Intellect Neurosciences 10Q 2009 Q4 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2009

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 þ No o

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

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 o	Accelerated filer	Non-accelerated filer	Smaller reporting company
	o	o	þ
		(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 o No þ

The registrant had 30,843,873 shares of Common Stock, par value $.001 par value per share, outstanding as of February9, 2010.

Index

		PAGE
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements: (Unaudited)

	Consolidated Condensed Balance Sheet as of June 30, 2009 and December 31, 2009	3

	Consolidated Condensed Statements of Operations for the six months ended December 31, 2009 and 2008 and for the period April 25, 2005 (inception) through December 31, 2009.	4-5

	Consolidated Condensed Statement of Changes in Capital Deficiency for the period ended December 31, 2009	6

	Consolidated Condensed Statements of Cash Flows for the six months ended December 31, 2009 and 2008 and for the period April 25, 2005 (inception) through December 31, 2009	7

	Notes to Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults upon Senior Securities	39

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

Item 5	Other Information	39

Item 6.	Exhibits	40

SIGNATURES		41

CERTIFICATIONS

Intellect Neurosciences, Inc. and Subsidary

(A development stage company)

Consolidated Condensed Balance Sheet

	December 31, 2009			June 30, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	8,577		$	270,589
Prepaid expenses & other current assets		9,899			14,390
Deferred debt costs, net		14,429			19,239
Total current assets	$	32,905		$	304,218

Fixed assets, net		91,462			162,760
Security deposits		70,652			70,652
Restricted cash		21,524			-
Total Assets	$	216,543		$	537,630

LIABILITIES AND CAPITAL DEFICIENCY

Current Liabilities:
Accounts payable and accrued expenses	$	4,028,150		$	4,192,008
Convertible promissory notes (net of debt discount of $138,803)		511,197			-
Convertible promissory notes (past due)		5,290,118			5,305,088
Accrued interest - convertible promissory notes		2,661,476			2,052,497
Derivative instruments		393,540			307,905
Preferred stock liability		459,309			872,867
Preferred stock dividend payable		1,820,531			1,574,035
Total Current liabilities	$	15,164,321		$	14,304,400

Commitments and Contingencies

Notes payable (long term; net of debt discount of $106,425)		2,119,747			2,104,777
Notes payable, due to shareholder		3,830,828			3,773,828
Deferred lease liability		6,387			11,489
Other long-term liabilities		26,285
Total Liabilities	$	21,147,568		$	20,194,494

Capital deficiency:

Preferred stock, $0.001 per share, 15,000,000 shares authorized
Series B Convertible Preferred stock - 459,309 shares designated and 459,309 shares issued (classified as liability above) (liquidation preference $9,858,448)
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		22,501,384			22,488,585
Deficit accumulated during the development stage		(43,463,252	)		(42,176,294	)

Total Capital Deficiency	$	(20,931,024	)	$	(19,656,865	)

Total Liabilities and Capital Deficiency	$	216,544		$	537,629

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidary

(A development stage company)

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	December 31,
	2009			2008

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

Costs and Expenses:
Research and development	$	2,470			37,938
General and administrative		354,848			934,520
Total cost and expenses	$	357,318		$	972,458

Income /(loss) from operations	$	(357,318	)	$	2,044,209

Other income/(expenses):

Interest expense	$	(649,577	)	$	(457,526	)
Interest income		-			(148	)
Changes in value of derivative instruments and preferred stock liability		(139,126	)		1,365,139
Other					(391	)

Total other income/(expense):	$	(788,703	)	$	907,074

Net income/(loss)	$	(1,146,021	)	$	2,951,283

Basic income/(loss) per share	$	(0.04	)	$	0.10

Diluted income/(loss) per share	$	(0.02	)	$	0.08

Weighted average number of shares outstanding:
Basic		30,843,873			30,843,873
Diluted		42,045,015			41,702,834

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidary

(A development stage company)

Consolidated Statements of Operations

(Unaudited)

	Six Months Ended
	December 31,						April 25, 2005 (inception) through December 31, 2009
	2009			2008

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

Costs and Expenses:
Research and development	$	40,708			364,997		$	13,312,505
General and administrative		878,556			1,885,670			29,227,948
Total cost and expenses	$	919,264		$	2,250,667		$	42,540,453

Income/ (loss) from operations	$	(919,264	)	$	1,766,000		$	(38,523,786	)

Other income/(expenses):

Interest expense	$	(395,714	)	$	(860,624	)	$	(12,763,298	)
Interest income		35			210		$	18,525
Changes in value of derivative instruments and preferred stock liability		729,854			4,438,261		$	15,240,912
Loss on extinguishment of debt		(701,869	)		(701,869	)	$	(701,869	)
Other		-			32,752		$	(6,583,736	)
Write off of investment					-		$	(150,000	)

Total other income/(expense):	$	(367,694	)	$	2,908,730		$	(4,939,466	)

Net income/(loss)	$	(1,286,958	)	$	4,674,730		$	(43,463,252	)

Basic income/(loss) per share	$	(0.04	)	$	0.15

Diluted income/(loss) per share	$	(0.01	)	$	0.13

Weighted average number of shares outstanding:
Basic		30,843,873			30,843,873
Diluted		41,937,758			41,621,819

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidary

(A development stage company)

Consolidated Statement of Changes in Capital Deficiency

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

Balance as of June 30, 2009		30,843,873	$	30,844	$	22,488,585		$	(42,176,293	)	$	(19,656,864	)

Stock based compensation
- Clinical and Advisory Board						(1,625	)					(1,625	)
- Extension of Director options						8,348						8,348
- Employees and Directors						6,076						6,076

Net loss for the period									(1,286,959	)		(1,286,959	)

Balance as of December 31, 2009	$	30,843,873	$	30,844	$	22,501,384		$	(43,463,252	)	$	(20,931,024	)

See notes to condensed consolidated financial statements

Intellect Neurosciences, Inc. and Subsidary

(A development stage company)

Consolidated Condensed Statements of Cash Flows

	Six Months Ended
	December 31,
	2009			2008			April 25, 2005 (inception) through December 31, 2009

Cashflows from operating activities:
Net cash provided by operating activities:		(881,448	)		644,846			(17,302,692	)

Cashflows from investing activities:
Security deposit		-			-			(70,649	)
Acquistion of property and equipment		-			(12,619	)		(1,059,699	)
Restricted cash		(21,524	)		(12,059	)		(21,524	)
Investment in Ceptor		-			-			(150,000	)

Net cash used by investing activities:		(21,524	)		(24,678	)		(1,301,872	)

Cashflows from financing activities:
Borrowings from stockholders		77,000			75,000			5,556,828
Proceeds from sale of common stock		-			-			21,353
Proceeds from sale of preferred stock		-			-			6,761,150
Preferred stock issuance costs		-			-			(814,550	)
Proceeds from sale of Convertible Promissory Notes		583,960			843,500			10,605,460
Repayment of borrowings from stockholder		(20,000	)		-			(1,726,000	)
Convertible Promissory Notes issuance cost		-			-			(466,100	)
Repayment of borrowings from noteholders		-			(105,000	)		(1,325,000	)
Warrants issued for extensions		-			-			-

Net cash provided by financing activities:		640,960			813,500			18,613,141

Net increase in cash and cash equivalents		(262,012	)		1,433,668			8,577

Cash and cash equivalents beginning of period		270,588			210,758			-

Cash and cash equivalents end of period	$	8,576		$	1,644,426		$	8,577

Supplemental disclosure of cash flow informations:
Cash paid during the period for:
Interest	$	-					$	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
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

See notes to condensed consolidated financial statements

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, 2009 but we have received $4,050,000 in license fees from inception through December 31, 2009. 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, 2009, we had approximately $8,577 in cash and investments, a capital deficit of approximately $20.9 million and a deficit accumulated during the development stage of our Company of approximately $43.5 million. Our net (loss)/income from operations for the three months ended December 31, 2009 and 2008 was approximately $(357,318) and $2,044,209, respectively. We anticipate that our existing capital resources will not enable us to continue operations past February of 2010, 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 the end of February 2010, we may be forced to cease operations.

We have taken actions to reduce the rate of our cash burn and preserve our existing cash resources. We have sublet approximately 75% of our office space at our New York City office facility, closed our facilities in Israel and terminated employees both in Israel and New York. The lease of our Israeli facilities was held by our wholly-owned subsidiary, Intellect Israel. On July 16, 2009, Intellect Israel entered into an agreement with the landlord of the Israeli facilities pursuant to which the lease was terminated in exchange for surrender of amounts available under certain lease guarantees and an agreement by Intellect Israel to pay the landlord certain costs related to rewiring the facilities, estimated at up to approximately $4,800. We will continue to conduct research through outsourced facilities and arrangements. Currently, we have a total of two employees.

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.

The previously disclosed engagement with HFP Capital Markets LLC to assist the Company to obtain equity funding terminated in accordance with its terms as of January 16, 2010.

As described more fully below in Note 6, Convertible Promissory Notes, as of December 31, 2009 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 $5.3 million. As described more fully below in Note 5, Material Agreements, we are in default with respect to certain payment obligations arising from various research agreements. We have entered into discussions with our note holders to obtain their agreement to accept common stock in repayment of their convertible promissory notes in default, but we cannot assure you that we will reach agreements with our noteholders.

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, 2009, 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 licensees 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.

A key asset of the Company is our ANTISENILIN patent estate. We have entered into two license agreements and one license option agreement with major global pharmaceutical companies. To-date, we have received $4,016,667,000 in license fees and milestone payments and the agreements provide for potential future milestone and royalty payments.

The Company’s proprietary internal pipeline includes:

•

OXIGON, an orally administered, small molecular weight, copper-binding compound that prevents oxidative stress and blocks formation of toxic Aß aggregates. Phase I trials in Europe have been completed and the drug candidate is planned to enter Phase II trials in AD patients, provided the Company obtains sufficient financing.

•

IN-N01, an Aß specific, humanized monoclonal antibody generated using the Company’s ANTISENILIN® platform technology. The prototype drug candidate is in preclinical optimization-stage. The antibody product would be administered to AD patients by infusion.

•

RECALL-VAX, an active vaccine against Aß based on the Company’s RECALL-VAX™ technology. The prototype drug candidate is ready for preclinical optimization. The vaccine product would be used to inoculate individuals by injection with a modified non-toxic form of Aß so that they become “immunized” to the naturally occurring toxin.

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. Currently, Intellect Israel is dormant and we conduct our research activities 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 10-K for the fiscal year ended June 30, 2009 filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2009. 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 its 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, 2009 and 2008 for share-based payment awards was $7.712 and $107,753, respectively, of which $0 and $57,442, respectively, is shown in research and development costs and $7,712 and $50,311, respectively, is shown in general and administrative expenses in the condensed statement of operations.

At December 31, 2009, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was approximately $2,975, which is expected to be recognized over a weighted-average period of .50 years. No tax benefit was realized due to a continued pattern of operating losses.

Summary of all option plans at December 31, 2009:

	Year Ended June 30, 2009			Weighted Average Exercise Price		Instrinisic value		Weighted Average Remaining Contractual Life

Options outstanding at June 30, 2009		12,205,478		$	0.74	$	-
Granted		-		$	-
Cancelled/Forfeited		-		$	-		-
Expired		(375,000	)	$	-
Balance at the end of period		11,830,478		$	0.74		-		6.826
Options excercisable at December 31, 2009		11,801,278		$	0.73		-		6.829

Options vested or expected to vest		11,830,478		$	0.74		-		6.826

A summary of the status of the Company’s non-vested shares as of December 31, 2009:

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

Balance, beginning of the period		47,500		$	0.43	$	0.33
Granted		-
Vested		(18,750	)	$	0.38	$	0.28
Cancelled		-
Forfeited		-
Balance at December 31, 2009		28,750		$	0.46	$	0.38	0.57

A summary of the Company’s stock options at December 31, 2009 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

$0.08 - $0.40		575,000		8.10	$	0.18		556,250	$	0.17
$0.41 - $0.78		11,255,478		6.76	$	0.77		11,245,478	$	0.77

		11,830,478		6.86		0.74		11,801,728		0.74

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. In connection with the extensions, we recorded a charge of $83,479, calculated using a Black Scholes option pricing model.

5. Material Agreements

South Alabama Medical Science Foundation Research and License Agreement. 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. 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 – BETAVAX (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 were 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 did not pay the license payments due on April 1, 2007 or April 1, 2008. 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, 2009, the approximate remaining balance due to NYU in respect of the License Agreement, including accrued interest is $145,260, which is included in Accounts Payable and Accrued Expenses as Due to Licensors on our Consolidated Balance Sheet.

In addition, we were 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 were 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 on 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. 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 $50,000 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 a total of $200,000 of up-front fees and $560,000 of 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, 2009, we have paid to MRCT a total of $300,000 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 the $560,000 research milestone payment obligations. Three of the five research milestones have been achieved and as a result, a liabilityof $350, 000 reflecting research milestone payment obligations outstanding is included in Accounts Payable and Accrued Expenses.

Élan Pharma International Limited and Wyeth License Agreement – ANTISENILIN. 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, initially we 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, and recorded periodic amortization expense related to the deferred credit based on 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.

As described more fully below, in October 2008, we entered into an Option and 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 “Subject Patents” in the Option Agreement). The patents are the same patents and patent applications as the Subject 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 Subject Patents described above terminated as of December 19, 2008. Accordingly, we recognized the remaining balance of the deferred credit as income during the period ended December 31, 2008.

ANTISENILIN Option and License Agreement. In October 2008, we entered into an Option Agreement (the “Option Agreement”) by and among Intellect and a global pharmaceutical company (“Option Holder”) regarding an option to obtain a license under certain of our patents and patent applications (the “Subject Patents”) related to antibodies and methods of treatment for Alzheimer’s disease and to make, have made, use, sell, offer to sell and import certain Licensed Products, as defined in the Agreement.

Pursuant to the 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 agreed to 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.

GSK Option and License Agreement - ANTISENILIN. On April 29, 2009, we entered into an Option Agreement (the “Agreement”) with Glaxo Group Limited (“GSK”) regarding an option to purchase a license under certain of Intellect’s patents and patent applications (the “Subject Patents”) related to antibodies and methods of treatment for Alzheimer’s disease.

Pursuant to the Agreement, we granted GSK an irrevocable option (the “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 (as such terms are defined in the Agreement).

Upon exercise of the Option, GSK will pay us two million dollars ($2,000,000). In addition, upon the later of the (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 incorporating a GSK Compound in the Territory in the Field (as such terms are defined in the Agreement), GSK will pay us an additional two million U.S. dollars (U.S. $2,000,000). An additional milestone payment will be made to us should GSK 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 provides that we will be eligible to receive certain royalty payments from GSK in connection with Net Sales of Licensed Products by GSK, 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).

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. Authoritative guidance 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 determined according to authoritative guidance issued by the Financial Accounting Standards Board.

We have determined based on authoritative guidance issued by the Financial Accounting Standards Board, that the embedded conversion feature present in the 2006 Notes should not be valued separately at the commitment date. 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. 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 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, 2009, 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 is outstanding and past due.

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. The conversion price of the 2007 Notes and the exercise price of the warrants will be reduced to a price equal to the price at which the Company issues shares of common stock (subject to certain exceptions). 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, 2009, we are in default with respect to all but one of the of the remaining 2007 Notes, which have an aggregate carrying value of $5,290,118. 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 that approximately $541,000 of principal and accrued interest was past due pursuant to a convertible promissory note and that he was entitled to a money judgment against us for all amounts due under such note, plus attorney’s fees, costs and disbursements. David Blech and Margie Chassman provided personal guarantees to this note holder guaranteeing all of our obligations under this note. Margie Chassman is one of our principal shareholders and David Blech is her husband and a consultant to the Company. On March 22, 2009, Ms. Chassman purchased the note from the note holder and agreed to cancel the note. In exchange, we issued to Ms. Chassman an additional Senior Note with a face amount of $310,000 and repaid $100,000 of Notes held by Ms. Chassman. We did not issue any additional warrants to Ms. Chassman. On March 26, 2009, we entered into a General Release with the original note holder related to amounts due under the note. The matter was subsequently dismissed with prejudice.

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 from 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 (subject to adjustment). 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, 2009, is approximately $325,000. As of December 31, 2009, we are in default with respect to 2008 Notes with an aggregate face amount of $180,000. 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 June 30, 2008, the outstanding principal balance of the Warrantless Notes was $5,277,328, of which $3,808,828 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 (each, a“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”).

Each Senior Note Payable has 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 have an exercise price of $1.75 per common share and contain full anti-dilution protection. The Royalty Participation entitles 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 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 authoritative guidance issued by FASB. 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.)

As described more fully above, on March 22, 2009, in connection with the settlement of certain litigation relating to a convertible promissory note in default, one of our shareholders who is a related party purchased the note in default from the original note holder and agreed to cancel the note. In exchange, we issued to the related party shareholder an additional Senior Note with a face amount of $310,000 and repaid $100,000 of Notes held by the shareholder. We did not issue any additional warrants to the shareholder. At December 31, 2009, Senior Notes Payable to related parties of $3,830,828 and Senior Notes Payable to unrelated parties with a carrying value of $2,119,747 remain outstanding.

Bridge Note Financing

On August 12, 2009, we issued and sold a 10% Senior Promissory Note (the “August Note”) with a principal amount of $450,000, resulting in net proceeds of approximately $360,000. The August Note was sold to an “accredited investor” (as defined in Section 2(15) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 501 promulgated thereunder) in an offering exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

The August Note bears interest at 10% annually and matures upon the earlier of 6 months from the date of the Note or the closing of an equity financing with gross proceeds to us of at least $1,125,000 (the “Liquidity Event”). The payment and performance obligations of the Company under the Note are guaranteed by Margie Chassman, a principal shareholder of the Company. In consideration of the guaranty provided by Ms. Chassman, we paid her a fee of $30,000.

As additional consideration to repayment of the August Note and interest in cash, the purchaser of the August Note will receive at maturity or early repayment of the August Note either (1) a number of shares of common stock, par value $0.001, of the Company (the “Shares”), equal to the quotient of the principal amount of the August Note divided by 0.15; or (2) warrants to purchase a number of shares of common stock, par value $0.001, of the Company (the “Purchaser Warrants”), equal to the quotient of the principal amount of the August Note divided by 0.15, at an exercise price equal to $1.75 per share, as adjusted upon the occurrence of certain events as set forth in the Purchaser Warrant. If the Liquidity Event occurs on or prior to the maturity date of the August Note, the purchaser will receive Shares. If the Liquidity Event has not occurred on or prior to the maturity date of the August Note, the purchaser will receive Purchaser Warrants.

The Purchaser Warrants, if issued, will entitle the holder to purchase shares of the Company’s common stock at a price of $1.75 per share. The number of shares issuable on exercise of the Purchaser Warrants is subject to adjustment for subdivision, combination, recapitalization, reclassification, exchange or substitution, as well as in the event of merger or sale of all or substantially all of our assets. The Purchaser Warrants also benefit from anti-dilution adjustments upon some issuances of shares of the Company’s common stock (or securities convertible into or exchangeable or exercisable for such stock). If the Company issues common stock (other than certain types of excluded stock or stock issued for the purposes of adjustment) at a price that is less than $1.75 (or if the Company issues rights, warrants or other securities having an exercise, conversion or exchange price that is less than $1.75), the exercise price of the Purchaser Warrants will be reduced (i) until the completion by the Company of financings providing cumulative gross proceeds of at least $10,000,000, involving the issuance of shares of Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock, to a price equal to the issuance, conversion, exchange or exercise price, as applicable, of any such securities so issued and (ii) thereafter to a price determined by dividing (a) an amount equal to the sum of (A) the number of shares of Common Stock outstanding and shares of Common Stock issuable upon conversion or exchange of securities of the Company outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price and (B) the consideration, if any, received by the Company upon such issue or sale by (b) the total number of shares of Common Stock outstanding and shares of Common Stock issuable upon conversion or exchange of securities of the Company outstanding immediately after such issue or sale. Additional reductions of the exercise price of the Purchaser Warrants will be made if the Company issues securities at a price (or having an exercise, conversion or exchange price) less than the exercise price of the Purchaser Warrants at the time of such issuances. The Purchaser Warrants carry piggyback registration rights whereby holders of Purchaser Warrants are entitled to compel the Company to include the common stock issuable pursuant to such holder’s Purchaser Warrants in each registration statement that the Company files other than registration statements which relate exclusively to an employee stock option, purchase, bonus or other benefit plan. Each Purchaser Warrant expires on the fifth anniversary of the date of its issuance.

We determined at the time of issuance of the August Note that it was probable that the holder of the August Note would receive Purchaser Warrants rather than the Shares at maturity of the Note. We based this determination on our estimate of the likelihood that the Liquidity Event would occur on or before the maturity date of the August Note. We determined the initial fair value of the warrants issued to the purchaser of the August Note to be $151,930 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the August Note. This difference will be amortized over the term of the August Note 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 Purchaser Warrants.

Sandgrain Securities Inc. acted as placement agent for the offering of the August Note. We paid to Sandgrain a commission of $45,000 (10% of the principal amount of the Note sold) plus reimbursement of expenses. We are obligated to issue to Sandgrain (or its designees) warrants (the “Sandgrain Warrants”) to purchase 750,000 shares of the Company’s common stock, exercisable for 5 years from their date of issuance. The Sandgrain Warrants will be issued to Sandgrain (or its designees) at the time that we issue to the purchaser of the August Note either the Shares or the Purchaser Warrants. The exercise price of the Sandgrain Warrants will be $$0.15 per share if we issue Shares to the Purchasers or $1.75 per share if we issue Purchaser Warrants to the Purchasers. The Sandgrain Warrants may be exercised on a cashless basis and will have registration, anti-dilution and other rights similar to the Purchaser Warrants. In addition, we have agreed to extend the expiration date of warrants to purchase 485,714 shares of our common stock, which were issued to Sandgrain (or its designees) in July 2007 in connection with a previous financing transaction by the Company. The expiration date of all such warrants will be extended from July 16, 2012 until the expiration date of the Sandgrain Warrants to be issued in connection with this offering of August Note.

The maturity date of the August Note is February 12, 2010. We have yet to pay the principle plus accrued interest due with respect to the August Note. We have entered into discussions with the holder of the August Note to accept common stock in repayment of amounts due under the Note. We cannot assure you that we will reach an agreement with the Note holder.

On November 17, 2009, we issued and sold 14% Convertible Promissory Notes (the “November Notes”) with an aggregate principal amount of $200,000, resulting in net proceeds to the Company of approximately $192,500. The November Notes were sold to “accredited investors” (as defined in Section 2(15) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 501 promulgated thereunder) in an offering exempt from registration under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

The November Notes bear interest at 14% annually and mature 3 months from the issue date of the November Notes. Interest is payable quarterly in arrears on the last day of each calendar quarter, commencing December 31, 2009. Each November Note may be converted into shares of Company common stock equal to the sum of the principal owed and interest that has accrued on such Note divided by the conversion price of $1.75. The November Notes are not entitled to dividends, distributions or other payments and carry no registration rights related to the underlying common stock.

In connection with the sale of the November Notes, the purchasers of the November Notes will receive at maturity of the November Notes 2.5 million shares of Company common stock (the “Purchaser Shares”. Daniel Chain, CEO of the Company, has transferred to an escrow agent, 2.5 million shares of Company common stock issued to him at the time that he founded the Company in 2005 as collateral for the purchasers’ right to receive such shares.

We calculated the initial fair value of the Purchaser Shares to be $250,000 based on the closing price of the Company’s common stock on the date of issuance of the November Notes. We treated this amount as a liability with a corresponding decrease in the carrying value of the November Notes of $200,000, with the remaining $50,000 treated as interest expense for the current period. The decrease in the carrying value of the November Notes will be amortized over the term of the November 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 Purchaser Shares.

Pursuant to the terms of the November Notes, the Company has agreed, among other things, to use its best efforts to obtain the consent of the holders of its outstanding Common Stock to increase the number of authorized shares of common stock from 100 million to 650 million. Provided this proposal is adopted by the Company’s shareholders, the Company has agreed to effectuate a conversion of its outstanding Series B Preferred Stock at a conversion price of $0.10 per share (and $0.08 per share under certain circumstances) in the event holders of eighty percent (80%) or more of the Series B Preferred Stock agree to convert their stock at such price.

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.

Authoritative accounting guidance states that a portion of the proceeds of debt securities issued with detachable stock purchase warrants is allocable to the warrants and should be accounted for as paid-in capital. The allocation should be based on the relative fair values of the two securities at time of issuance. A similar methodology is to be used in circumstances in which convertible securities are issued along with another security, and proceeds from the issuance of convertible preferred stock with detachable warrants should be allocated between the preferred stock and the other securities based on the relative fair values of the components. Authoritative accounting guidance provides that proceeds from the issuance of warrants or other derivative instruments that give the counterparty the choice of cash settlement or settlement in shares, should be reported as a liability, which is measured at fair value, with changes in fair value reported in earnings. The accounting guidance further provides that a contract that contains an indeterminate number of shares to be delivered in a share settlement is essentially a contract that gives the counterparty a choice of cash settlement or settlement in shares and should be recorded as a liability.

Both the Series B Preferred and the Series B Warrants contain such provisions as a result of the anti-dilution features contained in the Statement of Designation of the Series B Convertible Preferred Stock, the Warrant and other relevant contracts. Accordingly we have accounted for the Series B Preferred and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes Option pricing model. We recorded the amount received in consideration for the Series B Preferred as a liability for the Series B Preferred shares with an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the Series B preferred stock and the Warrants will be marked to market for all future periods they remain outstanding with an offsetting charge to earnings. At December 31, 2009 the Series B Preferred stock liability was $459,309 with a change (decrease) in fair value of $91,862 for the three months ended December 31, 2009, 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 guidance for Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, which under certain circumstances requires the bifurcation of an embedded conversion feature from the host instrument, provides that when the fair value of the common stock into which the preferred stock can be converted exceeds the proceeds (a beneficial conversion feature), the issuer should allocate a portion of the proceeds equal to that excess to paid-in capital or to a liability if the issuer has a cash payment obligation. Under this accounting guidance, we determined that the Series B Preferred do not contain an embedded beneficial conversion feature because the fair value of our common stock was less than the proceeds from the issuance of the Series B Preferred. We compared the value of our common stock to the amount received from issuance of the Series B Preferred after allocating a portion of the proceeds of the Series B Preferred to the Series B 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, 2009, we have accrued Series B Preferred Stock dividends payable of $1,820,531 which are recognized as interest expense.

8. Derivative Instrument Liability

Derivative instruments consist of the following:

	December 31, 2009

Warrants and shares related to Convertible Promissory Notes:	$	390,773

Warrants issued with Series B Convertible Preferred Stock:		2,767

Total	$	393,540

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; 371,429 were issued in connections with a Note issued during fiscal year ended June 30, 2009; and 3,000,000 were issued in connection with a Note issued during the fiscal year ended June 30, 2010.

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. Authoritative accounting guidance 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 $1.06 per common share and the weighted average remaining life of the warrants is 2.69 years. At December 31, 2009, the Convertible Note Warrant liability was $390,773 with an increase in fair value of the outstanding warrants of $297,385 and $167,580 for the three months and six months ended December 31, 2009, 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.

Authoritative accounting guidance 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, 2009, 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 1.15 years. At December 31, 2009 the Series B Warrant liability was $2,767 with a decrease in fair value of $43,780 and $43,901 for the three months and six months ended December 31, 2009 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 3.6 years. At December 31, 2009, the Warrant liability for these Senior Note Warrants was $26,461.

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 ended September 30, 2008.

Warrants to be issued in connection with the August Notes (the “Purchaser Warrants”).

As described above in Note 6, Convertible Promissory Notes Payable, we expect to issue warrants to purchase up to 3.0 million of our common shares (the Purchaser Warrants) to the purchaser of the August Note. We have accounted for the Purchaser Warrants as a liability for the reasons described above. The carrying value of the associated August Note has been reduced by the initial fair value of these Purchaser Warrants. The August Note will be accreted back up to its face value over the term of the Note. The Purchaser Warrants have been valued at the date of the issuance of the August Note and the resulting liability will be marked to market for each future period the August Note remains outstanding with the resulting gain or loss being recorded in the statement of operations. At December 31, 2009, the Warrant liability for these Purchaser Warrants was $250,000.

Shares to be issued in connection with the November Notes (the “Purchaser Shares”).

As described above in Note 6, Convertible Promissory Notes Payable, we expect to issue a total of 2.5 million of our common shares (the Purchaser Shares) to the purchasers of the November Notes. We have accounted for the Purchaser Shares as a liability for the reasons described above. The carrying value of the associated November Notes has been reduced by the initial fair value of these Purchaser Shares, with the excess treated as interest expense for the current period. The November Notes will be accreted back up to their face value over the term of the Notes. The Purchaser Shares have been valued at the date of the issuance of the November Notes and the resulting liability will be marked to market for each future period the November Notes remain outstanding with the resulting gain or loss being recorded in the statement of operations. At December 31, 2009, the liability for these Purchaser Shares was $250,000.

9. 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 authoritative accounting guidance, 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 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 6, Convertible Promissory Notes Payable, 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.

10. 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.

During the three months ended March 31, 2009, we borrowed an additional $410,000 from these shareholders evidenced by notes with the same terms as described above and repaid notes with an aggregate amount of $100,000.

During the three months ended June 30, 2009, we repaid notes with an aggregate face amount of $35,000 to these shareholders.

During the three months ended September 30, 2008, we repaid notes with an aggregate face amount of $20,000. The remaining balance of these shareholder loans as of December 31, 2009 was $3,380,828.

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 six months ended December 31, 2009, we accrued $60,000 of consulting expense for this former director and shareholder and during December 2008 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 six months ended December 31, 2009.

11. 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, 2009.

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.

12. 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, 2009			December 31, 2008		December 31, 2009			December 31, 2008
Basic EPS

Net (loss) income attributable to common stockholders, basic	$	(1,146,021	)	$	2,950,983	$	(1,286,959	)	$	4,674,730

Weighted average shares outstanding		30,843,873			30,843,873		30,843,873			30,843,873
Basic (loss) earnings per share	$	(0.04	)	$	0.10	$	(0.04	)	$	0.15

Diluted EPS

Net (loss) income attributable to common stockholders, basic	$	(1,146,021	)	$	2,950,983	$	(1,286,959	)	$	4,674,730
Preferred stock dividends		123,248			123,248		246,496			246,496
Interest on convertible notes		308,742			172,427		608,879			542,746
Net (loss) income attributable to common stockholders, diluted	$	(714,031	)	$	3,246,658	$	(431,584	)	$	5,463,972

Weighted average shares outstanding		30,843,873			30,843,873		30,843,873			30,843,873
Dilutive effect of stock options		123,958			-		61,979			-
Dilutive effect of warrants		-			-		-			-
Dilutive effect of Series B preferred shares		4,593,091			4,593,091		4,593,091			4,593,091
Dilutive effect of convertible notes		6,484,093			6,265,870		6,438,815			6,184,855
Diluted weighted average shares outstanding		42,045,015			41,702,834		41,937,758			41,621,819
Diluted earnings (loss) per share	$	(0.02	)	$	0.08	$	(0.01	)	$	0.13

13. Subsequent Events

Effective January 24, 2010, Mr. William Keane, Mr. Harvey Kellman and Dr. Kelvin Davies resigned as members of the Board of Directors of the Company. Effective January 22, 2010, Ms. Kathleen Mullinix resigned as a member of the Board of Directors of the Company. Until the effective date of the resignations, Mr. Keane was Chairman of the Audit Committee and a member of the Compensation Committee and Nominating and Governance Committee; Mr. Kellman was Chairman of the Compensation Committee and a member of the Audit Committee and Nominating and Governance Committee; and Ms. Mullinix was Chairwoman of the Nominating and Governance Committee and a member of the Audit Committee and Compensation Committee. Dr. Daniel Chain, Chairman and CEO, and Mr. Elliot Maza, President and CFO, remain as the sole directors of the Company.

The Directors advised the Company that they were resigning because of inadequate funds to renew the Directors and Officers Liability insurance coverage. The resignations were not motivated by any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

On February 5, 2010, we reached a preliminary agreement with certain of our existing shareholders to provide us with interim funding to sustain our operations until we obtain additional financing. The contemplated transactions are subject to negotiation and execution of definitive agreements. There is no assurance that the contemplated transactions will be successfully completed.

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, 2009 contained in our Current Report on Form 10Kiled with the Securities and Exchange Commission (the “SEC”) on October 16, 2009.. 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 December 31, 2009. 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 has commenced 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, and 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, 2009 were $13,312,505, which exclude patent related expenses.

The previously disclosed engagement with HFP Capital Markets LLC to assist the Company to obtain equity funding terminated in accordance with its terms as of January 16, 2010.

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, 2009 and December 31, 2008, our accumulated deficit was approximately $42.5 million and $39.3 million, respectively. Our net loss before other income/ (expense) from operations for the three months ended December, 2009 and 2008 was approximately $(357,318) and $2,044,209, respectively. Our capital shows a deficit of approximately $20.9 million and $16.8 million as of December 31, 2009 and December 31, 2008, 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, Material 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, 2009, we had cash and cash equivalents of approximately $8,577. We anticipate that our existing capital resources will not enable us to continue operations beyond February 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 February 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, 2009 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 $5.3 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 $541,000 of principal and accrued interest was past due pursuant to a convertible promissory note and that he is entitled to a money judgment against us for all amounts due under such note, plus attorney’s fees, costs and disbursements. David Blech and Margie Chassman, provided personal guarantees to this note holder guaranteeing all of our obligations under the note. On March 22, 2009, Ms. Chassman purchased the note from the note holder and agreed to cancel the note. In exchange, we issued to Ms. Chassman a senior note with a face amount of $310,000 and repaid $100,000 of other notes held by Ms. Chassman. On March 26, 2009, we entered into a General Release with the original note holder related to amounts due under the note. The matter was subsequently dismissed with prejudice.

The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the period ended June 30, 2009 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, 2009 Compared to Three Months Ended December 31, 2008:

	Three Months Ended December 31,
				(in thousands)
	2009			2008		Change
Net income/(loss) from operations		(357	)		2,044		(2,401	)
Net other income (expenses):		(789	)		907		(1,696	)

Net income/(loss)	$	(1,146	)	$	2,951	$	(4,097	)

Net operating income decreased by approximately $2.4 million as a result of the following:

	(in thousands)

Decrease in license fee revenue	$	3,016
Decrease in salaries, benefits and Board compensation		(189	)
Decrease in clinical expenses and R&D fees and expenses		(35	)
Decrease in professional fees		(283	)
Decrease in other G&A expenses		(108	)
	$	2,401

The decrease in license fee revenue is related to certain research milestone payments that we received from Elan and Wyeth following grant of the European patent for our ANTISENILIN platform technology last year.

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 termination of research and clinical activity.

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

The decrease in other G&A expenses is due to a decrease in overall office expenses plus a decrease in rent costs due to the subletting of a portion of the New York office.

Other income decreased by approximately $1.7 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 $1.3 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, partially offset by amortization and interest expenses.

Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008:

	Six Months Ended December 31, 2009,
				(in thousands)
	2009			2008		Change
Net income/(loss) from operations		(919	)		1,766		(2,685	)
Net other income (expenses):		(367	)		2,908		(3,275	)

Net income/(loss)	$	(1,286	)	$	4,674	$	(5,960	)

Net operating income decreased by approximately $2.7 million as a result of the following:

	(in thousands)

Decrease in license fee revenue	$	4,016
Decrease in clinical expenses and R&D fees and expenses		(324	)
Decrease in salaries, benefits and Board compensation		(470	)
Decrease in professional fees		(134	)
Decrease in other G&A expenses		(403	)
	$	2,685

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 termination of research and clinical activity.

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

The decrease in other G&A expenses is due to a decrease in overall office expenses plus a decrease in rent costs due to the subletting of a portion of the New York office.

Other income decreased by approximately $3.3 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 $3.5 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, partially offset by amortization and interest expenses.

Off-Balance Sheet Arrangements

As of December 31, 2009, 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 obligations during the six months ended December 31, 2009.

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 of the research milestones and we have included $350,000 of the total $560,000 in accrued expenses at December 31, 2009.

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, Material Agreements, 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 has 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 authoritative accounting guidance 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. These authoritative accounting standards require 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 the relevant accounting guidance in future periods, the compensation expense that we record 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 the relevant accounting guidance. 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, 2009, 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 are expensed as incurred. Patent related fees are excluded from research and development costs and are 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 3, Quantitative and Qualitative Disclosures about Market Risk, for additional information on the volatility in market value of derivative instruments.

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 authoritative accounting guidance, 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 authoritative accounting guidance, which provides that 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 December 2007, FASB issued guidance related to Business Combinations under ASC 805, Business Combinations, and guidance related to the accounting and reporting of non-controlling interest under ASC 810-10-65-1, Consolidation. This guidance significantly changes the accounting for and reporting of business combination transactions and non-controlling (minority) interests in consolidated financial statements. This guidance became effective January 1, 2009.

In March 2008, the FASB issued guidance related to the disclosures about derivative instruments and hedging activities under FASB ASC 815-10-50, Derivatives and Hedging. This guidance requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under applicable guidance, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. These disclosure requirements are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Our adoption of ASC 815-10-50 on January 1, 2009 did not have a material impact on our consolidated condensed financial statements.

In June 2008, the FASB issued guidance to evaluate whether an instrument (or embedded feature) is indexed to an entity’s own stock under ASC 815-40-15, Derivatives and Hedging. The guidance requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock in order to determine if the instrument should be accounted for as a derivative under the scope of ASC 815-10-15. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted ASC 815-40-15 beginning January 1, 2009. Our adoption of ASC 815-10-15 on January 1, 2009 did not have a material impact on our consolidated condensed financial statements.

In May 2009, the FASB issued guidance related to subsequent events under ASC 855-10, Subsequent Events. This guidance sets forth the period after the balance sheet date during which management or a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. It requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted ASC 855-10 beginning June 30, 2009 and have included the required disclosures in our consolidated condensed financial statements.

In June 2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC 105, Generally Accepted Accounting Principles. This guidance states that the ASC will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification’s content carries the same level of authority. Thus, the U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. This is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted ASC 105 as of September 30, 2009 and thus have incorporated the new Codification citations in place of the corresponding references to legacy accounting pronouncements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and Disclosures. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure the fair value using one or more of the following techniques: a valuation technique that uses the quoted price of the identical liability or similar liabilities when traded as an asset, which would be considered a Level 1 input, or another valuation technique that is consistent with ASC 820. This Update is effective for the first reporting period (including interim periods) beginning after issuance. Thus, we adopted this guidance as of September 30, 2009, which did not have a material impact on our consolidated condensed financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Value of Warrants and Derivative Liabilities. At December 31, 2009, the estimated fair value of our warrant liability was $393,540. 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 officer and chief financial officer, 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, 2009. 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 officer and our chief financial officer, concluded that based on the evaluation, our disclosure controls and procedures were effective as of the date of the period covered by this quarterly report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

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

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

None

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 Annual Report on Form 10-K for the fiscal year ended June 30, 2009 filed with the SEC on October 13, 2009 including:

Risks related to our lack of liquidity

We have no revenues and have incurred and expect to continue to incur substantial losses. We will not be successful unless we reverse this trend.

We have an extremely low cash balance and if we fail to raise additional capital or receive substantial cash inflows from potential partners by the end of February, 2010, we may be forced to cease operations.

We are in default under certain of our Convertible Notes and do not currently have adequate funds to repay additional notes that are due in the near future.

Risks related to our business

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

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.

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. In addition, we may fail to obtain certain patents in the United States, which would diminish the amounts realizable under our existing License Agreements.

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.

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 as well as skilled employees 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.
	·	All of our non-employee directors have resigned and we have no independent directors on our Board.

Risks related to our common stock

	·	Shares of our stock may suffer from low trading volume and wide fluctuations in market price.
	·	Any future issuance of securities by us at a price (or having an exercise or conversion price) below $1.75 per share will substantially reduce the conversion and exercise prices of many of our outstanding convertible preferred stock, convertible notes and warrants and entitle the holders of those securities to receive an extremely large number of shares of common stock upon conversion or exercise, which would result in very substantial dilution to holders of our common stock and a further decline in the trading price of our common stock.

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 10-K filed with the SEC on October 13, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of December 31, 2009, we are in default with respect to Convertible Promissory Notes, which have an aggregate carrying value of $ 5,290,118.

Item 5. Other Information.

None

ITEM 6. EXHIBITS

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)

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 16, 2010	Intellect Neurosciences, Inc.

	/s/ Daniel Chain
	Daniel Chain
	Chief Executive Officer

	/s/ Elliot Maza
	Elliot Maza
	Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Intellect Neurosciences Inactive 10-Q2009 Q4 Quarterly report

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