2. Summary of Accounting Policies

Cash Equivalents

The Company considers any liquid investments with maturity of three months or less when purchased to be cash equivalents. At December 31, 2011 the Company's unrestricted cash equivalents are approximately $1.5 million and are deposited primarily in a checking account with a financial institution.

Property and Equipment

Property and equipment are stated at cost net of accumulated depreciation. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. The cost of major additions and improvements is capitalized, while maintenance and repair costs that do not improve or extend the lives of the respective assets are charged to operations as incurred.

Property and equipment balances and corresponding lives were as follows:


	December 31
	2011			2010			Lives
	(in thousands)
Machinery, equipment and information systems		21			110			5-7 years
Equipment held for sale		0			21
Furniture and fixtures		52			186			5-7 years

Total		73			317
Less: Accumulated depreciation		(66	)		(273	)

	$	7		$	44

Depreciation expense associated with property and equipment was approximately $2000, $21,000 and $208,000 in 2011, 2010 and 2009, respectively.

In accordance with ASC Topic 360, Property, Plant and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible levels for which there are identifiable assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company had no impairments in 2011, 2010 and 2009.

Accrued Expenses

Accrued expenses include approximately $0.2 million and $0.3 million in accrued vacation expense, $0.1 million and $0.7 million in other research and development / general and administrative expenses as of December 31, 2011 and 2010, respectively.

Revenue Recognition

In December 2003, the Securities and Exchange Commission ("SEC") issued ASC Topic 605, Revenue Recognition, which updates and summarizes the Commission's views on the application of generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its revenue recognition policies conform to the requirements of ASC Topic 605.

Contract revenue is recognized as the services are performed on a cost reimbursement basis. Revenue associated with development milestones, if any, is recognized based upon the achievement of the milestones, as defined in the respective agreements. Overall, revenue is considered to be realized or realizable and earned when there is persuasive evidence of a revenue arrangement in the form of a contract or purchase order, the services have been performed, the price is fixed or determinable and collectability is reasonably assured.

Research and Development

All research and development costs are expensed as incurred. The value of acquired in-process research and development is charged to expense on the date of acquisition. Research and development expenses include, but are not limited to, acquired in-process technology deemed to have no alternative future use, license fees related to license agreements, preclinical and clinical trial studies, payroll and personnel expense, lab supplies, consulting and research-related overhead. Research and development expenses paid in the form of cash and Company stock to related parties aggregated $11.5 million for the period from inception (August 15, 1994) to December 31, 2003 (see Note 6, "Colthurst, Edenland and Mr. Prendergest" and "Aeson Therapeutics"). No such related party expenses were incurred in 2011, 2010 or 2009.

Accounting for Share-Based Payments

The Company has an equity-based incentive compensation plan known as "The 2005 Equity Incentive Plan" (the "Plan"). The Plan allows us to grant stock options and other stock or stock-based awards, including stock appreciation rights, stock purchase awards, restricted stock awards and restricted stock units awards. The Plan also allows us to provide equity compensation to non-employee directors and consultants. The exercise price for an option granted under the Plan is typically not less than the fair market value of the common stock subject to such option. The term of any options granted under the Plan may not exceed 10 years from the date of the grant. Options issued to employees generally vest over a four-year period, with 25% vesting on the first anniversary date and the balance vesting monthly during years two, three and four.

Prior to (ASC Topic 718), Compensation-Stock Compensation, all stock options for employees (with the exception of three grants) have been granted at or above the market price where the exercise price of the option equaled or exceeded the market price of the stock on the date of the grant. As a result, under previous rules, there was no stock-based compensation expense for those grants. Compensation expense was taken for the three options granted at below market value (see "2005 Annual Report on Form 10-K, Notes to Financial Statements – No. 9 Stock Options" for more detail). As of December 31, 2011 the Plans have 7,066,940 shares of common stock reserved for issuance.

Effective January 1, 2006, we adopted ASC Topic 718, requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by ASC Topic 718; accordingly, results from prior periods have not been restated. Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2011, 2010 and 2009 includes:

a) compensation expense for all stock-based compensation awards granted prior to January 1, 2006 but not yet vested, based on the grant date fair value estimated in accordance with the original provisions of ASC Topic 718, and

b) compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of ASC Topic 718.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect the Company's experience. Compensation expense is recognized using the straight-line method for all stock-based awards issued after January 1, 2006. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company's historical experience and future expectations. Prior to the adoption of ASC Topic 718, the effect of forfeitures on the pro forma expense amounts was not recognized. ASC Topic 718, requires forfeitures to be estimated at the time of the grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.

Black-Scholes Option Valuation Assumptions (1)


	Fiscal Years Ended
	December 31, 2011 (4)		December 31, 2010			December 31, 2009
Risk-free interest rate		n/a		4.35	%		4.5	%
Expected dividend yield		n/a		0	%		0	%
Expected life (2)		n/a		6.32 years			7.04 years
Expected volatility (3)		n/a		88	%		85	%

(1)	Forfeitures are estimated as 7.78% for 2010 and 7.88% for 2009 for stock options.

(2)	The 2010 and 2009 expected life is based on historical experience

(3)	The expected stock price volatility is estimated based on historical experience.

(4)	There were no stock options granted during 2011.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options.

401(k) Matching Contributions

Our Company sponsored a 401(k) savings plan, to which eligible domestic employees may voluntarily contribute a portion of their income, subject to statutory limitations. In addition to the participant's own contributions to these 401(k) savings plans, we matched such contributions up to a designated level. Total matching contributions related to employee savings plans were approximately zero, $76,000 and $120,000 in 2011, 2010 and 2009, respectively. The 401(k) plan was terminated in 2011 and the assets disbursed according to the participants instructions.

Income Taxes

The Company provides for income taxes under the principles of ASC Topic 740, Income Taxes, which requires that provision be made for taxes currently due and for the expected future tax effects of temporary differences between book and tax bases of assets and liabilities.

On July 13, 2006 ASC Topic 740 was issued, Accounting for Uncertainty in Income Taxes, which establishes recognition and measurement thresholds that must be met before a tax benefit can be recognized in the financial statements. The Company adopted ASC Topic 740 on January 1, 2007, and it has had no material impact on its financial statements.

Financial Instruments

The Company's financial instruments consist primarily of cash and accounts payable. These financial instruments are stated at their respective carrying values, which approximate their fair values, due to their short-term nature.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Concentrations of Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash with high quality financial institutions.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at December 31, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits. At December 31, 2011 the Company had no interest-bearing amounts on deposit in excess of federally insured limits.

Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed in a manner consistent with basic net loss per share after giving effect to potentially dilutive securities. Potential common shares of 3,332,168, 7,379,164 and 5,010,334 related to the Company's outstanding stock option and warrants were excluded from the computation of diluted net loss per share for the years ended December 31, 2011, 2010 and 2009 because their effect on net loss per share is anti-dilutive.