Summary of URIGEN PHARMACEUTICALS, INC.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains 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. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "intends," "projects," "will," and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part I, "Item 1A. Risk Factors" of 10-K reports filed with the Securities and Exchange Commission and those described from time to time in our future reports filed with the Securities and Exchange Commission.

CORPORATE OVERVIEW

We were formerly known as Valentis, Inc. and were formed as the result of the merger of Megabios Corp. and GeneMedicine, Inc. in March 1999. We were incorporated in Delaware on August 12, 1997. In August 1999, we acquired U.K.-based PolyMASC Pharmaceuticals plc.

On October 5, 2006, we entered into an Agreement and Plan of Merger, as subsequently amended (the "Merger") with Urigen N.A., Inc., a Delaware corporation ("Urigen N.A."), and Valentis Holdings, Inc., our newly formed wholly-owned subsidiary ("Valentis Holdings"). Pursuant to the Merger Agreement, on July 13, 2007, Valentis Holdings was merged with and into Urigen N.A., with Urigen N.A. surviving as our wholly-owned subsidiary. In connection with the Merger, each Urigen stockholder received, in exchange for each share of Urigen N.A. common stock held by such stockholder immediately prior to the closing of the Merger, 2.2554 shares of our common stock. At the effective time of the Merger, each share of Urigen N.A. Series B preferred stock was exchanged for 11.277 shares of our common stock. An aggregate of 51,226,679 shares of our common stock were issued to the Urigen N.A. stockholders. Upon completion of the Merger, we changed our name from Valentis, Inc. to Urigen Pharmaceuticals, Inc.

From and after the Merger, our business is conducted through our wholly owned subsidiary Urigen N.A. The discussion of our business in this annual report is that of our current business which is conducted through Urigen N.A.

BUSINESS

We specialize in the design and implementation of innovative products for patients with urological ailments including, specifically, the development of innovative products for amelioration of Painful Bladder Syndrome (PBS), Urethritis, Nocturia and Overactive Bladder (OAB).

Urology represents a specialty pharmaceutical market of approximately 12,000 physicians in North America. Urologists treat a variety of ailments of the urinary tract including urinary tract infections, bladder cancer, overactive bladder, urgency and incontinence and interstitial cystitis, a subset of PBS. Many of these indications represent significant, underserved therapeutic market opportunities.

Over the next several years a number of key demographic and technological factors should accelerate growth in the market for medical therapies to treat urological disorders, particularly in our product categories. These factors include the following:

· Aging population. The incidence of urological disorders increases with age. The over-40 age group in the United States is growing almost twice as fast as the overall population. Accordingly, the number of individuals developing urological disorders is expected to increase significantly as the population ages and as life expectancy continues to rise.

· Increased consumer awareness. In recent years, the publicity associated with new technological advances and new drug therapies has increased the number of patients visiting their urologists to seek treatment for urological disorders.

Urigen's two clinical stage products target significant unmet medical needs with meaningful market opportunities in urology:

· URG101, a bladder instillation for Painful Bladder Syndrome/Interstitial Cystitis

· URG301, a female urethral suppository for urethritis and nocturia

URG101 targets Painful Bladder Syndrome/Interstitial Cystitis (PBS) which affects approximately 10.5 million men and women in North America. URG101 is a unique, proprietary combination therapy of components that is locally delivered to the bladder for rapid relief of pain and urgency as demonstrated in Urigen's positive Phase II Pharmacodynamic Crossover study.

URG301 targets urethritis and nocturia, typically seen in overactive bladder patients. URG301 is a proprietary dosage form of an approved drug that is locally delivered to the female urethra. Urethritis pain commonly occurs with urinary tract infections (UTIs) which cause more than 8 million visits to the doctor annually. Nocturia, or nighttime urgency and frequency, is secondary to overactive bladder and can severely impact quality of life by disrupting the normal sleep pattern.

The novel urethral suppository platform presents excellent opportunities for effective product lifecycle management. As market penetration of URG301 deepens, line extensions will be available through alternate generic drugs as well as new chemical entities. To further expand the pipeline, the Company will identify and prioritize both marketed and development-stage products for acquisition. The commercial opportunity for such candidates will benefit significantly from the synergy provided by URG101 and URG301 in the urology marketplace.

We plan to market our products to urologists and urogynecologists in the United States via a specialty sales force managed internally. As appropriate, our specialty sales force will be augmented by co-promotion and licensing agreements with pharmaceutical companies that have the infrastructure to market our products to general practitioners. In all other countries, we plan to license marketing and distribution rights to our products to pharmaceutical companies with strategic interests in urology and gynecology.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, except for the impact of FASB Staff Position ("FSP") 157-2. FSP 157-2 deferred the adoption of SFAS 157 for non financial assets and liabilities until years beginning after November 15, 2008. The Company adopted SFAS 157 effective July 1, 2008 and it did not have a material effect on our financial position and/or results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities" ("SFAS 159"). SFAS 159 provides entities with the option to report selected financial assets and liabilities at fair value. Business entities adopting SFAS 159 will report unrealized gains and losses in their statement of operations at each subsequent reporting date on items for which the fair value option has been elected. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 requires additional information that will help investors and other financial statement users to understand the effect of an entity's choice to use fair value on its results of operations. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company adopted SFAS 159 effective July 1, 2008. The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening accumulated deficit balance.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R changes accounting for acquisitions made by the Company with closing dates on or after July 1, 2009. More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard. SFAS 141R promotes greater use of fair values in financial reporting. Some of the changes will introduce more volatility into earnings. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. SFAS 141R will have an impact on the Company's financial position, results of operations, and cash flows, but the effect is dependant upon the acquisitions that may be made in the future.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"), an amendment of ARB No. 51. SFAS 160 will change the accounting and reporting for minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of presentation and disclosure requirements for existing minority interests. The Company is currently assessing the impact that SFAS 160 may have on its financial position, results of operations, and cash flows.

In December 2007, the FASB issued Emerging Issues Task Force ("EITF") Issue 07-1, "Accounting for Collaborative Arrangements" ("EITF 07-1"). Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about collaborative arrangements. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and is to be applied retrospectively for all collaborative arrangements existing as of the effective date. The Company is currently assessing the impact that EIFT 07-1 may have on its financial position, results of operations, and cash flows.

In July 2008, FASB issued EITF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock". This issue was added to the EITF's agenda with the purpose of providing an overall framework for determining whether an instrument is indexed to an entity's own stock and whether such instruments or embedded features are classified as equity or a liability. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the impact that EITF 07-5 may have on its financial position, results of operations, and cash flows.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective immediately, including prior periods for which financial statements have not been issued. Therefore, the Company adopted the provisions of FSP 157-3 in its financial statements in the quarter ended September 30, 2008. The adoption did not have an impact on the Company's financial position, results of operations, and cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP 157-4"). FSP 157-4 supersedes FSP 157-3 and provides significant guidance for determining when a market has become inactive as well as guidance for determining whether transactions are not orderly. FSP 157-4 also provides guidance on the use of valuation techniques and the use of broker quotes and pricing services. It reiterates that fair value is based on an exit price and also that fair value is market-driven and not entity-specific. FSP 157- 4 applies to all assets and liabilities within the scope of FAS 157. In addition, FSP 157-4 amends SFAS 157 to require interim disclosures of the inputs and valuation technique(s) used to measure fair value as well as disclosure of information regarding changes in valuation techniques and related inputs, if any, on an interim basis. FSP 157-4 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 157-4 in the quarter ended June 30, 2009. The adoption did not have an impact on the Company's financial position, results of operations, and cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP 115-2"). FSP 115-2 provides guidance related to determining the amount of an other-than-temporary impairment ("OTTI") of debt securities and prescribes the method to be used to present information about an OTTI in the financial statements. In addition, FSP 115-2 extends the disclosure requirements of SFAS 115 and FSP 115-1, which were previously generally only required for annual periods, to interim periods. FSP 115-2 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 115-2 in the quarter ended June 30, 2009. The adoption did not have an impact on the Company's financial position, results of operations, and cash flows.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, "Interim Disclosures About Fair Value of Financial Instruments" ("FSP 107-1"). FSP 107-1 amends SFAS 107, "Disclosures about Fair Value of Financial Instruments," to require its disclosures in the interim financial statements of publicly traded companies. FAS 107 requires disclosures of the fair value of all financial instruments (recognized or unrecognized) except for those specifically excepted by paragraph 8 of SFAS 107, when practicable to do so. An entity must also disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. FSP 107-1 is effective for all interim and annual periods ending after June 15, 2009. The Company adopted the provisions of FSP 107-1 in the quarter ended June 30, 2009. Because FSP 107-1 requires only additional disclosures, the adoption of FSP 107-1 did not have an impact on the Company's financial position, results of operations, and cash flows.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"), which is effective for interim and annual periods ending after June 15, 2009. SFAS· 165 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted the provisions of SFAS 165 in the fourth quarter of fiscal 2009 and it did not have a material impact on its consolidated financial position, results of' operations or cash flows. Refer to Note 17 for disclosure on subsequent events.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162" ("SFAS 168"), which approved the FASB Accounting Standards Codification ("Codification") as the single source of authoritative United States accounting and reporting standards for all non-governmental entities, except for guidance issued by the Securities and Exchange Commission. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, beginning with the Company's first quarter of fiscal 2010, all references made to generally accepted accounting principles in the United States ("U.S. GAAP") will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing U.S. GAAP, it is not expected to have any impact on the Company's consolidated financial position, results of operations or cash flows.

Critical Accounting Policies

Clinical trial expenses

We believe the accrual for clinical trial expenses are a significant estimate used in the preparation of our consolidated financial statements. Our accruals for clinical trial expenses are based in part on estimates of services received and efforts expended pursuant to agreements established with clinical research organizations and clinical trial sites. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our biopharmaceutical drugs. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flows. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. The objective of our clinical trial accrual policy is to reflect the appropriate trial expenses in our financial statements by matching period expenses with period services and efforts expended. In the event of early termination of a clinical trial, we accrue expenses associated with an estimate of the remaining, non-cancelable obligations associated with the winding down of the trial. Our estimates and assumptions for clinical trial expenses have been materially accurate in the past.

Intangible Assets

Intangible assets include the intellectual property and other patented rights acquired. Consideration paid in connection with acquisitions is required to be allocated to the acquired assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on the Company's estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, the Company is required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. The Company uses the straight-line method to expense long-lived assets (including identifiable intangibles). The intangible assets were recorded based on their estimated fair value and are being amortized using the straight-line method over the estimated useful life of 20 years, which is the life of the intellectual property patents.

Contractual Obligations and Notes Payable

In November 2007, the Company entered into an agreement with M & P Patent AG (Mattern) under which we licensed worldwide rights to Mattern's intra-nasal testosterone product for men. The Mattern patent and intellectual property rights were not placed in service and were not being amortized, nor included in future amortization estimates, as of December 31, 2007. At December 31 2007, the Company had recorded a license payment to Mattern of one million shares of Urigen common stock and accrued $1,500,000 in milestone payments. The Company terminated its license agreement with Mattern effective March 31, 2008. Accordingly, the accrued liability and intangible asset was reversed and a general and administrative impairment expense of $99,750 was recorded, which represents the fair value of the one million shares of restricted stock that were issued. The Company believes there will be no further payments to Mattern as a result of this transaction.

On November 17, 2006, the Company entered into an unsecured promissory note with C. Lowell Parsons, a director of the Company, in the amount of $200,000. Under the terms of the note, the Company is to pay interest at a rate per annum computed on the basis of a 360-day year equal to 12% simple interest. The foregoing amount is due and payable on the earlier of (i) forty-five (45) days after consummation of the Merger (as defined in the Agreement and Plan of Merger, dated as of October 5, 2006, between the Company and Valentis, Inc., or
(ii) two (2) calendar years from the note issuance date (in either case, the "Due Date"). All amounts due under the note agreement are still outstanding as of June 30, 2009. Also, the Company had issued 11,277 shares of Urigen N.A. Series B preferred stock, in connection with this note agreement, which was converted to common stock at the time of the Merger. Interest expense paid was $0 and $8,000 for the years ended June 30, 2009 and 2008, respectively. At June 30, 2009 and 2008, the Company owed accrued interest expense of $42,000 and $18,000, respectively.

On January 5, 2007, the Company entered into an unsecured promissory note with KTEC Holdings, Inc. in the amount of $100,000. Tracy Taylor who was the Company's Chairman of the Board of Directors at the time this note was signed, is President and Chief Executive Officer of the Kansas Technology Enterprise Corporation (KTEC). Under the terms of the note, the Company is to pay interest at a rate of 12% per annum until paid in full, with interest compounded as additional principal on a monthly basis if said interest is not paid in full by the end of each month. Interest shall be computed on the basis of a 360 day year. All amounts owed are due and payable by the Company at its option, without notice or demand, on the earlier of (i) ninety (90) days after consummation of the Merger as defined in the Agreement and Plan of Merger, dated as of October 5, 2006, between the Company and Valentis, Inc., or (ii) two (2) calendar years from the note issuance date (in either case, the "Due Date"). Also, the Company had issued 5,639 shares of Urigen N.A. Series B preferred stock in connection with this note agreement, which was converted to common stock at the time of the Merger. If this note is not paid when due, interest shall accrue thereafter at the rate of 18% per annum. All principal amounts due under the note agreement are still outstanding as of June 30, 2009. Interest paid was $0 and $4,088 for the years ended June 30, 2009 and 2008, respectively. At June 30, 2009 and 2008, the Company owed accrued interest expense of $23,236 and $9,536, respectively.

On June 25, 2007, Valentis, Inc., upon approval of its Board of Directors, issued Benjamin F. McGraw, III, Pharm.D., who was the Company's Chief Executive Officer, President and Treasurer prior to the Merger, a promissory note in the amount of $176,000 in lieu of accrued bonus compensation owed to Dr. McGraw. This note was assumed by the Company pursuant to the Merger. The note bears interest at the rate of 5.0% per annum, may be prepaid by the Company in full or in part at anytime without premium or penalty and was due and payable in full on December 25, 2007. On December 25, 2007, the note was extended through June 25, 2008. On August 11, 2008, the note was extended through December 25, 2008. On January 6, 2009, the note was extended through December 25, 2009. Dr. McGraw was a member of the Board of Directors as of June 30, 2009 and resigned from the Board of Directors in July 2009. At June 30, 2009 and June 30, 2008, the Company owed accrued interest expense of $17,600 and $8,800, respectively.

On August 6, 2008, the Company entered into an unsecured promissory note with C. Lowell Parsons, M.D. a director of the Company, in the amount of $40,000. Under the terms of the note, the Company is to pay interest at a rate per annum computed on the basis of a 360-day year equal to 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000. The note is due and payable on the earlier of (i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date. The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty. Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company. The rate of repayment in common stock is based on $0.15 per share. All principal amounts due under the note agreement are still outstanding as of June 30, 2009. At June 30, 2009, the Company owed accrued interest expense of $5,417.

On August 6, 2008, the Company entered into an unsecured promissory note with J. Kellogg Parsons, M.D. the son of C. Lowell Parsons, M.D., a director of the Company, in the amount of $20,000. Under the terms of the note, the Company is to pay interest at a rate per annum computed on the basis of a 360-day year equal to 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a minimum of $300,000. The foregoing amount is due and payable on the earlier of
(i) forty-five (45) days after consummation of a merger, (ii) the completion of a licensing agreement with a pharmaceutical partner or (iii) two calendar years from the note issuance date. The Company may, in its discretion, pay this note in whole or part at any time, without premium or penalty. Dr. Parsons may, in his discretion, request payment of this note, in whole or in part in restricted common stock of the Company. The rate of repayment in common stock is based on $0.15 per share. At June 30, 2009, the Company owed accrued interest expense of $2,708.

On August 12, 2008, the Company entered into an unsecured promissory note with William J. Garner, M.D., the Chief Executive Officer and a director of the Company, in the amount of $5,000. Under the terms of the note, the Company is to pay interest at a rate per annum computed on the basis of a 360-day year equal to 15% simple interest. The note allows for an adjustment of the interest rate equal to that of the rate that the Company procures from a bridge loan of a . . .