellect common stock as security for the Harlan Note. The shares were sold for total consideration of $104,244 and the proceeds were remitted to Harlan in discharge of the Harlan Note. We issued a convertible promissory note to the shareholder with a face amount equal to the proceeds from the sale of the shares and recorded a corresponding research and development expense.

Related Party Consulting Fees. On January 3, 2007, we entered into a consulting contract with a former member of our Board of Directors and significant shareholder pursuant to which he is to provide us with consulting services related to identifying, soliciting and procuring collaboration agreements on behalf of Intellect. Under the agreement, Intellect is obligated to pay this former director and shareholder consulting fees of $10,000 per month beginning in January 2007. In addition, to the extent permitted under our applicable group health insurance policy, we are obligated to provide health insurance to this individual and his family without any reimbursement from him. In further consideration of the provision of services by this individual, he is entitled to receive cash payments in an amount equal to 2.5% of all revenues received by us, including payments we receive from collaboration agreements, as we realize the revenue through the receipt of cash payments from third parties. Total amounts payable to this former director and shareholder under the Consulting Agreement are limited to $1 million, calculated by taking into account all consulting fees paid to this director, cost of health insurance and revenue participation payments. The agreement may be terminated by us with or without cause at any time, provided however, that we have fulfilled our monetary obligations described above. During the three months ended December 31, 2008, we accrued $30,000 of consulting expense for this former director and shareholder and made a $20,000 cash payment to him, of which $11,803 was for travel expenses and the remainder was for consulting services.

Consulting Contracts. We have entered into consulting contracts with various members of our Board of Directors and the members of our Clinical and Scientific Advisory Boards. Certain of these individuals are shareholders of Intellect. The consulting contracts are for services to be rendered in connection with ongoing research and development of our drug candidates. The contracts provide for either per-diem payments or monthly retainers. No charges were recorded during the three months ended December 31, 2008.

12. Commitments and Contingencies

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2008.

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the action of various regulatory agencies. If necessary, management consults with counsel and other appropriate experts to assess any matters that arise. If, in management’s opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss, and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our financial position, results of operations or cash flows.

MPM Capital. Dr. Daniel Chain was the CEO and President and sole director of Mindset at the time of the execution of the Asset Transfer Agreement between Intellect and Mindset. He remains the President of Mindset. Although Dr. Chain was not employed by Intellect at the time of execution of the Asset Transfer Agreement, he owned a significant amount of Intellect common stock at that time. However, those shares were subject to forfeiture if Dr. Chain declined the offer of employment to join Intellect as its Chairman and CEO.

In connection with execution of the Asset Transfer Agreement, all of the stockholders and creditors of Mindset other than MPM Capital Group, a significant Mindset shareholder, executed a Release of Claim releasing Mindset and its officers and directors from any claim arising from the sale of assets from Mindset to Intellect. MPM Capital continues to own a significant amount of Mindset shares and is a creditor of Mindset.

MPM Capital may seek to assert various claims against us, such as claims under bulk sales laws and other laws and doctrines designed to protect creditors of an insolvent entity and stockholders generally. Although MPM Capital has not asserted any such claim against Intellect, it has asserted in a letter addressed to Dr. Chain that he acted improperly in selling certain of Mindset’s assets to Intellect and that he evidently did so for personal benefit to the detriment of MPM Capital and other shareholders. There can be no assurance that MPM Capital will refrain from asserting claims against us or that if they do, they will be unsuccessful. Dr. Chain and the Company have entered into an agreement to temporarily postpone to December 2008, the initiation of any legal action in order for the parties to explore a mutual resolution of the issues and claims raised by MPM Capital. The agreement to postpone the initiation of legal action was subsequently extended until June 2009.

On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming approximately $542,000 of damages, consisting of principal and accrued interest alleged to be due under a promissory note, plus attorney’s fees, costs and disbursements. Margie Chassman, one of our principal shareholders, and David Blech, her husband and a consultant to the Company, provided personal guarantees to this note holder guaranteeing all of our obligations under the Brauser promissory note and are also named in the lawsuit. We responded to the complaint with various affirmative defenses, including the plaintiff’s failure to credit us for prior payments made. On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. The last day for the completion of discovery is April 17, 2009. The parties are currently exchanging documents and have scheduled a mediation conference to take place during early March.

13. Per Share Data

The following table sets forth the information needed to compute basic and diluted earnings per share:

	Three Months Ended					Six Months Ended
	December 31, 2008		December 31, 2007			December 31, 2008		December 31, 2007
Basic EPS

Net income (loss) attributable to common stockholders, basic	$	2,950,983	$	(892,488	)	$	4,674,730	$	27,924,156

Weighted average shares outstanding		30,843,873		30,862,656			30,843,873		30,815,816

Basic earnings (loss) earnings per share	$	0.10	$	(0.03	)	$	0.15	$	0.91

Diluted EPS

Net income (loss) attributable to common stockholders, basic	$	2,950,983	$	(892,488	)	$	4,674,730	$	27,924,156

Preferred stock dividends		-		-			246,496		246,496

Interest on convertible notes		-		-			542,746		376,658

Net income (loss) attributable to common stockholders, diluted	$	2,950,983	$	(892,488	)	$	5,463,971	$	28,547,310

Weighted average shares outstanding		30,843,873		30,862,656			30,843,873		30,815,816

Dilutive effect of stock options		-		-			-		2,164,793

Dilutive effect of warrants		-		-			-		5,940

Dilutive effect of Series B preferred shares		-		-			4,593,091		4,593,091

Dilutive effect of convertible notes		-		-			6,184,854		4,451,123

Diluted weighted average shares outstanding		30,843,873		30,862,656			41,621,818		42,030,763
Diluted earnings (loss) per share	$	0.10	$	(0.02	)	$	0.11	$	0.68

Outstanding warrants to acquire 12,624,050 common shares issued in connection with the issuance of Convertible Promissory Notes, Series B Preferred shares and the Royalty Participation Transaction as well as options to acquire 12,197,307 common shares were not included in the diluted computation, as their effect would be anti-dilutive.

Legal Proceedings

ITEM 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations contains information that management believes is relevant to an assessment and understanding of our results of operations. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the period ended June 30, 2008 contained in our Current Report on Form 10KSB/A, filed with the Securities and Exchange Commission (the “SEC”) on November 7, 2008. Certain statements set forth below constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” appearing elsewhere in this Report. References to “Intellect,” the “Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and its subsidiaries.

General

We are a biopharmaceutical company conducting research and developing our own proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts and resources to research and development activities and advancing our intellectual property portfolio. We have no product sales through September 30, 2008. We operate under a single segment. Our fiscal year end is June 30.

Our core business strategy is to leverage our intellectual property estate through license and other arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications.

In May, 2008, we entered into a License Agreement with AHP MANUFACTURING BV, acting through its Wyeth Medica Ireland Branch, (“Wyeth”) and ELAN PHARMA INTERNATIONAL LIMITED (“Elan”) to provide Wyeth and Elan (the “Licensees”) certain license rights under our ANTISENILIN patent estate, which relates to certain antibodies that may serve as potential therapeutic products for the treatment for Alzheimer’s Disease (the “Licensed Products”) and for the research, development, manufacture and commercialization of Licensed Products. In exchange for the licenses, the Licensees have agreed to collectively pay us an up-front payment, and we may be entitled to milestone and royalty payments in the future.

In October, 2008, we entered into an Option Agreement with a global pharmaceutical company regarding the right to obtain a license to our ANTISENILIN patent estate. Pursuant to the Option Agreement, we received a non-refundable option fee upon execution of the Agreement. In addition, upon exercise of the Option by the licensee, we will be entitled to fees, and we may be entitled to milestone payments and royalties from potential future drug sales. Effective as of December 19, 2008, the Option Holder became the Licensee of the Subject Patents by paying us $1,550,000, which is the Exercise Fee described in the Option Agreement as adjusted by subsequent discussions between the parties to the Option Agreement

Our most advanced drug candidate, OXIGON, is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule. We commenced human Phase I clinical trials for OXIGON on December 1, 2005 in the Netherlands and completed Phase I clinical trials on November 15, 2006. We have designed a Phase IIa clinical trial to test OXIGON in 80 to 100 mild to moderate AD patients and plan to initiate that trial during 2009 if we have sufficient financial resources. We plan to orally administer OXIGON to evaluate the drug’s activity in patients as measured by changes in certain biomarkers that correlate with the condition of AD.

Our pipeline includes drugs based on our immunotherapy platform technologies, ANTISENILIN and RECALL-VAX. These immunotherapy programs are based on monoclonal antibodies and therapeutic vaccines, respectively, to prevent the accumulation and toxicity of the amyloid beta toxin. Both are in pre-clinical development. Our lead product candidate in our immunotherapy programs is IN-N01, a monoclonal antibody that is undergoing the humanization process at MRCT in the UK.

OXIGON, RECALL-VAX and ANTISENILIN are our trademarks. Each trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q belongs to its respective holder.

Our current business is focused on granting licenses to our patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the treatment of AD. We expect research and development, including patent related costs, to continue to be the most significant expense of our business for the foreseeable future. Our research and development activity is subject to change as we develop a better understanding of our projects and their prospects. Research and Development costs from inception through December 31, 2008 were $13,191,866, which include patent related expenses.

We have closed our Israeli research laboratory to conserve our financial resources. We continue to incur rent on the facility and are attempting to sublet it to another tenant. We have written off the carrying value of the remaining laboratory equipment. We expect to continue our research and development activity through outsourcing and other third party arrangements. For example, IN-N01 is undergoing the humanization process at MRCT, a UK provider of antibody humanization services.

Reverse Merger

On January 25, 2007, GlobePan Resources, Inc. (“Globepan”) (now known as Intellect Neurosciences, Inc.) entered into an agreement and plan of merger with Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) and INS Acquisition, Inc., a newly formed, wholly-owned Delaware subsidiary of GlobePan Resources, Inc. also called Acquisition Sub. On January 25, 2007, Acquisition Sub merged with and into Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.), Acquisition Sub ceased to exist and Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) survived the merger and became the wholly-owned subsidiary of GlobePan Resources, Inc. Immediately following the merger, Intellect Neurosciences, Inc., the surviving entity in the merger, changed its name to Intellect USA, Inc. and GlobePan Resources, Inc. changed its name to Intellect Neurosciences, Inc. Therefore, as of January 26, 2007, Intellect Neurosciences, Inc. is the name of our parent holding company. The name of our wholly-owned operating subsidiary is Intellect USA, Inc., which owns all of the shares of Intellect Neurosciences (Israel) Ltd., an Israeli company.

Following the merger and after giving effect to the options we issued immediately following the merger, there were 35,075,442 shares of our common stock issued and outstanding on an actual basis and 55,244,385 shares of our common stock issued and outstanding on a fully diluted basis. In our determination of the number of shares of our common stock issued and outstanding on a fully diluted basis, we (i) include the aggregate 9,000,000 shares of our common stock retained by existing GlobePan stockholders, (ii) include the aggregate 26,075,442 shares of our common stock received by former holders of Intellect Neurosciences, Inc. (now known as Intellect USA, Inc.) capital stock, (iii) assume the issuance of all shares potentially available for issuance under our 2006 and our 2007 equity incentive plans, regardless of whether such shares are currently covered by options, and (iv) assume the conversion of all outstanding warrants and convertible notes into shares of our common stock.

In connection with the merger, we reflected in the year ending June 30, 2007 a charge of $7,020,000, representing the shares issued to the Globepan shareholders.

Liquidity and Capital Resources

Since our inception in 2005, we have generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. As of December 31, 2008 and December 31, 2007, our accumulated deficit was approximately $39.3 million and $35.7 million, respectively. Our income/(loss) before other income/ (expense) from operations for the three months ended December 31, 2008 and 2007 was approximately $2.0 million (which reflects $3 million of license fee revenue) and $(1.6) million, respectively. Our capital shows a deficit of approximately $16.8 million and $14.0 million as of December 31, 2008 and December 31, 2007, respectively. We are eligible to receive certain milestones and royalties based on sales of Licensed Products as set forth in our Licensing Agreement with Elan Pharma International Limited and Wyeth and the Option Agreement with another top tier global pharmaceutical company as described in Note 5, Research and License and Assignment Agreements; however, achievement of these milestones is uncertain.

We have limited capital resources and operations to date have been funded with the proceeds from equity and debt financings. As of December 31, 2008, we had cash and cash equivalents of approximately $1.6 million. We anticipate that our existing capital resources will not enable us to continue operations beyond July 2009, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity. If we fail to raise additional capital or obtain substantial cash inflows from potential partners prior to July 2009, we will be forced to cease operations. We are in discussions with several investors concerning our financing options. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.

As of December 31, 2008 and continuing through the date of filing of this report, we are in default on convertible promissory notes with an aggregate carrying value of approximately $5.5 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming approximately $542,000 in damages consisting of principal and accrued interest alleged to be due under a promissory note, plus attorney’s fees, costs and disbursements. Margie Chassman, one of our principal shareholders, and David Blech, her husband and a consultant to the Company, provided personal guarantees to this note holder guaranteeing all of our obligations under the Brauser promissory note and are also named in the lawsuit. We responded to the complaint with various affirmative defenses, including the plaintiff’s failure to credit us for prior payments made. On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. The last day for the completion of discovery is April 17, 2009. The parties are currently exchanging documents and have scheduled a mediation conference to take place during early March.

The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the period ended June 30, 2008 includes an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern.

Even if we obtain additional financing, our business will require substantial additional investment that we have yet to secure. We are uncertain as to how much we will need to spend in order to develop, manufacture and market new products and technologies in the future. We expect to continue to spend substantial amounts on research and development, including amounts that will be incurred to conduct clinical trials for our product candidates. Further, we will have insufficient resources to fully develop any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. Our failure to raise capital when needed will adversely affect our business, financial condition and results of operations, and could force us to reduce or discontinue our operations at some time in the future, even if we obtain financing in the near term.

Results of Operations

Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007:

	Three Months Ended December 31,
			(in thousands)
	2008		2007			Change
Net income/(loss) from operations		2,044		(1,593	)		3,637
Net other income (expenses):		907		701			206

Net income/(loss)	$	2,951	$	(892	)	$	3,843

Net operating costs decreased by approximately $3.6 million as a result of the following:

	(in thousands)

Increase in license fee revenue	$	(3,017	)
Decrease in salaries, benefits and Board compensation		(417	)
Decrease in clinical expenses and R&D fees and expenses		(387	)
Increase in professional fees		176
Net increase in other G&A expenses		8
	$	(3,637	)

The increase in license fee revenue is related to the milestones that we received from Elan and Wyeth and another top tier, global pharmaceutical company pursuant to our respective license agreements with such companies.

The decrease in compensation and benefit costs is related to a decrease in staff levels in our New York headquarters and Israeli research laboratory.

The decrease in clinical fees and expenses is related to the reduced level of research and clinical activity.

The increase in professional fees is due to an increase in accounting costs associated with the year end audit and legal costs related to patent filings.

Other income decreased by approximately $0.2 million as a result of the following:

This decrease is mainly due to changes in the fair value of derivative instruments and preferred stock liability of $0.9 million related to the valuation of the warrants associated with the Series B Preferred stock, Convertible Promissory Notes, and the New Series B Preferred Stock liability, offset by a reduction in interest expense of $0.7 related to our Convertible Promissory notes.

Six Months Ended December 31, 2008 Compared to Six Months Ended December 31, 2007:

	Six Months Ended December 31,
			(in thousands)
	2008		2007			Change
Net income/(loss) from operations		1,766		(3,744	)		5,510
Net other income (expenses):		2,908		31,668			(28,760	)

Net income/(loss)	$	4,674	$	27,924		$	(23,250	)

Net operating costs decreased by approximately $5.5 million as a result of the following:

	(in thousands)

Increase in license fee revenue	$	(4,016	)
Decrease in salaries, benefits and Board compensation		(750	)
Decrease in clinical expenses and R&D fees and expenses		(649	)
Decrease in professional fees		(89	)
Net decrease in other G&A expenses		(6	)
	$	(5,510	)

The increase in license fee revenue is related to milestone payments that we received from Elan and Wyeth and another top tier, global pharmaceutical company pursuant to our respective license agreements with such companies

The decrease in compensation and benefit costs is related to a decrease in staff levels in our New York headquarters and Israeli research laboratory.

The decrease in clinical fees and expenses is related to the reduced level of research and clinical activity.

The decrease in professional fees is due to a decrease in accounting and legal costs.

Other income decreased by approximately $28.7 million as a result of the following:

This decrease is mainly due to changes in the fair value of derivative instruments and preferred stock liability of $30.5 million related to the valuation of the warrants associated with the Series B Preferred stock, Convertible Promissory Notes, and the New Series B Preferred Stock liability, offset by a reduction in interest expense related to our Convertible Promissory notes and a reduction in amortization costs of approximately $1.8 million in the aggregate.

Off-Balance Sheet Arrangements

As of December 31, 2008, we had no off-balance sheet arrangements, other than operating leases and obligations under various strategic agreements as set out below. There were no changes in significant contractual off balance sheet arrangements during the three months ended December 31, 2008.

Under a License Agreement with New York University (“NYU”) and a similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OXIGON program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay each of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect.

Pursuant to a Letter Agreement executed in January 2006 between Intellect USA and the Institute for the Study of Aging (the “ISOA”), we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical development of OXIGON.

Under a Research Agreement with MRCT as amended, we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty based on sales, of the resulting drug products. MRCT has achieved three research milestones and we have included $350,000 of the total $560,000 in accrued expenses at December 31, 2008.

Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement with IBL we agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.

Under the terms of our License Agreement with Wyeth and Elan, which we entered into in May, 2008, effectively we have an obligation to incur $50,000 in patent or program research related expenses during any six month period that the Agreement is in effect. Failure to incur these costs could be treated as an abandonment of the Licensed Patents, resulting in termination of the License Agreement and a discharge of the Licensees’ obligations to pay us any milestone or royalty payments. As described in Note 5 above, effective as of December 19, 2008, the Licensed Patents became the subject of a second non-exclusive license to another party and as a result, the Licensees’ option to receive ownership of all of our right, title and interest in and to the Licensed Patents and our corresponding obligation to incur $50,000 in patent or program research related expenses during any six month period that the Agreement is in effect terminated as of December 19, 2008.

Under the terms of a Royalty Participation Agreement, which was approved by our Board of Directors as of May 2, 2008, but which became effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties that we receive from the license of our ANTISENILIN patent estate.

Critical Accounting Estimates and New Accounting Pronouncements

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

Share-Based Payments - As of July 1, 2006, we adopted SFAS 123(R), "Share-Based Payment", which establishes standards for share-based transactions in which an entity receives employee's services for equity instruments of the entity, such as stock options, or liabilities that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) supersedes the option of accounting for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees", and requires that companies expense the fair value of stock options and similar awards, as measured on the awards' grant date, date of adoption, and to awards modified, repurchased or cancelled after that date.

We estimate the value of stock option awards on the date of grant using the Black-Scholes-Merton option-pricing model (the “Black-Scholes model”). The determination of the fair value of share-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates.

If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS 123(R). Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. During the three months ended December 31, 2008, we do not believe that reasonable changes in the projections would have had a material effect on share-based compensation expense.

Research and Development Costs and Clinical Trial Expenses - Research and development costs include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research, preclinical development, and clinical trials. All costs associated with research and development is expensed as incurred.

Warrants - Warrants issued in connection with our Series B Preferred Stock and Convertible Promissory Notes have been classified as liabilities due to certain provisions that may require cash settlement in certain circumstances. At each balance sheet date, we adjust the warrants to reflect their current fair value. We estimate the fair value of these instruments using the Black-Scholes option pricing model which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates, remaining term and the closing price of our common stock. Changes in the assumptions used to estimate the fair value of these derivative instruments could result in a material change in the fair value of the instruments. We believe the assumptions used to estimate the fair values of the warrants are reasonable. See Item 6A, Quantitative and Qualitative Disclosures about Market Risk, for additional information on the volatility in market value of derivative instruments.

Equipment and Leasehold Improvements - -Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided for on a straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized over the life of the lease or of the improvements, whichever is shorter. Expenditures for maintenance and repairs that do not materially extend the useful lives of the respective assets are charged to expense as incurred. The cost and accumulated depreciation or amortization of assets retired or sold are removed from the respective accounts and any gain or loss is recognized in operations.

Restructuring Related Assessments - During the fourth quarter of fiscal 2008, we effectively closed our Israeli laboratory and terminated all but three of the remaining employees. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, we have estimated the future sublease income from our Israeli laboratory through the end of the lease period, which ends in October 2011, and have recorded rent expense based on the present value of the excess of our rental commitment in Israel through October 2011 over the estimated future sublease income from the laboratory during that period. In addition, we have written down the cost basis of the remaining laboratory equipment to zero, which is our estimate of fair value for such equipment.

Revenue Recognition - We recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), Financial Accounting Standards Board (“FASB”') and Emerging Issues Task Force No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Non-refundable upfront and research and development milestone payments and payments for services are recognized as revenue as the related services are performed over the term of the collaboration.

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 also amends certain provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. We do not expect our adoption of SFAS No. 159 in fiscal year 2009 to have a material impact on our results of operations or financial position.

In April 2007, the FASB issued FSP FIN 39-1, which amends FASB Interpretation (“FIN”) No. 39, "Offsetting of Amounts Related to Certain Contracts ” (“FIN 39”), to permit a reporting entity that is party to a master netting arrangement to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39. FSP FIN 39-1 was effective for fiscal years beginning after November 15, 2007. The adoption of FSP FIN 39-1 on July 1, 2008 is not expected to have an impact on the Company’s results of operations or financial condition.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN No. 48-1, Definition of Settlement in FASB Interpretation No. 48. FSP FIN No. 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN No. 48-1 is effective retroactively to April 28, 2007. The adoption of this standard did not have a significant impact on the Company’s consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations," however, it retains the fundamental requirements of the former Statement that the acquisition method of accounting (previously referred to as the purchase method) be used for all business combinations and for an acquirer to be identified for each business. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Among other requirements, SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs generally will be expensed as incurred. SFAS No. 141(R) requires certain financial statement disclosures to enable users to evaluate and understand the nature and financial effects of the business combination. SFAS No. 141(R) must be applied prospectively to business combinations that are consummated beginning in the Company's fiscal 2010. The Company's adoption of SFAS No. 141(R) is not expected to have a material effect on its consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110"). This staff accounting bulletin ("SAB") expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), Share-Based Payment. In particular, the staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Our adoption of SAB 111 is not expected to have a material effect on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”). This Statement amends Accounting Research Bulletin (ARB) No. 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements will have no impact. SFAS No. 160 is effective for the Company’s fiscal year beginning July 1, 2009. Management has determined that the adoption of this standard will not have an impact on the Company’s financial statements.

In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157". This FSP delays the effective date of SFAS No. 157, "Fair Value Measurements", for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company's adoption of SFAS No. 161 is not expected to have a material effect on its condensed consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position SOP 90-7-1, An Amendment of AICPA Statement of Position 90-7 (“FSP SOP 90-7-1”). FSP SOP 90-7-1 resolves the conflict between the guidance requiring early adoption of new accounting standards for entities required to follow fresh-start reporting under American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, and other authoritative accounting standards that expressly prohibit early adoption. Specifically, FSP SOP 90-7-1 will require an entity emerging from bankruptcy that applies fresh-start reporting to follow only the accounting standards in effect at the date fresh-start reporting is adopted, which include those standards eligible for early adoption if an election is made to adopt early. Management has elected to only adopt new accounting standards in effect at the date fresh-start reporting is adopted and to not early adopt standards eligible for early adoption.

In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement), (the “FSP”). The adoption of this FSP will affect the accounting for convertible and exchangeable notes and convertible preferred units. The FSP requires the initial proceeds from the sale of our convertible and exchangeable senior notes and convertible preferred units to be allocated between a liability component and an equity component. The resulting discount will be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP is effective for our fiscal year beginning on July 1, 2008 and requires retroactive application. The Company is currently evaluating the impact that this will have on the Company’s results of operations or financial condition.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Board does not expect that this Statement will result in a change in current practice. However, transition provisions have been provided in the unusual circumstance that the application of the provisions of this Statement results in a change in practice.

In June 2008, the FASB issued FSP EITF 03-6-1, which addresses whether instruments granted in equity-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per unit under the two-class method prescribed by SFAS 128. FSP EITF 03-6-1 is retrospectively effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years, with early application prohibited. The Company is evaluating the impact the adoption of FSP EITF 03-6-1 will have on its earnings per share calculations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Value of Warrants and Derivative Liabilities. At December 31, 2008, the estimated fair value of our warrant liability was $205,087. We estimate the fair values of these instruments using the Black-Scholes option pricing model which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates, remaining maturity and the closing price of our common stock. We believe that the assumption that has the greatest impact on the determination of fair value is the closing price of our common stock.

Investments We currently invest our excess cash balances in money market accounts. The amount of interest income we earn on these funds will change as interest rates in general change. Due to the short-term nature of our investments, an immediate 1% change in interest rates would not have a material impact on our financial position, results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We performed an evaluation under the supervision and with the participation of our management, including our chief executive and chief financial officers, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2008. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Following the evaluation described above, our management, including our chief executive and chief financial officer, concluded that based on the evaluation, our disclosure controls and procedures were effective as of December 31, 2008.

The Company has yet to begin its project to become compliant with the requirements of Section 404 of the Sarbanes-Oxley Act. We plan to initiate our assessment, documentation, testing and improvement of internal controls over financial reporting and become Section 404 compliant during 2009.

Changes in Internal Controls Over Financial Reporting and Management’s Remediation Initiatives

As defined by Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company previously disclosed in its Form 10-KSB filed November 7, 2008 that it identified a material weakness in internal control over financial reporting. The following deficiency in the control environment constituted a material weakness:

We did not maintain a sufficient complement of personnel with the appropriate level of knowledge, experience and training in the application of accounting principles generally accepted in the United States (referred to as GAAP) and in internal control over financial reporting commensurate with our financial reporting obligations under the Exchange Act. This weakness was evidenced during the preparation of our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2008 by our failure to prepare the reports required to be filed or submitted under the Exchange Act within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Upon identification of the material weakness, management advised our Audit Committee of the issues encountered and management’s key decisions related to remediation efforts. We are developing a plan to remediate the material weaknesses. Our plan of remediation will include hiring sufficient part time external personnel who are trained in the preparation of financial statements in accordance with GAAP to assist in the preparation and review of the financial statements at each financial reporting cycle to compensate for the lack of adequate full time personnel in the Company’s accounting function and to ensure that we have in place appropriate internal control over financial reporting.

We determined that the previously identified material weakness in our internal control over financial reporting persisted in the quarter ended December 31, 2008, as we do not yet have adequate controls in place to establish and maintain an effective control environment. Although these material weaknesses over preparation of the financial statements and related disclosures existed at fiscal year end and persisted as of December 31, 2008 , the consolidated financial statements in this Quarterly Report on Form 1O-Q fairly present, in all material respects, our financial condition as of December 31, 2008 and 2007, in conformity with GAAP.

The effectiveness of our internal controls following our remediation efforts will not be known until we test those controls in connection with management’s tests of internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

Brauser v. Intellect Neurosciences, Inc., et al

As described in Item 3 below, as of June 30, 2008 and continuing through the date of filing of this report, we are in default on convertible promissory notes with an aggregate carrying value of approximately $5.5 million. On October 21, 2008, one of our note holders filed a complaint in the United States District Court of the Southern District of New York claiming approximately $542,000 in damages consisting of principal and accrued interest alleged to be due under a promissory note, plus attorney’s fees, costs and disbursements. Margie Chassman, one of our principal shareholders, and David Blech, her husband and a consultant to the Company, provided personal guarantees to this note holder guaranteeing all of our obligations under the Brauser promissory note and are also named in the lawsuit. We responded to the complaint with various affirmative defenses, including the plaintiff’s failure to credit us for prior payments made. On January 5, 2009, Judge Shira A. Scheindlin issued an order setting a discovery schedule and referring the matter for mediation. The last day for the completion of discovery is April 17, 2009. The parties are currently exchanging documents and have scheduled a mediation conference to take place during early March.

ITEM 1A. RISK FACTORS

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements that we make in this Report and elsewhere (including oral statements) from time to time. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Report. Our business is subject to many risks, which are detailed further in our Current Report on Form 10-KSB/A filed with the SEC on November 7, 2008 including:

Risks related to our lack of liquidity

We have incurred and expect to continue to incur substantial losses. We will not be successful unless we reverse this trend.

If we fail to raise additional capital or receive substantial cash inflows from potential partners by September of 2009, we will be forced to cease operations.

We are in default under certain of our Convertible Notes and one of our note holders has commenced legal proceedings against us.

Risks related to our business

We are in the early stages of product development and our success is uncertain.

If we fail to apply for, adequately prosecute to issuance, maintain, protect or enforce patents for our inventions and products or fail to secure the rights to practice under certain patents owned by others, the value of our intellectual property rights and our ability to license, make, use or sell our products would materially diminish or could be eliminated entirely.

We plan to develop our products by collaborating with third-parties and we face substantial competition in this endeavor. If we are not successful in establishing such third party collaboration arrangements, we may not be able to successfully develop and commercialize our products.

We have a limited operating history and we may not be able to successfully develop our business.

OXIGON is our only product in clinical trials and if we are unable to proceed with clinical trials for our other product candidates or if the future trials are unsuccessful or significantly delayed we may not be able to develop and commercialize our products.

If we or future partners fail to obtain or maintain the necessary United States or worldwide regulatory approvals for our product candidates or those subject to license agreements with us, such products will not be commercialized.

If we are not able to maintain our current license rights or obtain additional licenses, our business will suffer.

If we fail to make payments under or otherwise breach our key license agreements, they could be terminated and we would lose our rights to such technologies. This loss of rights could materially adversely affect our ability to develop and commercialize our product candidates and our ability to generate revenues.

Our operating results may significantly fluctuate from quarter-to-quarter and year-to-year.

We have no research facilities. If we are not successful in developing our own research facilities or entering into research agreements with third party providers, our development efforts and clinical trials may be delayed.

We have no manufacturing capabilities. If we are not successful in developing our own manufacturing capabilities or entering into third party manufacturing agreements or if third-party manufacturers fail to devote sufficient time and resources to our concerns, our clinical trials may be delayed.

Our product candidates are subject to the risk of failure inherent in the development of products based on new and unproved technologies.

In order to achieve successful sales of our product candidates or those developed by any of our future partners, the product candidates need to be accepted in the healthcare market by healthcare providers, patients and insurers. Lack of such acceptance will have a negative impact on any future sales.

Our ability to generate product revenues will be diminished if our drugs sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.

Our product candidates may be subject to future product liability claims. Such product liability claims could result in expensive and time-consuming litigation and payment of substantial damages.

Our future collaborators may compete with us or have interests which conflict with ours. This may restrict our research and development efforts and limit the areas of research in which we intend to expand.

We do not have control of our outside scientific and clinical advisors. They may pursue objectives which are contrary to our interest, which could impede our research and development efforts.

A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly and an unfavorable outcome could harm our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.

Certain of our product development programs depend on our ability to maintain rights under our licensed intellectual property. If we are unable to maintain such rights, our research and development efforts will be impeded and our business and financial condition will be negatively impacted.

The United States government holds rights that may permit it to license to third parties technology that we currently hold the exclusive right to use. We may lose our rights to such licenses if the government chooses to exercise its rights.

Our rights to certain licensed technologies are limited to use in the United States. This may restrict our ability to expand our business internationally.

We may be subject to litigation related to our acquisition of assets from Mindset

Risks related to our industry

Our technology may become obsolete or lose its competitive advantage.

Clinical trials are expensive, time-consuming and difficult to design and implement.

Problems during our clinical trial procedures could have serious negative impacts on our business.

The results of our clinical trials may not support our product candidate claims.

If our competitors produce generic substitutes of our product candidates, we may face pricing pressures and lose sales.

Physicians and patients may not accept and use our drugs.

Risks related to management

We rely on key executive officers and scientific and medical advisors and consultants, and their knowledge of our business and technical expertise would be difficult to replace.

Certain of our directors and scientific advisors have relationships with other biotechnology companies that may present potential conflicts of interest.

Risks related to our common stock

Shares of our stock may suffer from low trading volume and wide fluctuations in market price.

We cannot assure you that our common stock will become listed on the American Stock Exchange, Nasdaq or any other securities exchange.

The concentrated ownership of our capital stock may have the effect of delaying or preventing a change in control of our company.

We will continue to incur increased costs as a result of being an operating public company.

The regulatory background of the spouse of one of our founding principal stockholders may make it more difficult for us to obtain listing on Nasdaq or another securities exchange.

Our common stock is considered “a penny stock.”

There may be issuances of shares of preferred stock in the future that could have superior rights to our common stock.

The exchange of Series B Preferred Stock for Common Stock may be challenged by existing common stockholders.

We have failed to comply with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting and such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

We have never paid nor do we expect in the near future to pay dividends.

For a more complete listing and description of these and other risks that the Company faces, please see our Form 10KSB/A filed with the SEC on November 7, 2008.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of December 31, 2008, we are in default with respect to Convertible Promissory Notes, which have an aggregate carrying value of $ 5,517,123.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS

10.1	Option & License Agreement by and between Intellect Neurosciences, Inc. and Licensee, as defined there, as of October 3, 2008. 1

31.1	Certification pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ( filed herewith)

31.2	Certification pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ( filed herewith)

32.1	Certification pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( filed herewith)

32.2	Certification pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( filed herewith)

Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of this agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

February 17,2009	Intellect Neurosciences, Inc.

/s/ Daniel Chain
Daniel Chain
Chief Executive Officer

/s/ Elliot Maza
Elliot Maza
Chief Financial Officer

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Intellect Neurosciences Inactive 10-Q2008 Q4 Quarterly report

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