The spinal cord and brain together comprise the central nervous system, or CNS. The billions of nerve cells that make up the CNS, in conjunction with the nerve bundles that run through all parts of the body, which is called the peripheral nervous system, transmit the electrical impulses necessary to sustain, regulate and monitor every aspect of human life. The spinal cord serves as the master link between the brain and the body. Nerve impulses travel between the brain and spinal cord via long, thin fibers, or axons, that transmit information. The spinal cord also acts as a conduit for information that regulates involuntary functions, such as breathing, blood pressure, temperature control, and bladder, bowel and sexual functions. The myelin sheath that surrounds nerve fibers in the brain and spinal cord provides insulation that facilitates the effective transmission of nerve impulses. It is composed of multiple layers of tightly packed cell membrane, and is vulnerable to damage in conditions like chronic spinal cord injury, referred to as SCI, and multiple sclerosis, referred to as MS,. Once damaged, it is often not effectively repaired. Although nerve fibers can survive in a demyelinated state, their ability to conduct nerve impulses may be completely lost or severely compromised.

Approximately 250,000 people in the United States live with the long-term consequences of SCI and approximately 10,000 to 12,000 new spinal cord injuries occur each year, typically in young men. The majority of people with SCI are injured under the age of 30 and live with permanent disability and multiple related medical conditions for more than 40 years. It is estimated by the Center for Disease Control that the annual direct cost to the U.S. healthcare system for people with SCI exceeds $9 billion. The National Spinal Cord Injury Database at the University of Alabama estimates that the average lifetime costs directly attributable to SCI for an individual injured at age 25 would vary from $700,000 to $2.8 million depending on the severity of injury. According to The National Institutes of Health, it is believed that approximately 250,000 to 350,000 people in the United States have been diagnosed with MS, and approximately 10,000 people are newly diagnosed annually. MS is more prevalent in Caucasians and women and is generally diagnosed between the ages of 20 and 50. The NIH estimates that the annual economic, social and medical cost of treating MS in the United States exceeds $2.5 billion.

The Company’s other research and development programs are also focused on novel therapeutics for CNS disorders. The Company’s product candidates include small molecules, antibodies, and other protein therapeutics.

The Company has entered into a collaboration agreement with Teva to co-develop and co-promote valrocemide in the United States. Valrocemide is a small molecule drug with early Phase 2 clinical evidence of safety and efficacy as an add-on therapy for partial seizures, a type of epilepsy, and preclinical evidence of activity in animal models of epilepsy and neuropathic pain. The Company plans to move valrocemide into late Phase 2 clinical trials for epilepsy and early Phase 2 clinical trials for bipolar disorder in 2004. The Company may also pursue clinical development of valrocemide for the treatment of neuropathic pain.

The Company’s pre-clinical programs include two distinct myelin restoring therapies, Glial Growth Factor 2, refered to as GGF-2, and remyelinating antibodies. GGF-2 has been shown in various published studies to stimulate remyelination in animal models of MS and to have a variety of other effects in neural protection and repair. The Company plans to develop GGF-2 initially for treatment of MS, pending successful completion of preclinical toxicology testing. The Company’s remyelinating antibody program involves monoclonal antibodies that have demonstrated the ability to stimulate repair of myelin in three different animal models of MS. The Company is currently in the process of final preclinical validation and selection of the lead candidate molecule.

Chondroitinase Program for Scar Matrix Modification is a novel therapeutic approach to repair the injured brain and spinal cord targets the scar tissue that develops as a result of injury, which is believed to impede nerve fiber regeneration and limit functional recovery. The Company has initiated a collaborative program to develop this promising technology and it is in the process of building its intellectual property position with respect to this technology.

Research and development expenses for the three month period ended September 30, 2003 were $9.9 million compared to $3.5 million for the three month period ended September 30, 2002, an increase of approximately $6.4 million or 182%.

General and administrative expenses for the three month period ended September 30, 2003 were $10.8 million compared to $1.8 million for the three month period ended September 30, 2002, an increase of approximately $9 million, or 511%.

Other expenses for the three month period ended September 30, 2003 consisted of approximately $19.6 thousand of interest on GE Capital note payable compared with $11.9 thousand for the three month period ended September 30, 2002, an increase of $7.7 thousand.

Charges related to preferred stock increased from $14.0 thousand for the three month period ended September 30, 2002 to $6.0 million for the three month period ended September 30, 2003.