According to Podiatry Today, 35 to 36 million people in the United States have onychomycosis. Over 95% of such infections are onychomycosis of the toenail, according to a report in U.S. Dermatology Review. According to the manufacturer of Lamisil, 47% of those affected are not receiving treatment. For those who do seek treatment, options include debridement, oral or topical drugs or a combination of debridement and drug therapies. Debridement consists of scraping, cutting away or removal of the affected nail. If not treated, onychomycosis may persist or worsen.

Worldwide sales of Lamisil, the leading systemic drug for onychomycosis, peaked at $1.2 billion in 2004 and totaled $978 million in 2006. A generic version of Lamisil, terbinafine, recently became available. According to IMS Health, Penlac, the only approved topical agent for onychomycosis, reached peak annual sales in the United States of approximately $125 million in 2002 but declined to approximately $88 million in 2006.

Psoriasis is a chronic inflammatory skin disease that affects approximately 10 million people worldwide, according to Decision Resources. Psoriasis is characterized by thickened patches of inflamed, red skin covered with thick, silvery scales typically found at the elbows, knees, scalp and genital area. Patients can be categorized as mild, moderate or severe, with approximately 80% of patients having mild to moderate forms of the disease.

The disorder ranges from a single, small, localized lesion in some patients to a severe generalized eruption. The recent introductions of new systemic biologic therapies for moderate to severe psoriasis has provided new treatment options for patients with moderate to severe disease and greatly expanded amounts spent on drugs to treat psoriasis. According to IMS Health, sales of psoriasis drugs in the United States were nearly $1 billion in 2006.

AN2690 is the Company’s product candidate for the topical treatment of onychomycosis, a fungal infection of the nail and nail bed. AN2690 is a potent antifungal that, according to the Company’s preclinical studies, penetrates the human nail plate 250 times more effectively than Penlac, the only currently approved topical therapy.

AN2728 is the Company’s topical anti-inflammatory product candidate for the treatment of psoriasis. AN2728 is designed to inhibit the production of TNF-alpha, a known mediator of the inflammation associated with psoriasis and a validated target, as well as other cytokines, which are proteins produced by the immune system that are involved in the inflammation process. AN2728 has demonstrated efficacy in psoriasis patients in a Phase 1b clinical trial. The Company intends to begin an additional Phase 1b clinical trial and a Phase 2 clinical trial in parallel in 2007 to better characterize the safety profile of AN2728 and evaluate the appropriate efficacious dose for treating psoriasis.

AN0128 is the Company’s product candidate that has both antibiotic and anti-inflammatory properties. The Company has demonstrated in preclinical studies and an initial clinical trial that AN0128 can be effective at killing types of bacteria most frequently found on the skin and in the mouth, and also bacteria resistant to other drugs. The Company is evaluating the use of AN0128 in diseases that have components of both infection and inflammation.

AN2718 is the Company’s product candidate in preclinical development for the topical treatment of vaginal candidiasis, or yeast infections, and tinea pedis, or athlete\'s foot. In preclinical studies, AN2718 has been shown to be effective against yeasts associated with vaginal candidiasis, including those resistant to current treatments, which are becoming more prevalent. Additionally, AN2718 has been shown in preclinical studies to be effective against fungal strains that cause tinea pedis. The Company has engineered AN2718 to penetrate the thick skin of the foot.

Research and development expenses increased by $2.4 million from $7.8 million for the six months ended June 30, 2006 to $10.2 million for the six months ended June 30, 2006.

Interest income increased by $433,000 from $138,000 for the six months ended June 30, 2006 to $571,000 for the six months ended June 30, 2006.