U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Q




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

|                                |               
|------------------------------- | --------------
|For the
 quarterly period ended | June 30,
 2009
|                                |               

|                                                                                                    |                                                                                          
|--------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|or                                                                                                 
|                                                                                                    |                                                                                          
|o                                                                                                   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                                    |                                                                                          
|For the
 transition period ended

                    
                     
         
          to

|                                                      
|------------------------------------------------------
|Commission File Number: 333-45241                     
|                                                      
|                                                      
|ELITE
 PHARMACEUTICALS, INC.                          
|                                                      
|(Exact name of registrant as specified in its charter)

|                                                                |  |                                      | 
|--------------------------------------------------------------- |  | ------------------------------------ | 
|Delaware                                                        |  | 22-3542636                          
|                                                                |  |                                     
|(State or
 other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                                |  |                                      | 
|165 Ludlow
 Avenue, Northvale, New Jersey                       |  | 07647                                | 
|                                                                |  |                                     
|(Address of
 principal executive offices)                       |  | (Zip Code)                           | 

|                                                    
|----------------------------------------------------
|(201) 750-2646                                      
|                                                    
|(Registrants telephone number, including area code)

(Former name, former address and former
fiscal year, if changed since last report)

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 x No o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer   oAccelerated
Filer   oNon-Accelerated Filer   oSmaller Reporting Company   x

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).

Yes o No x

Indicate the
number of shares outstanding of the common stock, $.01 par value, as of June
30, 2009: [70,048,723] (exclusive of 100,000 shares held in treasury).

---



ELITE
PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX

|                                |                                                                                                                                      |          | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | -------- | 
|                                |                                                                                                                                      | Page No.
|PART I -
 FINANCIAL INFORMATION |                                                                                                                                      |         
|                                |                                                                                                                                      |         
|Item 1.                         | Financial
 Statements                                                                                                                |          | 
|                                |                                                                                                                                      |          | 
|                                | Condensed Consolidated Balance Sheets as of
 June 30, 2009 (unaudited) and March 31, 2009 (audited)                                  | F-1      | 
|                                |                                                                                                                                      |          | 
|                                | Condensed Consolidated Statements of Operations
 for the three months ended June 30, 2009 (unaudited) and June 30, 2008
 (unaudited) | F-3      | 
|                                |                                                                                                                                      |          | 
|                                | Condensed Consolidated Statement of Changes
 in Stockholders Equity for the three months ended June 30, 2009 (unaudited)            | F-4      | 
|                                |                                                                                                                                      |          | 
|                                | Condensed Consolidated Statements of Cash
 Flows for the three months ended June 30, 2009 (unaudited) and June 30, 2008
 (unaudited) | F-5      | 
|                                |                                                                                                                                      |          | 
|                                | Notes to Condensed Consolidated Financial
 Statements                                                                                | F-6      | 
|                                |                                                                                                                                      |          | 
|Item 2.                         | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                                               | 1        | 
|                                |                                                                                                                                      |          | 
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                                                           | 10       | 
|                                |                                                                                                                                      |          | 
|Item 4.                         | Controls and Procedures                                                                                                              | 10       | 
|                                |                                                                                                                                      |         
|PART II - OTHER INFORMATION     |                                                                                                                                      |         
|                                |                                                                                                                                      |          | 
|Item 1.                         | Legal Proceedings                                                                                                                    | 10       | 
|Item 1A.                        | Risk Factors                                                                                                                         | 11       | 
|Item 2                          | Unregistered Sales of Equity Securities and Use of Proceeds                                                                          | 22       | 
|Item 3.                         | Defaults upon Senior Securities                                                                                                      | 22       | 
|Item 4.                         | Submission of Matters to a Vote of Security Holders                                                                                  | 22       | 
|Item 5.                         | Other Information                                                                                                                    | 22       | 
|Item 6.                         | Exhibits                                                                                                                             | 23       | 
|                                |                                                                                                                                      |         
|SIGNATURES                      | 24                                                                                                                                   |         

---



ELITE PHARMACEUTICALS, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                                                                                   |  |                           |            |                          |   |            | 
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | ------------------------ | - | ---------- | 
|                                                                                                                   |  | June 30,
 2009(Unaudited) |            | March 31,
 2009(Audited) |  
|                                                                                                                   |  |                           |            |                          |  
|CURRENT ASSETS                                                                                                     |  |                           |            |                          |   |            | 
|Cash and cash equivalents                                                                                          |  | $                         | 763,117    |                          | $ | 282,578    | 
|Accounts receivable                                                                                                |  |                           |           |                          |   | 1,177      | 
|Inventories (net of reserve of 494,425 and
 nil, respectively)                                                     |  |                           | 1,438,943  |                          |   | 1,703,766  | 
|Prepaid expenses and other current assets                                                                          |  |                           | 143,509    |                          |   | 331,622    | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|Total current assets                                                                                               |  |                           | 2,345,569  |                          |   | 2,319,143  | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|PROPERTY AND EQUIPMENT, net of accumulated
 depreciation and amortization                                          |  |                           | 4,455,374  |                          |   | 4,575,487  | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|INTANGIBLE ASSETS  net of accumulated
 amortization                                                               |  |                           | 25,860     |                          |   | 27,743     | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|OTHER ASSETS                                                                                                       |  |                           |            |                          |   |            | 
|Accrued interest receivable                                                                                        |  |                           | 9,916      |                          |   | 8,539      | 
|Deposit on equipment                                                                                               |  |                           |           |                          |   | 14,073     | 
|Investment in Novel Laboratories, Inc.                                                                             |  |                           | 3,329,322  |                          |   | 3,329,322  | 
|Security deposits                                                                                                  |  |                           | 13,488     |                          |   | 13,488     | 
|Restricted cash  debt service for EDA
 bonds                                                                      |  |                           | 364,351    |                          |   | 327,435    | 
|EDA Bond offering costs, net of accumulated
 amortization of $53,080 and $49,534, for June and March, respectively |  |                           | 301,372    |                          |   | 304,918    | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|Total other assets                                                                                                 |  |                           | 4,018,448  |                          |   | 3,997,775  | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|                                                                                                                   |  |                           |            |                          |   |            | 
|TOTAL ASSETS                                                                                                       |  | $                         | 10,845,252 |                          | $ | 10,920,148 | 
|                                                                                                                   |  |                           |            |                          |   |            | 

The accompanying notes are an integral part
of the condensed consolidated financial statements.

F-1

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES
AND STOCKHOLDERS (DEFICIT) EQUITY

|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ------------------------ | - | ----------- | -
|                                                                                                                                                                                                                        |  | June 30, 2009(Unaudited) |             | March 31,
 2009(Audited) |  
|CURRENT LIABILITIES                                                                                                                                                                                                     |  |                          |             |                          |   |             |  
|Current portion of EDA Bonds                                                                                                                                                                                            |  | $                        | 210,000     |                          | $ | 210,000     |  
|Short term loans and current portion of
 long-term debt                                                                                                                                                                 |  |                          | 78,124      |                          |   | 10,788      |  
|Accounts payable and accrued expenses                                                                                                                                                                                   |  |                          | 1,055,521   |                          |   | 981,058     |  
|Preferred share derivative interest
payable                                                                                                                                                                             |  |                          | 335,460     |                          |   |            |  
|Dividends payable                                                                                                                                                                                                       |  |                          |            |                          |   | 358,621     |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Total Current Liabilities                                                                                                                                                                                               |  |                          | 1,679,105   |                          |   | 1,560,467   |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|LONG TERM LIABILITIES                                                                                                                                                                                                   |  |                          |             |                          |   |             |  
|EDA bonds  net of current portion                                                                                                                                                                                      |  |                          | 3,385,000   |                          |   | 3,385,000   |  
|Long-term debt, less current portion                                                                                                                                                                                    |  |                          | 28,672      |                          |   | 31,600      |  
|Derivative Liability  Preferred
Shares                                                                                                                                                                                 |  |                          | 4,841,305   |                          |   |            |  
|Derivative Liability  Warrants                                                                                                                                                                                         |  |                          | 4,502,436   |                          |   |            |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Total Long-Term Liabilities                                                                                                                                                                                             |  |                          | 12,757,413  |                          |   | 3,416,600   |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Total Liabilities                                                                                                                                                                                                       |  |                          | 14,436,518  |                          |   | 4,977,067   |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|COMMITMENTS AND CONTINGENCIES:                                                                                                                                                                                          |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                                                          |  |                          |             |                          |   |             |  
|Preferred Stock - $0.01 par value;                                                                                                                                                                                      |  |                          |             |                          |   |             |  
|Authorized 4,483,442 shares (originally
 5,000,000 shares of which 516,558 shares of Series A Convertible Preferred
 Stock were retired) and 0 shares outstanding as of March 31, 2009 and June
 30, 2009, respectively |  |                          |            |                          |   |            |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Authorized 10,000 Series B convertible
 Preferred Stock  issued and outstanding 896 and 1,046 shares, respectively 
 Reclassified as a liability as of 4/1/09                                                         |  |                          |            |                          |   | 11          |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Authorized 20,000 Series C convertible
 Preferred Stock  issued and outstanding 5,418 and 1,3705 shares,
 respectively  Reclassified as a liability as of 4/1/09                                                      |  |                          |            |                          |   | 137         |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Authorized 30,000 Series D convertible
 Preferred Stock  issued and outstanding 5,418 and 1,3705 shares,
 respectively  Reclassified as a liability as of 4/1/09                                                      |  |                          |            |                          |   | 91          |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Common Stock - $0.01 par value;                                                                                                                                                                                         |  |                          |             |                          |   |             |  
|Authorized 210,000,000 shares as of June
 30, 2009 and March 31, 2009 Issued and outstanding  70,048,723 shares and
 60,839,374 shares, respectively                                                                   |  |                          | 700,487     |                          |   | 608,394     |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Subscription receivable                                                                                                                                                                                                 |  |                          | (75,000     | )                        |   | (75,000     | )
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Additional paid-in capital                                                                                                                                                                                              |  |                          | 88,855,849  |                          |   | 95,718,082  |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Accumulated deficit                                                                                                                                                                                                     |  |                          | (92,765,761 | )                        |   | (90,001,793 | )
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Treasury stock, at cost (100,000 shares)                                                                                                                                                                                |  |                          | (306,841    | )                        |   | (306,841    | )
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|Total
    Stockholders (Deficit) Equity                                                                                                                                                                                |  |                          | (3,591,266  | )                        |   | 5,493,081   |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  
|TOTAL LIABILITIES
    AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                                |  | $                        | 10,845,252  |                          | $ | 10,920,148  |  
|                                                                                                                                                                                                                        |  |                          |             |                          |   |             |  

The accompanying notes are an integral part
of the condensed consolidated financial statements.

F-2

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                              |  |                               |             |             |   |            |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | ----------- | - | ---------- | -
|                                                                                              |  | THREE
 MONTHS ENDED
 JUNE 30, |            
|                                                                                              |  |                               |            
|                                                                                              |  | 2009                          |             | 2008        |  
|                                                                                              |  |                               |             |             |  
|                                                                                              |  | (Unaudited)                   |             | (Unaudited) |  
|REVENUES                                                                                      |  |                               |             |             |   |            |  
|Manufacturing Fees                                                                            |  | $                             | 665,064     |             | $ | 688,287    |  
|Royalties                                                                                     |  |                               | 148,811     |             |   | 88,391     |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|Total Revenues                                                                                |  |                               | 813,875     |             |   | 776,678    |  
|                                                                                              |  |                               |             |             |   |            |  
|Costs of Revenues                                                                             |  |                               | 550,014     |             |   | 601,925    |  
|Inventory Adjustment                                                                          |  |                               | 311,986     |             |   |           |  
|                                                                                              |  |                               |             |             |   |            |  
|Gross
    (loss) Profit                                                                       |  |                               | (48,125     | )           |   | 174,753    |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|COST OF OPERATIONS:                                                                           |  |                               |             |             |   |            |  
|Research and development                                                                      |  |                               | 251,092     |             |   | 1,346,979  |  
|General and administrative                                                                    |  |                               | 396,537     |             |   | 629,167    |  
|Depreciation and amortization                                                                 |  |                               | 125,542     |             |   | 130,257    |  
|                                                                                              |  |                               |             |             |   |            |  
|Total Cost of Operations                                                                      |  |                               | 773,171     |             |   | 2,106,403  |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|LOSS FROM OPERATIONS                                                                          |  |                               | (821,296    | )           |   | (1,931,650 | )
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|OTHER INCOME (EXPENSES):                                                                      |  |                               |             |             |   |            |  
|Interest income                                                                               |  |                               | 2,008       |             |   | 21,783     |  
|Interest expense                                                                              |  |                               | (71,987     | )           |   | (65,200    | )
|Non-cash compensation through issuance of
 stock options and warrants                         |  |                               | (55,363     | )           |   | (306,549   | )
|Change in fair value of outstanding warrant
 derivatives                                      |  |                               | 154,326     |             |   |           |  
|Change in fair value of preferred share
 derivatives                                          |  |                               | 2,561,527   |             |   |            |  
|Interest expense attributable to dividends
 accrued to preferred share derivative liabilities |  |                               | (359,021    | )           |   |           |  
|Discount in Series E issuance attributable
 to beneficial conversion features                 |  |                               | (258,700    | )           |   |           |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|Total Other Income / (Expense)                                                                |  |                               | 1,972,790   |             |   | (349,966   | )
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|INCOME (LOSS)
    BEFORE PROVISION FOR INCOME TAXES                                           |  |                               | 1,151,494   |             |   | (2,281,616 | )
|                                                                                              |  |                               |             |             |   |            |  
|Provision for Income Taxes                                                                    |  |                               |            |             |   | 3,120      |  
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|NET INCOME
 (LOSS)                                                                            |  |                               | 1,151,494   |             | $ | (2,284,736 | )
|                                                                                              |  |                               |             |             |   |            |  
|Preferred Stock Dividends                                                                     |  |                               |            |             |   | (553,907   | )
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
 SHAREHOLDERS                                        |  | $                             | 1,151,494   |             | $ | (2,838,643 | )
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|NET INCOME (LOSS) PER SHARE                                                                   |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|BASIC                                                                                         |  | $                             | 0.02        |             | $ | (.12       | )
|                                                                                              |  |                               |             |             |   |            |  
|DILUTED                                                                                       |  | $                             | 0.01        |             | $ | (.12       | )
|                                                                                              |  |                               |             |             |   |            |  
|                                                                                              |  |                               |             |             |   |            |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
 OUTSTANDING  BASIC                                 |  |                               | 66,240,476  |             |   | 23,307,241 |  
|                                                                                              |  |                               |             |             |   |            |  
|DILUTED                                                                                       |  |                               | 128,304,240 |             |   | 23,307,241 |  
|                                                                                              |  |                               |             |             |   |            |  

The accompanying notes are an integral part
of the condensed consolidated financial statements.

F-3

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY

|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----- | ------------------------ | - | ------------------------ | - | ------------ | ------ | ------ | - | ------ | - | ------ | ----- | -------------- | - | ----------------------- | - | -------------------------- | ---------- | ------ | - | ------- |  | ------------------- | ------- | ------------------- | - | ---------- | - |  | -------- | - | - | -------- | - | - | ----------- | - | - | ----------- | -
|                                                                                                        |  | Series
B
Preferred Stock |       | Series
C
Preferred Stock |   | Series
D
Preferred Stock |   | Common
Stock |        |        |   |        |   |        |       | Treasury
Stock |   |                         |   |                            |            |        |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|                                                                                                        |  | Shares                   |       | Amount                   |   | Shares                   |   | Amount       |        | Shares |   | Amount |   | Shares |       | Amount         |   | Subscription
Receivable |   | Additional
Paid in
Capital |            | Shares |   | Amount  |  | Accumulated
Deficit |         | Stockholders
Equity |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Balance at March 31, 2009                                                                               |  |                          | 1,046 |                          | $ | 11                       |   |              | 13,705 |        | $ | 137    |   |        | 9,154 |                | $ | 91                      |   |                            | 60,839,374 |        | $ | 608,394 |  | $                   | (75,000 | )                   | $ | 95,718,082 |   |  | (100,000 | ) | $ | (306,841 | ) | $ | (90,001,793 | ) | $ | 5,943,081   |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Cumulative effect of reclassification of preferred stock and warrants
 under EITF 07-5                  |  |                          |       |                          |   | (11                      | ) |              |        |        |   | (137   | ) |        |       |                |   | (91                     | ) |                            |            |        |   |         |  |                     |         |                     |   | (7,143,892 | ) |  |          |   |   |          |   |   | (3,915,462  | ) |   | (11,059,593 | )
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Proceeds received in exchange for beneficial conversion features
 embedded in Series E preferred shares |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   | 258,700    |   |  |          |   |   |          |   |   |             |   |   | 258,700     |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Conversion of Series B, Series C and Series D preferred shares into
 common                             |  |                          | (150  | )                        |   |                          |   |              | (8,287 | )      |   |        |   |        | (110  | )              |   |                         |   |                            | 5,203,009  |        |   | 52,030  |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   | 52,030      |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Costs associated with raising capital                                                                   |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   | (351,362   | ) |  |          |   |   |          |   |   |             |   |   | (351,362    | )
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Non-cash compensation through Issuance of stock options and
warrants                                    |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   | 55,363     |   |  |          |   |   |          |   |   |             |   |   | 55,363      |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Net Income for the three months ended June 30, 2009                                                     |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   | 1,151,494   |   |   | 1,151,494   |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|Dividends                                                                                               |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            | 4,006,339  |        |   | 40,063  |  |                     |         |                     |   | 318,958    |   |  |          |   |   |          |   |   |             |   |   | 359,021     |  
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  
|                                                                                                       
|Balance at June 30, 2009                                                                                |  |                          | 896   |                          |   |                         |   |              | 5,418  |        |   |       |   |        | 9,044 |                |   |                        |   |                            | 70,048,722 |        | $ | 700,487 |  | $                   | (75,000 | )                   | $ | 88,855,849 |   |  | (100,000 | ) | $ | (306,841 | ) | $ | (92,765,761 | ) | $ | (3,591,266  | )
|                                                                                                        |  |                          |       |                          |   |                          |   |              |        |        |   |        |   |        |       |                |   |                         |   |                            |            |        |   |         |  |                     |         |                     |   |            |   |  |          |   |   |          |   |   |             |   |   |             |  

The accompanying notes are an integral part
of the condensed consolidated financial statements.

F-4

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                                      |  |                              |             |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  | THREE MONTHS ENDED
 JUNE 30, |            
|                                                                                                                                                      |  |                              |             |      |  
|                                                                                                                                                      |  | 2009                         |             | 2008 |  
|                                                                                                                                                      |  |                              |             |      |  
|                                                                                                                                                      |  |                              | (Unaudited) |      |   | (Unaudited) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                 |  |                              |             |      |   |             |  
|Net Income (Loss)                                                                                                                                     |  | $                            | 1,151,494   |      | $ | (2,284,736  | )
|Adjustments
    to reconcile income (loss) to cash used in operating
    activities:                                                                  |  |                              |             |      |   |             |  
|Depreciation and amortization                                                                                                                         |  |                              | 125,542     |      |   | 130,257     |  
|Inventory Adjustment                                                                                                                                  |  |                              | 311,986     |      |   |            |  
|Change in fair value of warrant derivative
 liability                                                                                                 |  |                              | (154,326    | )    |   |            |  
|Change in fair value of preferred shares
 derivative liability                                                                                        |  |                              | (2,561,527  | )    |   |            |  
|Discount in Series E issuance attributable
 to embedded beneficial conversion feature                                                                 |  |                              | 258,700     |      |   |            |  
|Preferred shares derivative interest
 accrued                                                                                                         |  |                              | 359,021     |      |   |            |  
|Non-cash compensation satisfied by issuance
 of common stock, options and warrants                                                                    |  |                              | 55,363      |      |   | 306,549     |  
|Changes in assets and liabilities:                                                                                                                    |  |                              |             |      |   |             |  
|Accounts and interest receivable                                                                                                                      |  |                              | 1,177       |      |   | (154,382    | )
|Inventories                                                                                                                                           |  |                              | (47,163     | )    |   | 221,480     |  
|Prepaid expenses and other current assets                                                                                                             |  |                              | (9,378      | )    |   | (5,301      | )
|Accrued Interest Receivable                                                                                                                           |  |                              | (1,377      | )    |   | (948        | )
|Deposit on Equipment                                                                                                                                  |  |                              | 14,073      |      |   |            |  
|Accounts payable, accrued expenses and
 other current liabilities                                                                                     |  |                              | 16,798      |      |   | (100,620    | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|NET CASH USED IN OPERATING ACTIVITIES                                                                                                                 |  |                              | (479,617    | )    |   | (1,887,701  | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                                 |  |                              |             |      |   |             |  
|Purchases of property and equipment                                                                                                                   |  |                              |            |      |   | (61,071     | )
|Deposits to restricted cash                                                                                                                           |  |                              | (36,916     | )    |   | (1,613      | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|NET CASH USED IN INVESTING ACTIVITIES                                                                                                                 |  |                              | (36,916     | )    |   | (62,684     | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                 |  |                              |             |      |   |             |  
|Dividends paid                                                                                                                                        |  |                              |            |      |   | (63,255     | )
|Proceeds from issuance of Series E
 Preferred Stock and Warrants                                                                                      |  |                              | 1,000,000   |      |   |            |  
|Payment of long-term debt                                                                                                                             |  |                              | (2,928      | )    |   | (2,384      | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|NET CASH PROVIDED
    BY (USED IN) FINANCING ACTIVITIES                                                                                               |  |                              | 997,072     |      |   | (65,639     | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                                                                               |  | $                            | 480,539     |      | $ | (2,016,024  | )
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|CASH AND CASH EQUIVALENTS  beginning of
 period                                                                                                      |  |                              | 282,578     |      |   | 3,702,615   |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|CASH AND CASH EQUIVALENTS  end of period                                                                                                             |  | $                            | 763,117     |      | $ | 1,686,591   |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:                                                                                                   |  |                              |             |      |   |             |  
|Cash paid for interest                                                                                                                                |  | $                            | 11,597      |      | $ | 1,156       |  
|Cash paid for income taxes                                                                                                                            |  |                              |            |      |   | 3,120       |  
|                                                                                                                                                      |  |                              |             |      |   |             |  
|SCHEDULE OF NON-CASH FINANCING ACTIVITIES:                                                                                                            |  |                              |             |      |   |             |  
|Preferred stock dividends of $359,021 and
 $490,652 paid by issuance of 4,006,339 and 998,639 shares of common stock in 2009 and
 2008, respectively. |  |                              |            |      |   |            |  
|Accrued dividends                                                                                                                                     |  |                              |            |      |   | 63,255      |  
|Accrued dividends on preferred share
 derivatives recorded as accrued interest                                                                        |  |                              | 335,460     |      |   |             |  
|Consulting services paid by issuance of
 125,000 shares of common stock in 2008                                                                       |  |                              |            |      |   | 101,250     |  
|                                                                                                                                                      |  |                              |             |      |   |             |  

The accompanying notes are an integral part
of the consolidated financial statements.

F-5

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1     - | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The
 information in this Form 10-Q Report includes the results of operations of
 Elite Pharmaceuticals, Inc. and its consolidated subsidiaries (collectively
 the Registrant) including its wholly-owned subsidiaries, Elite
 Laboratories, Inc. (Elite Labs) and Elite Research, Inc. (ERI) for the
 three months ended June 30, 2009 and 2008. The accompanying unaudited
 condensed consolidated financial statements have been prepared pursuant to
 rules and regulations of the Securities and Exchange Commission in accordance
 with accounting principles generally accepted for interim financial statement
 presentation. Accordingly, they do not include all of the information and
 footnotes required by accounting principles generally accepted in the United
 States of America for complete financial statements. In the opinion of
 management, all adjustments (consisting of normal recurring accruals)
 considered necessary for a fair presentation of the condensed consolidated
 financial position, results of operations and cash flows of the Registrant
 for the periods presented have been included.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The
 financial results for the interim periods are not necessarily indicative of
 the results to be expected for the full year or future interim periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The
 accompanying unaudited condensed consolidated financial statements should be
 read in conjunction with the consolidated financial statements and notes
 included in the Registrants Annual Report on Form 10-K for the year ended
 March 31, 2009. With the exception of the Registrant adopting the
 requirements of EITF 07-5 with regards to the accounting for warrants and
 convertible instruments with anti-dilutive properties, there have been no
 changes in significant accounting policies since March 31, 2009. Please refer
 to Note 2 of the financial statements in this report for a description of the
 change in accounting policy related to the adoption of the requirements of
 EITF 07-5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The
 Registrant does not anticipate being profitable for fiscal year ending March
 31, 2010; therefore a current provision for income tax was not established
 for the three months ended June 30, 2009. Only the minimum liability required
 for state corporation taxes is reflected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             | The
 accompanying unaudited condensed consolidated financial statements were
 prepared on the assumption that the Registrant will continue as a going concern.
 The Registrant continues to generate losses and negative cash flow from
 operations and does not anticipate being profitable for fiscal year 2010.
 Therefore Elite continues to require additional financing to ensure that we
 will be able to meet our expenditures to develop and commercialize our
 products. As of June 30, 2009, we had cash and cash equivalents of $763,117.
 We believe that our existing cash and cash equivalents plus revenues from
 sale of our Lodrane 24® and Lodrane 24D® products will be sufficient to fund
 our anticipated operating expenses and capital requirements through October
 2009. We will require additional funding in order to continue to operate
 thereafter. If the second and third closings of the transactions contemplated
 by the Epic Strategic Alliance Agreement are not closed on a timely basis, or
 if another financing or strategic alternative providing sufficient resources
 to allow us to continue operations is not consummated upon exhaustion of our
 current capital, we will be required to cease operations and liquidate our
 assets. No assurance can be given that we will be able to consummate the
 second and third closings under the Epic Strategic Alliance Agreement on a
 timely basis, or consummate such other financing or strategic alternative in
 the time necessary to avoid the cessation of our operations and liquidation
 of our assets. Moreover, even if we consummate the second and third closings
 under the Epic Strategic Alliance Agreement, or such other financing or
 strategic alternative, we may be required to seek additional capital in the
 future and there can be no assurances that the Registrant will be able to
 obtain such additional capital on favorable terms, if at all.

F-6

---



ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIESNOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTSTHREE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------
|NOTE 2     - | CHANGE IN ACCOUNTING PRINCIPAL AND
 DERIVATIVE LIABILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | The
 following discussion of derivative liabilities consists of the following
 sections:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Overview of
 Derivative Liability accounting                  
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Preferred
 Stock Derivative Liabilities                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Warrant
 Derivative Liabilities                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Beneficial
 Conversion Feature of Series E Preferred Stock    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Summary of
 effects of derivatives on the financial statements
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                               
|             | In June
 2008, the FASB finalized Emerging Issues Task Force (EITF) 07-5,
 Determining Whether an Instrument (or Embedded Feature) is indexed to an
 Entitys Own Stock, effective for fiscal years beginning after December 15,
 2008. Under EITF 07-5, instruments which do not have fixed settlement
 provisions are deemed to be derivative instruments. The conversion features
 within, and the detachable warrants issued with the Registrants Series B,
 Series C, Series D and Series E preferred stock, do not have fixed settlement
 provisions because their conversion and exercise prices may be lowered if the
 Registrant issues securities at lower prices in the future. The Registrant
 was required to include the reset provisions in order to protect the
 preferred share and warrant holders from potential dilution associated with
 future financings. In accordance with EITF 07-5, the preferred shares and
 warrants were recognized as a derivative instrument and have been
 re-characterized as derivative liabilities at their fair value. SFAS No. 133,
 Accounting for Derivative Instruments and Hedging Activities (FAS 133)
 requires that the fair value of these liabilities be re-measured at the end
 of every reporting period, with the change in value reported in the statement
 of operations. EITF 07-5 requires that the cumulative effect of this change
 in accounting principal, for all periods prior the period of implementation,
 be recognized as an adjustment in the opening balance of retained
 earnings/(accumulated deficit)
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|             | In addition,
 the Series E Preferred shares included an option, exercisable from the
 issuance date, to convert to common shares at a price which was below the
 share price on the date of issuance. The excess of value based on the share
 price over the cost of shares, based on the option price represents a
 beneficial conversion feature existing on the issue date. In accordance with
 EITF 98-5, the beneficial conversion feature was valued separately at
 issuance and allocated to additional paid in capital. As the options which
 comprise the beneficial conversion feature were exercisable when issued, a
 discount resulting from and in the full amount of the beneficial conversion
 feature was recorded at the time of issuance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-7

---



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Preferred
 Stock Derivative Liabilities                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                         
| | The portion
 of derivative liabilities related to the Series B, Series C, Series D and
 Series E preferred shares was valued at the market value of the underlying
 common shares, into which the preferred shares may be converted. Such valuation
 as of the beginning and end of the period is summarized as follows:

|                                                           |  |          |         |          |   |           |  |          |            |       |   |      |  |   |            | 
|---------------------------------------------------------- |  | -------- | ------- | -------- | - | --------- |  | -------- | ---------- | ----- | - | ---- |  | - | ---------- | 
|PREFERRED STOCK DERIVATIVE LIABILITY AS OF APRIL 1, 2009  
|                                                          
|                                                           |  | Series B |         | Series C |   | Series D  |  | Series E |            | Total |  
|                                                           |  |          |         |          |   |           |  |          |            |       |  
|Preferred shares Outstanding                               |  |          | 1,046   |          |   | 13,705    |  |          | 9,154      |       |   |     |  |   | 23,905     | 
|                                                           |  |          |         |          |   |           |  |          |            |       |   |      |  |   |            | 
|Underlying common shares into which
 Preferred may convert |  |          | 670,230 |          |   | 8,512,422 |  |          | 45,772,205 |       |   |     |  |   | 54,954,857 | 
|                                                           |  |          |         |          |   |           |  |          |            |       |   |      |  |   |            | 
|Closing price on valuation date                            |  | $        | 0.13    |          | $ | 0.13      |  | $        | 0.13       |       | $ | 0.13 |  | $ | 0.13       | 
|                                                           |  |          |         |          |   |           |  |          |            |       |   |      |  |   |            | 
|Preferred stock derivative liability at April 1, 2009      |  | $        | 87,130  |          | $ | 1,106,615 |  | $        | 5,950,386  |       | $ |     |  | $ | 7,144,131  | 
|                                                           |  |          |         |          |   |           |  |          |            |       |   |      |  |   |            | 

| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of April
 1, 2009, the total preferred stock derivative liability was $7,144,131. This
 amount represents the cumulative effect of the change in accounting principal
 for all periods prior to April 1, 2009 and as per the requirements of EITF
 07-5, is recognized as an adjustment in the opening accumulated deficit
 balance.

|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|---------------------------------------------------------------------------------------- |  | -------- | ------- | -------- | - | --------- | - | -------- | ---------- | ----- | - | ---------- |  | - | ---------- | -
|PREFERRED STOCK DERIVATIVE LIABILITY AS OF JUNE 30, 2009                                
|                                                                                        
|                                                                                         |  | Series B |         | Series C |   | Series D  |   | Series E |            | Total |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |  
|Preferred shares Outstanding                                                             |  |          | 896     |          |   | 5,418     |   |          | 9,044      |       |   | 1,000      |  |   | 16,358     |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|Underlying common shares into which
 Preferred may convert                               |  |          | 574,076 |          |   | 3,365,217 |   |          | 45,222,205 |       |   | 20,000,000 |  |   | 69,161,498 |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|Closing price on valuation date                                                          |  | $        | 0.07    |          | $ | 0.07      |   | $        | 0.07       |       | $ | 0.07       |  | $ | 0.07       |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|Preferred stock derivative liability at June 30, 2009                                    |  | $        | 40,185  |          | $ | 235,565   |   | $        | 3,165,555  |       | $ | 1,400,000  |  | $ | 4,841,305  |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|Series E liability at issue date (related to beneficial conversion
 option)              |  |          |         |          |   |           |   |          |            |       |   | 258,700    |  |   | 258,700    |  
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  
|Change in preferred stock derivative liability for the three months
 ended June 30, 2009 |  | $        | (46,945 | )        | $ | (871,050  | ) | $        | (2,784,832 | )     | $ | 1,141,300  |  | $ | (2,561,527 | )
|                                                                                         |  |          |         |          |   |           |   |          |            |       |   |            |  |   |            |  

| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The decrease
 of $2,561,527 in value of the preferred stock derivative liability occurring
 during the three months ended June 30, 2009 is included in the amount
 reported in the Other Income / (Expense) section of the statement of
 operations, in accordance with FAS 133.

F-8

---



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Warrant
 Derivative Liabilities                                                                                                                                                         
|
| | The portion
 of derivative liabilities related to outstanding warrants was valued using
 the Black-Scholes option valuation model and the following assumptions on the
 following dates:

|                                                                                  |  |               |            |               |   |            |  
|--------------------------------------------------------------------------------- |  | ------------- | ---------- | ------------- | - | ---------- | -
|                                                                                  |  | April 1, 2009 |            | June 30, 2009 |  
|                                                                                  |  |               |            |               |  
|Risk-Free interest rate                                                           |  |               | 2          | %             |   | 2          | %
|Expected volatility                                                               |  |               | 118% - 137 | %             |   | 116% - 153 | %
|Expected life (in years)                                                          |  |               | 3.2  5.2  |               |   | 3.0  7.0  |  
|Expected dividend yield                                                           |  |               |           |               |   |           |  
|Number of warrants                                                                |  |               | 45,469,740 |               |   | 85,469,740 |  
|                                                                                  |  |               |            |               |   |            |  
|Fair value  Warrant Derivative Liability                                         |  | $             | 3,915,462  |               | $ | 4,502,436  |  
|                                                                                  |  |               |            |               |   |            |  
|Derivative warrant liability recorded at issue date of Series E
 Preferred Shares |  |               |            |               |   | 741,300    |  
|                                                                                  |  |               |            |               |   |            |  
|Change in Warrant Derivative Liability for the three months ended
 June 30, 2009  |  |               |            |               | $ | (154,326   | )

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The risk
 free interest rate was based on rates established by the Federal Reserve. The
 expected volatility was based on the historical volatility of the
 Registrants share price for periods equal to the expected life of the outstanding
 warrants at each valuation date. The expected dividend rate was based on the
 fact that the Registrant has not historically paid dividends on common stock
 and does not expect to pay dividends on common stock in the future.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The warrant
 derivative liability as of April 1, 2009 was $3,915,462. This amount
 represents the cumulative effect of the change in accounting principal for
 all periods prior to April 1, 2009 and as per the requirements of EITF 07-5,
 is recognized as an adjustment in the opening accumulated deficit balance.                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The decrease
 of $154,326 in value of the warrant derivative liability occurring during the
 three months ended June 30, 2009 is reported in the Other Income (Expenses)
 section of the statement of operations, in accordance with FAS 133.                                                                                                                                                                                                                                

F-9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Beneficial
 Conversion Features of Series E Preferred Shares                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The Series E
 Preferred shares included an option, exercisable from the issuance date, to
 convert to common shares at a price of $0.05 per share. The share price on
 the date of issuance was $0.09. The difference of $0.04 between the share
 price and option price represents a beneficial conversion feature existing on
 the issue date.                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In
 accordance with EITF 98-5, the beneficial conversion feature was valued
 separately and allocated to additional paid in capital. The valuation of the
 beneficial conversion feature was valued at $258,700, calculated using the
 relative fair value method, as required by FAS 14, allocating the proceeds of
 $1 million from issuance of the Series E Preferred shares to the conversion
 option and detachable warrants included with such issuance as follows:

|                                                                                                                                  |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- | -
|Allocation % attributable to the Preferred
 shares conversion option                                                              |  |   |            |  
|                                                                                                                                 
|Proceeds from issuance of Series E
 preferred shares                                                                              |  | $ | 1,000,000  |  
|Value of warrants issued with Series E
 preferred shares(see below for a description of the method of valuation)                  |  |   | 2,865,486  |  
|Total of proceeds plus warrants                                                                                                   |  |   | 3,865,486  |  
|Allocation % attributable to Preferred
 Shares conversion option(quotient of the proceeds divided by the proceeds
 plus warrants) |  |   | 25.9       | %
|Amount of proceeds attributed to conversion
 option                                                                               |  | $ | 258,700    |  
|                                                                                                                                  |  |   |            |  
|Gross value of beneficial conversion
 feature                                                                                     |  |   |            |  
|                                                                                                                                 
|Share price as of issue date                                                                                                      |  | $ | 0.09       |  
|Conversion option price                                                                                                           |  | $ | 0.05       |  
|Beneficial conversion feature per share                                                                                           |  | $ | 0.04       |  
|Number of common shares                                                                                                           |  |   | 20,000,000 |  
|Gross value of beneficial conversion
 feature                                                                                     |  | $ | 800,000    |  
|                                                                                                                                  |  |   |            |  
|Beneficial conversion option recorded(lesser of the gross value or
 the amount of proceeds attributed to the conversion option)   |  | $ | 258,700    |  
|                                                                                                                                  |  |   |            |  

| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The warrants
 issued with the Series E Preferred shares were valued using the Black Scholes
 option valuation model, with the following assumptions:

| |                           |  |  |            | 
| | ------------------------- |  |  | ---------- | 
| | Risk-free
 interest rate  |  |  | 2%         | 
| | Expected
 volatility      |  |  | 115.2%     | 
| | Expected
 life (in years) |  |  | 7          | 
| | Number of
 warrants       |  |  | 40 million | 
| | Fair value                |  |  | $2,865,486 | 

| |                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | EITF 98-5
 requires that a beneficial conversion option be recognized as a discount and
 amortized from the date of issuance to the earliest conversion date. As the
 conversion options were exercisable on their issue date, the full value
 assigned to the conversion option was charged to interest expense.

F-10

---



| |                                                               
| | --------------------------------------------------------------
| | Summary of
 effects of derivatives on the financial statements

| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | ---------------------------------------------------------------------- |  | ----------------------- | ---------- | ------------------------------------------ | - | ------------------------ | - | - | --------- | -
| |                                                                        |  | Derivative
 Liabilities |            | Accumulated
 Deficit
 and
 Paid-in Capital |   | Other Income/
 (Expense) |  
| |                                                                        |  |                         |            |                                            |   |                          |  
| | Cumulative effect of change in accounting
 principle                   |  |                         |            |                                            |   |                          |   |   |           |  
| | -Preferred Stock Derivative Liability                                  |  | $                       | 7,144,131  |                                            | $ | (7,144,131               | ) | $ |          |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Cumulative effect of change in accounting
 principle                   |  |                         |            |                                            |   |                          |   |   |           |  
| | - Warrant Derivative Liability                                         |  |                         | 3,915,462  |                                            |   | (3,915,462               | ) |   |           |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Beneficial conversion feature of Series E                              |  |                         |            |                                            |   | 258,700                  |   |   |           |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Warrants issued with Series E                                          |  |                         | 741,300    |                                            |   |                          |   |   |           |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Amortization of beneficial conversion of
 Series E as interest expense |  |                         | 258,700    |                                            |   |                          |   |   | (258,700  | )
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Change in value of preferred stock
 derivative liability               |  |                         | (2,561,527 | )                                          |   |                          |   |   | 2,561,527 |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Change in value of warrants derivative
 liability                      |  |                         | (154,326   | )                                          |   |                          |   |   | 154,326   |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  
| | Net Effect of Derivatives                                              |  | $                       | 9,343,740  |                                            | $ | (10,800,893              | ) | $ | 2,457,153 |  
| |                                                                        |  |                         |            |                                            |   |                          |   |   |           |  

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3     - | INVENTORIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | Inventories
 are recorded at the lower of cost or market. As of June 30, 2009 the Company
 established an inventory valuation reserve totaling $494,425 resulting in a
 charge to Operations of $311,986                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 4     - | DIVIDENDS PAYABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | Dividends
 payable as of June 30, 2009 consisted of $299,460 in dividends earned and
 accrued during the quarter ended June 30, 2009 plus $18,000 in dividends
 earned during the quarter ended December 31, 2008, but not previously paid,
 plus $18,000 in dividends earned during the quarter ended March 31, 2009, but
 not previously paid. The dividends relating to the quarter ended June 30,
 2009 were paid via the issuance of 4,236,856 shares of common stock in July
 2009. The Registrant expects to also pay the dividends relating to the
 quarters ended December 31, 2008 and March 31, 2009 via the issuance of
 common shares and is in the process of executing the necessary waivers to do
 so. The Registrant expects to have such required waivers executed subsequent
 to the filing of this Report.

F-11

---



|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5     - | NJEDA BONDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | On September
 2, 1999, the Company completed the issuance of tax exempt bonds by the New
 Jersey Economic Development Authority (NJEDA or theAuthority). The
 aggregate proceeds from the issuance of the fifteen year term bonds was
 $3,000,000. Interest on the bonds accrues at 7.75% per annum. A portion of
 the proceeds were used by the Company to refinance its land and building, and
 the remaining proceeds were intended to be used for the purchase of
 manufacturing equipment and building improvements. On August 31, 2005, the
 Company successfully completed a refinancing of the 1999 bond issue through
 the issuance of new tax-exempt bonds (the Bonds). The refinancing involved
 borrowing $4,155,000, evidenced by a 6.5% Series A Note in the principal
 amount of $3,660,000 maturing on September 1, 2030 and a 9% Series B Note in
 the principal amount of $495,000 maturing on September 1, 2012. The net
 proceeds, after payment of issuance costs, were used (i) to redeem the outstanding
 tax-exempt Bonds originally issued by the Authority on September 2, 1999,
 (ii) refinance other equipment financing and (iii) for the purchase of
 certain equipment to be used in the manufacture of pharmaceutical products.
 Interest is payable semiannually on March 1 and September 1 of each year. The
 Bonds are collateralized by a first lien on the Companys facility and
 equipment acquired with the proceeds of the original and refinanced Bonds.
 The related Indenture requires the maintenance of a $415,500 Debt Service
 Reserve Fund consisting of $366,000 from the Series A Notes proceeds and
 $49,500 from the Series B Notes proceeds. The Debt Service Reserve is
 maintained in restricted cash accounts that are classified in Other Assets.
 $1,274,311 of the proceeds had been deposited in a short-term restricted cash
 account to fund the purchase of manufacturing equipment and development of
 the Companys facility. As of June 30, 2009, all of these proceeds were
 utilized to upgrade the Companys manufacturing facilities and for the
 purchase of manufacturing and laboratory equipment. Bond issue costs of
 $354,000 were paid from the bond proceeds and are being amortized over the
 life of the bonds. Amortization of bond financing costs amounted to $3,546
 and $3,546 for the years three months ended June 30, 2009 and 2008,
 respectively.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 6     - | STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | The adoption
 of EITF 07-5 resulted in a cumulative effect adjustment of $11,059,593 to the
 opening balance in the accumulated deficit account. This amount represents
 the cumulative effect on equity of the reclassification of the Series B,
 Series C, and Series D preferred shares and the outstanding warrants as
 derivative liabilities, pursuant to the requirements of EITF 07-5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Please refer
 to Note 2 for a discussion of the change in accounting principle and
 derivative liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|             | At June 30,
 2009, the Registrant had 2,879,900 options outstanding with exercise prices
 ranging from $1.08 to $3.00 per share; each option representing the right to
 purchase one share of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-12

---



|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7     - | PER SHARE INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | In
 accordance with SFAS No. 128, Earnings per Share, basic earnings per share
 of common stock (Basic EPS) is computed by dividing the net (loss) income
 by the weighted-average number of shares of common stock outstanding. Diluted
 earnings per share of common stock (Diluted EPS) is computed by dividing
 the net (loss) income by the weighted-average number of shares of common
 stock, and dilutive common stock equivalents and convertible securities then
 outstanding. SFAS No. 128 requires the presentation of both Basic and Diluted
 EPS, if such Diluted EPS is not anti-dilutive, on the face of Companys
 Consolidated Condensed Statements of Operations. Common stock equivalents
 totaling 48,141,640 and 26,818,934 shares were excluded from the computation
 of Diluted EPS for the three months ended June 30, 2009 and 2008,
 respectively, as their effect on the computation of Diluted EPS would have
 been anti-dilutive.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|             | The following
 table sets for the computation of basic and diluted per share information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                        |  |                                             |             |                                            |   |            |  
|----------------------------------------------------------------------- |  | ------------------------------------------- | ----------- | ------------------------------------------ | - | ---------- | -
|                                                                        |  | For the Three
 Months
 Ended June
 30, 2009 |             | For the Three
 Months Ended
 June 30, 2008 |  
|                                                                        |  |                                             |             |                                            |  
|Numerator                                                               |  |                                             |             |                                            |   |            |  
|Net Income (loss) attributable to common
 shareholders                  |  | $                                           | 1,151,494   |                                            | $ | (2,838,643 | )
|                                                                        |  |                                             |             |                                            |   |            |  
|Denominator                                                             |  |                                             |             |                                            |   |            |  
|Weighted-average shares of common stock
 outstanding                    |  |                                             | 66,240,476  |                                            |   | 23,307,241 |  
|Dilutive effect of stock options, warrants
 and convertible securities  |  |                                             | 62,063,764  |                                            |   |           |  
|                                                                        |  |                                             |             |                                            |   |            |  
|Weighted-average shares of common stock
 outstanding, assuming dilution |  |                                             | 128,304,240 |                                            |   | 23,307,241 |  
|                                                                        |  |                                             |             |                                            |   |            |  
|                                                                        |  |                                             |             |                                            |   |            |  
|Net (loss) income per share                                             |  |                                             |             |                                            |   |            |  
|Basic                                                                   |  | $                                           | 0.02        |                                            | $ | (0.12      | )
|Diluted                                                                 |  | $                                           | 0.01        |                                            | $ | (0.12      | )
|                                                                        |  |                                             |             |                                            |   |            |  

|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8     - | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | Consulting Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|             | As a result
 of the Registrants continuing efforts to reorganize its workforce and
 decrease its operating expenses the Registrant requested that Dr. Stuart
 Apfel, the Registrants Chief Scientific Officer and Chief Medical Officer,
 change the status of his relationship with the Registrant from employee to
 consultant. Dr. Apfel agreed to such change in status and will continue to
 provide his services as the Registrants Chief Scientific Officer and Chief
 Medical Officer on an hourly basis, thereby reducing the Registrants
 expenses as they relate to Dr. Apfel. In his continuing service as the
 Registrants Chief Scientific Officer and Chief Medical Officer, Dr. Apfel
 will be compensated pursuant to a consulting agreement, dated as of October
 20, 2008, between the Registrant and Parallex Clinical Research (Parallex).
 Dr. Apfel is the founder and current president of Parallex. Pursuant to the
 consulting agreement, Parallex is to provide the Registrant consulting
 services for its opioid abuse-resistant product, control release opioid
 product and other such products that the Registrant may request assistance
 with. Dr. Apfel will be the primary person providing such consulting services
 for which he will be paid on an hourly basis. The Registrant may terminate
 the consulting agreement at any time upon written notice to Parallex.
 Parallex and Dr. Apfel are subject to covenants not to disclose confidential
 information and assignment of intellectual property and a one year from termination
 non-competition covenant and non-solicitation covenant.

F-13

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|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             | The
 Registrant also requested that Dr. Charan Behl, the Registrants Head of
 Technical Affairs, change the status of his relationship with the Registrant
 from employee to consultant. Dr. Behl agreed to such change in status and
 will continue to provide his services as a consultant to the Registrant on an
 hourly basis, thereby reducing the Registrants expenses as they relate to
 Dr. Behl. In his continuing service to the Registrant as a consultant, Dr.
 Behl will be compensated pursuant to a consulting agreement, dated as of
 November 3, 2008, between the Registrant and Dr. Behl. Pursuant to the
 consulting agreement, Dr. Behl is to provide the Registrant consulting
 services for its opioid abuse-resistant product, control release opioid
 product and other such products that the Registrant may request assistance
 with. Dr. Behl will be paid for such consulting services on an hourly basis.
 The Registrant may terminate the consulting agreement at any time upon
 written notice to Dr. Behl. Dr. Behl is subject to covenants not to disclose
 confidential information and assignment of intellectual property and a one
 year from termination non-competition covenant and non-solicitation covenant.
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|NOTE 10    - | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             | The
 Registrant has evaluated subsequent events from the balance sheet date
 through August 19, 2009, the date the accompanying financial statements were
 issued. The following is a material subsequent event:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|             | Dividends
 accrued during the quarter ended June 30, 2009 were paid during July 2009
 through the issuance of 4,236,856 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-14

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED JUNE 30, 2009
COMPARED TO THE
THREE MONTH PERIOD ENDED JUNE 30, 2008
(UNAUDITED)

The following
discussion and analysis should be read with the financial statements and
accompanying notes, included elsewhere in this Form 10-Q and in the Annual
Report. It is intended to assist the reader in understanding and evaluating our
financial position.

This Quarterly Report on Form 10-Q and the documents
incorporated herein contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. When used in this Form 10-Q, statements that are not statements of
current or historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words plan, intend, may, will,
expect, believe, could, anticipate, estimate, or continue or
similar
expressions or other variations or comparable terminology are intended to
identify such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Except as required by law, the Company undertakes no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.

Any reference to Elite, the Company,
we, us, our or the Registrant refers to Elite Pharmaceuticals Inc. and
its subsidiaries.

Overview

Elite is a
specialty pharmaceutical company principally engaged in the development and
manufacture of oral, controlled-release products, using proprietary technology.
Elites strategy includes improving off-patent drug products for life cycle
management and developing generic versions of controlled-release drug products
with high barriers to entry. Elites technology is applicable to develop
delayed, sustained or targeted release pellets, capsules, tablets, granules and
powders.

Elite has two
products, Lodrane 24® and Lodrane 24D®, currently being sold commercially, and
a pipeline of five additional drug candidates under active development in the
therapeutic areas that include pain management, gastro-intestinal and
infection. Of the products under development, ELI-216, a once-a-day, abuse
deterrent oxycodone product, and ELI-154, a once-a-day oxycodone product, are
in clinical trials and Elite has completed pilot studies on two of Elites
other generic product candidates. Elite has also submitted an ANDA with Elites
co-development partner, The PharmaNetwork, for a pain management generic
product. The addressable market for the pipeline of products is approximately
$6 billion. Elites facility in Northvale, New Jersey is a Good Manufacturing
Practice (GMP)
and DEA registered facility for research, development and manufacturing.

In
January 2006, the FDA accepted Elites Investigational New Drug Application (an
IND)
for ELI-154, Elites once-a-day oxycodone painkiller. Elite has completed two
pharmacokinetic studies to evaluate ELI-154s controlled-release formulation,
of which the most recent study was completed in 2006. Elite is currently
scaling up the product and it will begin its Phase III studies for this product
upon the completion of a joint development and distribution agreement.
Currently there is no once-daily oxycodone available commercially.

1

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In May 2005,
the FDA accepted Elites IND for ELI-216, Elites once-a-day, abuse resistant
oxycodone painkiller. After the acceptance of the IND, Elite completed two
pharmacokinetic studies and a euphoria study in recreational drug users to
assess the abuse deterrent properties of ELI-216. Elite met with the FDA in
October 2006 and received guidance for the ELI-216 development program and in
November 2007, Elite reached agreement with the FDA on a Special Protocol
Assessment for the Phase III protocol for ELI-216. Elite is currently scaling
up the product and it will begin its Phase III studies for this product upon
the completion of a joint development and distribution agreement. Currently
there is no abuse deterrent oxycodone product available commercially. Elite
estimate that the U.S. market for controlled-release, twice-daily oxycodone was
about $2.8 billion in 2008.

Strategy

Elite is
focusing its efforts on the following areas: (i) development of Elites pain
management products, (ii) manufacturing of Lodrane 24(R) and Lodrane 24D(R)
products; (iii) the development of the other products in Elites pipeline; (iv)
development of the eight products with pursuant to the Epic Strategic Alliance
Agreement and (v) commercial exploitation of Elites products either by license
and the collection of royalties, or through the manufacture of Elites formulations,
and (vi) development of new products and the expansion of Elites licensing
agreements with other pharmaceutical companies, including co-development
projects, joint ventures and other collaborations.

Elite is
focusing on the development of various types of drug products, including
branded drug products (which require new drug applications (NDA)
under Section 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent
Term Restoration Act of 1984 as well as generic drug products (which require
abbreviated new drug applications (ANDA)).

Elite believes
that its business strategy enables Elite to reduce Elites risk by having a
diverse product portfolio that includes both branded and generic products in
various therapeutic categories and build collaborations and establish licensing
agreements with companies with greater resources thereby allowing Elite to
share costs of development and to improve cash-flow.

Epic Strategic Alliance Agreement

On March 18,
2009, Elite entered into the Epic Strategic Alliance Agreement (amended on
April 30, 2009, June 1, 2009 and July 28, 2009), pursuant to which Elite
commenced a strategic relationship with Epic, a pharmaceutical company that
operates a business synergistic to that of Elite in the research and development,
manufacturing, sales and marketing of oral immediate and controlled-release
drug products.

Use
of Facility and Joint Development of Drug Products

Pursuant to
the Epic Strategic Alliance Agreement, on June 3, 2009 (the Initial
Closing Date), Elite and Epic conducted the initial closing (the Initial
Closing) of the transactions contemplated by the Epic Strategic
Alliance Agreement, and Epic and its employees and consultants commenced use of
a portion of Elites facility located at 165 Ludlow Avenue, Northvale, New
Jersey (the Facility), for the purpose of developing new generic drug
products, all at Epics sole cost and expense for a period of at least three
years (the Initial
Term), unless sooner terminated or extended pursuant to the Epic
Strategic Alliance Agreement or by mutual agreement of Elite and Epic (the
Initial Term, as shortened or extended, the Term). In addition to the
use of the Facility, Epic will use Elites machinery, equipment, systems,
instruments and tools residing at the Facility (collectively the Personal
Property) in connection with its joint drug development project at
the Facility. Under the Epic Strategic Alliance Agreement, Epic has the right,
exercisable in its sole discretion, to extend the Initial Term for two periods
of one year each by giving written notice to Elite of such extension within
ninety days of the end of the Initial Term or any extension thereof. Any such
extension will be on the same terms and conditions contained in the Epic
Strategic Alliance Agreement. Elite will be responsible for (and Epic will have
no responsibility for) any maintenance, services, repairs and replacements in,
to or of the Facility and the Personal Property, unless any such maintenance,
service, repair or replacement is required as a result of the negligence or
misconduct of Epics employees or representatives, in which case Epic will be
responsible for the costs and expenses associated therewith.

2

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During the
Term, Epic will use and occupy a portion of the Facility and use the Personal
Property for the purpose of developing (i) at least four controlled-release
products (the Identified CR Products) and (ii) at least four
immediate-release products (the Identified IR Products), the identity of
each have been agreed upon by Epic and Elite. If, during the Term, Epic
determines, in its reasonable business judgment, that the further or continuing
development of any Identified CR Product and/or Identified IR Product is no
longer commercially feasible, Epic may, upon written notice to Elite, eliminate
from development under the Epic Strategic Alliance Agreement such Identified CR
Product and/or Identified IR Product, and replace such eliminated product with
another controlled-release or immediate-release product, as applicable.

Pursuant to
the Epic Strategic Alliance Agreement, Epic will also use a portion of the
Facility and use the Personal Property for the purpose of developing (x)
additional controlled-release products of Epic (the Additional CR Products),
subject to the mutual agreement of Epic and Elite, and/or (y) additional
immediate-release products of Epic (the Additional IR Products), subject to the
mutual agreement of Elite and Epic (each Identified CR Product, Identified IR
Product, Additional CR Product and Additional IR Product, individually, a Product,
and collectively, the Products). Under the Epic Strategic
Alliance Agreement, Epic may not eliminate an Identified CR Product or an
Identified IR Product unless it replaces such Product with an Additional CR
product or Additional IR Product, as the case may be. Subject to the mutual
agreement of Elite and Epic as to additional consideration and other terms,
Epic may use and occupy the Facility for the development of other products of
Epic (in addition to the Products).

As additional
consideration for Epics use and occupancy of a portion of the Facility and its
use of the Personal Property during the Term and the issuance and delivery by
Elite to Epic of the Milestone Shares (as defined below) and Milestone Warrants
(as defined below), for the period beginning on the First Commercial Sale (as
defined in the Epic Strategic Alliance Agreement) of each Product and
continuing for a period of ten years thereafter (measured independently for
each Product), Epic will pay Elite a cash fee (the Product Fee) equal to
fifteen percent of the Profit (as defined in the Epic Strategic Alliance
Agreement), if any, on each of the Products.

With respect
to each Identified CR Product and Additional CR Product developed by Epic at
the Facility: (i) Elite will issue and deliver to Epic a seven-year warrant to
purchase up to 10,000,000 shares of Common Stock, at an exercise price of
$0.0625, following the receipt by Elite from Epic of each written notice of
Epics receipt of an acknowledgment from the FDA that the FDA accepted for
filing an ANDA for such Identified CR Products and/or Additional CR Products,
up to a maximum of four such warrants for the right to purchase up to an
aggregate of 40,000,000 shares of Common Stock (such warrants, the CR Related
Warrants), and (ii) Elite will issue and deliver to Epic 7,000,000
shares of Common Stock following the receipt by Elite from Epic of each written
notice of Epics receipt from the FDA of approval for such Identified CR
Products and/or Additional CR Products, up to a maximum of an aggregate of
28,000,000 shares of Common Stock (such shares, the CR Related Shares).

With respect
to each Identified IR Product and Additional IR Product developed by Epic at
the Facility, (i) Elite will issue and deliver to Epic a seven year warrant to
purchase up to 4,000,000 shares of Common Stock, at an exercise price of
$0.0625, following the receipt by Elite from Epic of each written notice of
Epics receipt of an acknowledgment from the FDA that the FDA accepted for
filing an ANDA for such Identified IR Products and/or Additional IR Products,
up to a maximum of four such warrants for the right to purchase up to an
aggregate of 16,000,000 shares of Common Stock (such warrants, together with
the CR Related Warrants, the Milestone Warrants), and (ii) Elite will
issue and deliver to Epic 3,000,000 shares of Common Stock following the
receipt by Elite from Epic of each written notice of Epics receipt from the
FDA of approval for such Identified IR Products and/or Additional IR Products,
up to a maximum of an aggregate of 12,000,000 shares of Common Stock (such
shares, together with the CR Related Shares, the Milestone Shares). The
Milestone Warrants may only be exercised by payment of the applicable cash exercise
price. Elite will have no obligation to register with the United States
Securities and Exchange Commission (the SEC) or any state securities commission
the resale of the Milestone Shares, Milestone Warrants or the shares of Common
Stock issuable upon exercise of the Milestone Warrants.

3

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Subject to the
mutual agreement of Epic and Elite with respect to the selection of Additional
CR Products and/or Additional IR Products pursuant to the Epic Strategic
Alliance Agreement, Epic will have the sole right to make all decisions
regarding all aspects of the Products, including, but not be limited to, (i)
research and development, formulation, studies and validation of each Product,
(ii) identifying, evaluating and obtaining ingredients for each Product, (iii)
preparing and filing the ANDA for each Product with the FDA and addressing and
handling all regulatory inquiries, audits and investigations pertaining to the
ANDA, and (iv) the manufacture, marketing, supply and commercialization of each
Product. In addition, Epic will be the sole and exclusive owner of all right,
title and interest in and to each of the Products.

Pursuant to
the Epic Strategic Alliance Agreement, the use by each of Elite and Epic of the
other partys confidential and proprietary information is restricted by
customary confidentiality provisions. Elite and Epic also agreed in the Epic
Strategic Alliance Agreement to indemnify and hold each other harmless from
certain losses under the Epic Strategic Alliance Agreement.

Under certain
circumstances Epic will be entitled to terminate the Term early in the event
that the Facility is totally damaged or destroyed such that the Facility is
rendered wholly untenantable. In addition, subject to certain exceptions,
either Elite or Epic may terminate the Term at any time if the other party is
in breach of any material obligations under Article V of the Epic Strategic
Alliance Agreement and has not cured such breach within sixty days after
receipt of written notice requesting cure of such breach.

Elite may also
terminate the Term by written notice to Epic if (i) all conditions precedent
that Elite is obligated to satisfy pursuant to Article II of the Epic Strategic
Alliance Agreement on or prior to a Closing (as defined in the Epic Strategic
Alliance Agreement) have been, or will have been, satisfied by Elite in
accordance with the terms thereof and (ii) Epic does not consummate such
Closing in accordance with Article II. Notwithstanding the foregoing, if Elite
terminates the Epic Strategic Alliance Agreement as described in this
paragraph, then any and all product fees to which it would otherwise be
entitled will remain the obligation of Epic and must be paid to Elite in
accordance with the terms of Epic Strategic Alliance Agreement.

Infusion
of Additional Capital Necessary for Product Development

At the Initial
Closing, which occurred on June 3, 2009, in order to fund the continued
development of Elites drug products, Elite issued and sold to the Purchaser,
in a private placement, pursuant to an exemption from registration under
Section 4(2) of the Securities Act, 1,000 shares of its Series E Convertible
Preferred Stock, par value $0.01 per share (the Series E Preferred Stock),
at a price of $1,000 per share, each share convertible, at $0.05 per share (the
Conversion
Price), into 20,000 shares of Common Stock, par value $0.01 per
share (the Common
Stock). The Conversion Price is subject to adjustment for certain
events, including, without limitation, dividends, stock splits, combinations
and the like. The Conversion Price is also subject to adjustment for (a) the
sale of Common Stock or securities convertible into or exercisable for Common
Stock, for which the Purchasers consent was not required under the Certificate
of Designation of Preferences, Rights and Limitations of the Series E
Convertible Preferred Stock, at a price less than the then applicable
Conversion Price, (b) the issuance of Common Stock in lieu of cash in
satisfaction of Elites dividend obligations on outstanding shares of its Series
B 8% Convertible Preferred Stock, par value $0.01 per share, Series C 8%
Convertible Preferred Stock, par value $0.01 per share, and/or Series D 8%
Convertible Preferred Stock, par value $0.01 per share (the Series D
Preferred Stock), and (c) the issuance of Common Stock as a result
of any holder of Series D Preferred Stock exercising its right to require Elite
to redeem all of such holders shares of Series D Preferred Stock pursuant to
the terms thereof. The Purchaser also acquired a warrant to purchase 20,000,000
shares of Common Stock (the Initial Warrant), exercisable on or
prior to June 3, 2016, at a per share exercise price of $0.0625 (the Exercise
Price), subject to adjustments for certain events, including, but
not limited to, dividends, stock splits, combinations and the like. The
Exercise Price of the Initial Warrant will also be subject to adjustment for
the sale of Common Stock or securities convertible into Common Stock, for which
the Purchasers consent was not required under the Alliance Agreement, at a
price less than the then applicable Exercise Price of the Initial Warrant. The
Purchaser paid an aggregate purchase price of $1,000,000 for the shares of
Series E Preferred Stock and the Initial Warrant issued and sold by Elite to the
Purchaser at the Initial Closing, of which $250,000 was received by Elite, in
the form of a cash deposit, on April 30, 2009, pursuant to the First Amendment.
The remaining $750,000 of such aggregate purchase price was paid to Elite by
the Purchaser at the Initial Closing.

4

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On the fifth
trading day following the Special Meeting of Stockholders (as defined in the
Epic Strategic Alliance Agreement) at which the Shareholder Approval (as
defined in the Epic Strategic Alliance Agreement) is obtained, Elite and Epic
will conduct a second closing (the Second Closing and the date of such
Second Closing, the Second Closing Date), provided that all
conditions precedent to such Second Closing contained in the Epic Strategic
Alliance Agreement have been satisfied or waived by the appropriate party on or
before the Second Closing Date. The Second Closing must occur within 180 days
of the Initial Closing Date. At the Second Closing, Epic will pay to Elite a
sum of $1,000,000 in exchange for an additional 1,000 shares of Series E
Preferred Stock, which such shares of Series E Preferred Stock will be
convertible, at the Conversion Price, subject to adjustment, into 20,000,000
shares of Common Stock, and a warrant (the Second Warrant) to purchase an additional
40,000,000 shares of Common Stock. The Second Warrant will be exercisable until
the date that is the seventh anniversary of the Second Closing Date and will
have a per share exercise price equal to $0.0625, subject to adjustments for
certain events, including, but not limited to, dividends, stock splits,
combinations and the like. The per share exercise price of the Second Warrant
will also be subject to adjustment for the sale of Common Stock or securities
convertible into Common Stock at a price less than the then applicable per
share exercise price of the Second Warrant, for which Epics consent was not
required under the Epic Strategic Alliance Agreement.

On the first
trading day following the first anniversary of the Initial Closing Date, Elite
and Epic will conduct a third closing (the Third Closing and the date of such Third
Closing, the Third Closing Date), provided that all conditions precedent
to such Third Closing contained in the Epic Strategic Alliance Agreement have
been satisfied or waived by the appropriate party on or before such Third
Closing Date. The Third Closing must occur within thirty days following the
first anniversary of the Initial Closing Date. At the Third Closing, Epic will
pay to Elite a sum of $1,000,000 in exchange for an additional 1,000 shares of
Series E Preferred Stock, which such shares of Series E Preferred Stock will be
convertible, at the Conversion Price, subject to adjustment, into 20,000,000
shares of Common Stock, and a warrant (the Third Warrant and collectively with the
Initial Warrant and the Second Warrant, the Warrants) to purchase an
additional 40,000,000 shares of Common Stock. The Third Warrant will be
exercisable until the date that is the seventh anniversary of the Third Closing
Date and will have a per share exercise price equal to $0.0625, subject to
adjustments for certain events, including, but not limited to, dividends, stock
splits, combinations and the like. The per share exercise price of the Third
Warrant will also be subject to adjustment for the sale of Common Stock or
securities convertible into Common Stock at a price less than the then
applicable per share exercise price of the Third Warrant, for which the
Purchasers consent was not required under the Epic Strategic Alliance
Agreement.

In addition,
within ten business days following the last day of each calendar quarter,
beginning with the first calendar quarter following the Initial Closing Date
and continuing for each of the eleven calendar quarters thereafter, Epic will
pay to Elite a sum of $62,500, for an aggregate purchase price over such period
of $750,000, in exchange for an additional 62.5 shares of Series E Preferred
Stock per quarter and 750 shares of Series E Preferred Stock, in the aggregate,
over such period, which such shares will be convertible into 1,250,000 shares
of Common Stock per quarter and 15,000,000 shares of Common Stock, in the
aggregate, over such period, subject to adjustment.

If Elite
determines, in its reasonable judgment, that additional funding is required for
the development of its pharmaceutical products, then, either (i) Elite will
issue, and Epic will purchase, such additional number of shares of Series E
Preferred Stock or Common Stock from Elite, upon such terms and conditions as
may be agreed upon by Elite and Epic at the time of such determination; or (ii)
on or after September 15, 2011, Epic will provide a loan to Elite, in an
aggregate principal amount not to exceed $1,000,000, which such loan will (A)
have an interest rate equal to the then prime interest rate as published in the
Wall Street Journal on the date of such loan, (B) mature on the second
anniversary of date of such loan, and (C) be on such other terms and conditions
which are customary and reasonable to loans of a similar nature and which are
mutually agreed upon between Epic and Elite.

Elite
believes, which as to such belief there can be no assurances, the completion of
the transactions contemplated by the Epic Strategic Alliance Agreement creates
value for our stockholders by adding a new revenue source for Elite upon the
commercialization of the Epic products developed at our facility, providing an
experienced partner to assist in the development, manufacture and licensing of
our pharmaceutical products, and contributing funding for the products.
Importantly, Elite will continue the development of its pain products and, with
the help of our new partner, work towards securing licensing arrangements for
such pain products.

5

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Board
of Directors Composition and Voting Rights

As of the Initial
Closing Date and at all times thereafter, except as otherwise set forth in the
Epic Strategic Alliance Agreement, Elite and its Board of Directors will take
any and all action necessary so that (i) the size of the Board of Directors
will be set and remain at seven directors, (ii) three individuals designated by
Epic (the Epic Directors) will
be appointed to the Board of Directors and (iii) the Epic Directors will be
nominated at each annual or special meeting of stockholders at which an
election of directors is held or pursuant to any written consent of the
stockholders; provided, however, that if at any time following the Lock-Up
Period (as defined above) the Purchaser owns less than (i) a number of shares
of Series E Preferred Stock equal to ninety percent of the aggregate number of
shares of Series E Preferred Stock purchased by the Purchaser at all of the
then applicable Closings or (ii) following the conversion by the Purchaser of
the Series E Preferred Stock, a number of shares of Common Stock equal to
ninety percent of the number of shares of Common Stock so converted, neither
Elite nor its Board of Directors will be obligated to nominate Epic Directors
or take any other action with respect to those actions described in (i), (ii)
and/or (iii) above. No Epic Director may be removed from office for cause
unless such removal is directed or approved by (x) a majority of the
independent members of the Board of Directors and (y) all of the non-affected
Epic Director (s). Any vacancies created by the resignation, removal or death
of an Epic Director will be filled by the appointment of an additional Epic
Director. Any Epic Director may be removed from office upon the request of the
Purchaser, with or without cause. At such time as the Purchaser owns more than
50% of the issued and outstanding Common Stock or other voting securities of
Elite, the number of Epic Directors that the Purchaser will be entitled to
designate under the Epic Strategic Alliance Agreement will be equal to a
majority of the Board of Directors.

In addition,
pursuant to the Epic Strategic Alliance Agreement and the Series E Certificate,
Elite has agreed that, between the date of the initial closing under the Epic
Strategic Alliance Agreement and the date which is the earlier of (x) the date
the Epic Directors constitute a majority of the Board of Directors and (y)
ninety days following the fifth anniversary of the Initial Closing Date, except
as Epic otherwise agrees in writing, Elite may conduct its operations only in
the ordinary and usual course of business consistent with past practice.
Further, pursuant to the Epic Strategic Alliance Agreement and the Series E
Certificate, Elite must obtain the prior written consent of Epic in order to
take the actions specifically enumerated therein.

For
information regarding composition of the Board and voting rights in connection
with Epic Strategic Alliance Agreement, refer to the Risk Factors under Item
1A, above, which are incorporated herein by reference.

Appointment of Chief Financial Officer,
Secretary and Treasurer

On July 1,
2009, Elite appointed Carter J. Ward as its Chief Financial Officer, replacing
Mark I. Gittelman, who served as the Elites Chief Financial Officer through
the same date.

In connection
with the appointment of Mr. Ward as Chief Financial Officer of the Registrant,
Mr. Ward and the Registrant entered into a letter agreement (the Employment
Letter). As previously disclosed in the Form 8-K filed by Elite on July 8,
2009, Mr. Ward became an at-will employee of the Registrant as its Chief
Financial Officer. Mr. Ward will dedicate at least two business days per week
toward fulfilling his responsibilities as Chief Financial Officer and he will
receive an annual base salary of $60,000, payable in accordance with the
Registrants payroll practices. In recognition of Mr. Wards part-time
commitment to the Registrant, the Registrant has acknowledged that Mr. Ward
will dedicate the remaining three business days per week to the performance of
his services to Epic Pharma, LLC (Epic), the Registrants strategic partner,
and its affiliates. Pursuant to the Employment Letter, Mr. Ward agrees to not
knowingly undertake or engage in any employment, occupation or business
enterprise that is, directly or indirectly, adverse to the interest of the
Registrant.

In addition,
pursuant to the Employment Letter, Mr. Ward may become eligible for cash and/or
equity based awards that may be granted by the Registrant in the future, with
any such awards to be granted in the discretion of the Registrant and its Chief
Executive Officer. Mr. Ward will be entitled to the same benefits generally
offered to other employees of Elite, subject to applicable eligibility
requirements.

6

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The Registrant
and Mr. Ward also entered into the Registrants standard Employee Proprietary
Information and Non-Solicitation Agreement that the Registrant requires its
employees to execute in connection with their employment with the Registrant.

Since June
2009, Mr. Ward has been engaged by Epic as a consultant and the services provided
by Mr. Ward to Epic pursuant to such engagement include, but are not limited
to, consulting on matters relating to the finances, business development and
operations of Epic. Prior to joining the Registrant, from July 2005 to April
2009, Mr. Ward filled multiple finance and supply chain leadership roles with
Actavis Group and its U.S. subsidiary Amide Pharmaceuticals. From September
2004 to June 2005, Mr. Ward was a consultant, mainly engaged in improving
internal controls and supporting Sarbanes-Oxley compliance of Centennial
Communications Inc., a NASDAQ-listed wireless communications provider. From
1999 to September 2004, Mr. Ward was the Chief Financial Officer for Positive
Healthcare/Ceejay Healthcare, a U.S.-Indian joint venture engaged in the manufacture
and distribution of generic pharmaceuticals and nutraceuticals in India. Mr.
Ward began his career as a certified public accountant in the audit department
of KPMG and is a certified public accountant. Mr. Ward holds a B.S. in
Accounting from Long Island University, Brooklyn, NY, from where he graduated summa cum laude.

Effective as
of July 1, 2009, Mr. Ward replaced Mr. Gittelman as the Registrants Chief
Financial Officer. Effective as of August 13, 2009, Mr. Ward was appointed as
the Registrants Secretary and Treasurer. Mr. Gittelman ceased providing
services to the Registrant in such capacities as of July 1, 2009.

Critical Accounting Policies and Estimates

Managements
discussion addresses our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and judgment, including those related to bad
debts, intangible assets, income taxes, workers compensation, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

Management
believes the following critical accounting policies, among others, affect its
more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements. Our most critical accounting policies include
the recognition of revenue upon completion of certain phases of projects under
research and development contracts. We also assess a need for an allowance to
reduce our deferred tax assets to the amount that we believe is more likely
than not to be realized. We assess the recoverability of long-lived assets and
intangible assets whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. We assess our exposure to
current commitments and contingencies. It should be noted that actual results
may differ from these estimates under different assumptions or conditions.

7

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Results of Consolidated Operations

Three Months Ended June 30, 2009 Compared to
Three Months Ended June 30, 2008

The
Registrants revenues for the three months ended June 30, 2009 were $813,875 an
increase of $37,197 or approximately 5% over revenues for the comparable period
of the prior year, and consisted of $665,064 in manufacturing fees and $148,811
in royalty fees. Revenues for the three months ended June 30, 2008, consisted
of $688,287 in manufacturing fees and $88,391 in royalty fees. Manufacturing
fees decreased by approximately 3% due to fluctuations in the number and timing
of batches shipped each quarter because of seasonality of sales, and management
of higher inventory levels in the market resulting from increased production in
the quarters preceding this quarter. Royalties increased by approximately 68%
due to growth of product sales.

Research and
development costs for the three months ended June 30, 2009, were $251,092, a
decrease of $1,095,887 or approximately 81% from $1,346,979 of such costs for
the comparable period of the prior year. Decreases were attributed to decreases
in salaries and wages, consulting fees associated with the development of
products and lower active pharmaceutical ingredient (API) costs for product
development. To conserve cash, the Registrant has reduced its number of
employees from 43 employees in June 2008, to 12 employees as of June 30, 2009.
The reduction in force was implemented during the last two quarters, with cost
savings beginning in this quarter. Research and development costs are expected
to increase, however, in future periods, once Phase III and other clinical
trials for ELI-216 are initiated. Additional funding is required for such
research and development costs. Elite is currently scaling up the product and
it will begin its Phase III studies for this product upon the completion of a
joint development and distribution agreement.

General and
administrative expenses for the three months ended June 30, 2009, were
$396,537, a decrease of $232,630, or approximately 37% from $629,167 of general
and administrative expenses for the comparable period of the prior year. The
decrease was primarily attributable to decreases in salaries and fringe
benefits offset by increases in legal and accounting fees.

Depreciation
and amortization for the three months ended June 30, 2009 were 125,542, a
decreased of $4,715, or approximately 4%, from $130,257 for the comparable
period of the prior year. The decrease was due to the cessation of acquisition
of new machinery in the current period.

Other
income/(expenses) (net) for the three months ended June 30, 2009 were
$1,972,790, an increase in other income of $2,322,756 from the net expense of
$349,966 for the comparable period of the prior year. The increase in other
income was due to derivative income related to changes in the fair value of
Registrants preferred shares and outstanding warrants of $2,715,853. The derivative
income is resulting from a change in accounting principle required by the
adoption of EITF 07-5 as of the beginning of the period. Please refer to Note 2
of the financial statements in this Report for a discussion of the effects of
this change in accounting principle.

As a result of
the foregoing, the Registrants net income for the three months ended June 30,
2009 was $1,151,494 compared to a loss of $2,281,616 for the three months ended
June 30, 2008.

Material Changes in Financial Condition

The
Registrants working capital (total current assets less total current
liabilities), decreased to $666,464 as of June 30, 2009 from $758,676 as of
March 31, 2008, primarily due to the Registrants net loss from operations,
exclusive of non-cash charges.

The Registrant
experienced negative cash flows from operations of $479,618 for the three
months ended June 30, 2009, primarily due to the Registrants net income from
continuing operations of $1,151,494, increased by non cash charges totaling
$1,110,612, which included depreciation and amortization of $125,542, inventory
adjustments of $311,986, non cash interest expense related to the series E
issuance of $258,700, dividends accruing to preferred share derivative
liabilities of $359,021, and reduced by non cash income related to the change
in fair value of preferred share derivative liabilities of $2,561,527, and the
change in fair value of warrant derivative liabilities of $154,326. Please
refer to Note 2 of the financial statements in this report for discussions on
the fair value of preferred share and warrant derivatives, and interest expense
recorded as a discount in Series E issuance.

8

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On November
15, 2004 and on December 18, 2006, the Registrants partner, ECR, launched
Lodrane 24(R) and Lodrane 24D(R), respectively. Under its agreement with ECR,
the Registrant is currently manufacturing commercial batches of Lodrane 24(R)
and Lodrane 24D(R) in exchange for manufacturing margins and royalties on
product revenues. Manufacturing revenues and royalty income earned for the
three months ended June 30, 2009 and June 30, 2008 were $813,875 and $776,678,
respectively. The Registrant expects future cash flows from manufacturing fees
and royalties to provide additional cash to help fund its operations. However, no
assurance can be given that the Registrant will generate any material revenues
from the manufacturing fees and royalties of the Lodrane products.

LIQUIDITY AND
CAPITAL RESOURCES

As of June 30,
2009, the Registrant had approximately four months of cash available based on
the Registrants current operations. As of the date of this Quarterly Report on
Form 10-Q, the Registrant is negotiating a strategic transaction with an
unaffiliated third party, which such strategic transaction, if consummated in
accordance with the current terms under negotiation, should allow the
Registrant to maintain its current level of operations. If such strategic
transaction is not closed in a timely basis, or if another financing or
strategic alternative providing sufficient resources to the Registrant to
continue its operations is not consummated in the near future, the Registrant
will be required to cease operations and liquidate its assets. No assurance can
be given that the Registrant will be able to close such strategic transaction
on a timely basis, or consummate such other financing or strategic alternative
in the time necessary to avoid the cessation of the Registrants operations and
liquidation of its assets, on favorable terms, if at all. Moreover, even if the
Registrant consummates such strategic transaction, or such other financing or
strategic alternative, it may be required to seek additional capital in the
future and there can be no assurances that the Registrant will be able to
obtain such additional capital on favorable terms, if at all.

Based upon the
Registrants current cash position, management has undertaken a review of the
Registrants operations and implemented cost-cutting measures in an effort to
eliminate any expenses which are not deemed critical to the Registrants
current strategic objectives. The Registrant will continue this process without
impeding its ability to proceed with its critical strategic goals.

For the three
months ended June 30, 2009, the Registrant expended $479,618 in operating
activities which the Registrant funded through the $1,000,000 in gross proceeds
raised through the Registrants private placement of its Series E Preferred
Stock and manufacturing and royalty revenues resulting from the manufacture and
sale of Lodrane 24® and Lodrane 24D ®. The Registrants working capital at June
30, 2009 was approximately $666,000 compared with working capital of
approximately $759,000 at June 30, 2008. Cash and cash equivalents at June 30,
2009, were approximately $763,000, an increase of approximately $481,000 from
the $283,000 at June 30, 2008.

As of June 30,
2009, the Registrants principal source of liquidity was approximately $763,000
of cash and cash equivalents. Additionally, the Registrant may have access to
funds through the exercise of outstanding stock options and warrants. There can
be no assurance that the exercise of outstanding warrants or options will
generate or provide sufficient cash.

The Registrant
had outstanding, as of June 30, 2009, bonds in the aggregate principal amount
of $3,595,000 consisting of $3,280,000 of 6.5% tax exempt bonds with an outside
maturity of September 1, 2030 and $315,000 of 9.0% bonds with an outside
maturity of September 1, 2012. The bonds are secured by a first lien on the
Registrants facility in Northvale, New Jersey. Pursuant to the terms of the
bonds, several restricted cash accounts have been established for the payment
of bond principal and interest. Bond proceeds were utilized for the redemption
of previously issued tax exempt bonds issued by the Authority in September 1999
and to refinance equipment financing, as well as provide approximately
$1,000,000 of capital for the purchase of additional equipment for the
manufacture and development at the Registrants facility of pharmaceutical products
and the maintenance of a $415,500 debt service reserve. All of the restricted
cash, other than the debt service was expended within the year ended March 31,
2008. Pursuant to the terms of the related bond indenture agreement, the
Registrant is required to observe certain covenants, including covenants
relating to the incurrence of additional indebtedness, the granting of liens
and the maintenance of certain financial covenants. As of June 30, 2009, the
Registrant was in compliance with the bond covenants.

9

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Off-Balance Sheet Arrangements

We have not
entered into any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that would be considered material to
investors.

Effects of Inflation

We are subject
to price risks arising from price fluctuations in the market prices of the
products that we sell. Management does not believe that inflation risk is
material to our business or our consolidated financial position, results of
operations, or cash flows.

|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK

Derivative Financial Instruments and Foreign
Exchange

The Registrant
had no investments in marketable securities as of June 30, 2009 or assets and
liabilities, which are denominated in a currency other than U.S. dollars or
involve commodity price risks.

Interest Rates

Our exposure
to market risk for changes in interest rates relates primarily to short-term
instruments and short-term obligations; thus, fluctuations in interest rates do
not have a material impact on the fair value of these securities. At June 30,
2009, we had approximately $763 thousand in cash and cash equivalents. A
hypothetical 5% increase or decrease in either short-term or long-term interest
rates would not have a material impact on our earnings or loss, or the fair
market value or cash flows of these instruments.

|        |                        
|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES

As
of the end of the period covered by this report, based on an evaluation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934), the acting Chief
Executive and Chief Financial Officer of the Company concluded that the
Companys disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SECs rules and forms.

There
have been no changes in the Companys internal control over financial reporting
during the quarter ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

|         |                  
|-------- | -----------------
|PART II. | OTHER INFORMATION
|         |                  
|ITEM 1.  | Legal Proceedings

In the
ordinary course of business we may be subject to litigation from time to time.
There is no past, pending or, to our knowledge, threatened litigation or
administrative action to which we are a party or of which our property is the
subject (including litigation or actions involving our officers, directors,
affiliates, or other key personnel, or holders of record or beneficially of
more than 5% of any class of our voting securities, or any associate of any
such party) which in our opinion has, or is expected to have, a material
adverse effect upon our business, prospects, financial condition or operations.

10

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|         |             
|-------- | ------------
|ITEM 1A. | Risk Factors

In addition to
the other information contained in this report, the following risk factors
should be considered carefully in evaluating an investment in us and in
analyzing our forward-looking statements.

Risks Related to Our
Business

We have a relatively
limited operating history, which makes it difficult to evaluate our future
prospects.

Although we
have been in operation since 1990, we have a relatively short operating history
and limited financial data upon which you may evaluate our business and
prospects. In addition, our business model is likely to continue to evolve as
we attempt to expand our product offerings and our presence in the generic
pharmaceutical market. As a result, our potential for future profitability must
be considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies that are attempting to move into new
markets and continuing to innovate with new and unproven technologies. Some of
these risks relate to our potential inability to:

| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | develop new
 products;                                                 
| |   |                                                                        
| |  | obtain
 regulatory approval of our products;                           
| |   |                                                                        
| |  | manage our
 growth, control expenditures and align costs with revenues;
| |   |                                                                        
| |  | attract,
 retain and motivate qualified personnel; and                 
| |   |                                                                        
| |  | respond to
 competitive developments.                                  

If we do not
effectively address the risks we face, our business model may become unworkable
and we may not achieve or sustain profitability or successfully develop any
products.

We have not been
profitable and expect future losses.

To date, we
have not been profitable and we may never be profitable or, if we become
profitable, we may be unable to sustain profitability. We have sustained losses
in each year since our incorporation in 1990. We incurred net losses of
$6,604,708, $13,893,060, $11,803,512, $6,883,914, and $5,906,890 for the years
ended March 31, 2009, 2008, 2007, 2006 and 2005, respectively. We expect to
incur losses for the current year of operation and to continue to incur losses
until we are able to generate sufficient revenues to support our operations and
offset operating costs.

There is doubt as to
our ability to continue as a going concern.

On June 3,
2009, after giving effect to the initial closing of the Epic Strategic Alliance
Agreement, we had cash reserves of $737,000 which permits us to continue
at our anticipated level of operations, including, but not limited to, the continued
development of our pipeline products, through October 2009. The completion of
all transactions contemplated by the Epic Strategic Alliance Agreement, including
the consummation of the second and third closings thereof, will provide additional
funds to permit us to continue development of our product pipeline for more
than two years. Beyond two years, we anticipate that, with growth of Lodrane
and the launch of the ANDA for a pain management generic product that we
submitted last year with our co-development partner, The Pharma Network,, Elite
could be profitable. In
addition, the commercialization of the Epic products developed at the
Facility under the Epic Strategic Alliance Agreement will add a new revenue
source for Elite. However, there can be no assurances as to the growth, success
of the development or the commercialization of these
products.

11

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Despite the
successful completion of the initial closing of the Epic Strategic Alliance
Agreement, there can be no assurances that we will be able to consummate the
second and third closings pursuant to the terms and conditions of the Epic
Strategic Alliance Agreement. If such transactions are consummated, we will
receive additional cash proceeds of $2.75 million. Even if we were able to
successfully complete the second and third closings of the Epic Strategic
Alliance Agreement, we still may be required to seek additional capital in the
future and there can be no assurances that we will be able to obtain such
additional capital on favorable terms, if at all. For additional information
regarding the Epic Strategic Alliance Agreement, please see our disclosures
under Epic Strategic Alliance Agreement in this report, in Item 7 of Part II
of our Annual Report on Form 10-K, and in our Current Reports on Form 8-K,
filed with the SEC on March 23, 2009, May 6, 2009 and June 5, 2009, which such
disclosures are incorporated herein by reference.

If we are unable to
obtain additional financing needed for the expenditures for the development and
commercialization of our drug products, it would impair our ability to continue
to meet our business objectives.

We continue to
require additional financing to ensure that we will be able to meet our
expenditures to develop and commercialize our products. As of June 3, 2009,
after giving effect to the initial closing of the Epic Strategic Alliance
Agreement, we had cash and cash equivalents of $737,000. We believe that our
existing cash and cash equivalents plus revenues from sale of our Lodrane 24®
and Lodrane 24D® products will be sufficient to fund our anticipated operating
expenses and capital requirements through September 2009. We will require
additional funding in order to continue to operate thereafter. If the second
and third closings of the transactions contemplated by the Epic Strategic
Alliance Agreement are not closed on a timely basis, or if another financing or
strategic alternative providing sufficient resources to allow us to continue
operations is not consummated upon exhaustion of our current capital, we will
be required to cease operations and liquidate our assets. No assurance can be
given that we will be able to consummate the second and third closings under
the Epic Strategic Alliance Agreement on a timely basis, or consummate such
other financing or strategic alternative in the time necessary to avoid the
cessation of our operations and liquidation of our assets. Moreover, even if we
consummate the second and third closings under the Epic Strategic Alliance
Agreement, or such other financing or strategic alternative, we may be required
to seek additional capital in the future and there can be no assurances that
the Registrant will be able to obtain such additional capital on favorable
terms, if at all.

If Novel Laboratories
issues additional equity in the future our equity interest in Novel may be
diluted, resulting in a decrease in our share of any dividends or other
distributions which Novel may issue in the future.

As a result of
our determination not to fund our remaining contributions to Novel at the
valuation set forth in the Novel Alliance Agreement and the resulting purchase
from us of a portion of our shares of Class A Voting Common Stock of Novel by
VGS Pharma, LLC, our remaining ownership interest in equity of Novel was
reduced to approximately 10% of the outstanding shares of Novel. Novel may seek
to raise additional operating capital in the future and may do so by the
issuance of equity. If Novel issues additional equity, our future equity
interest in Novel will decrease and we will be entitled to a decreased portion
of any dividends or other distributions which Novel may issue in the future.
Novel also has a company sponsored stock option plan and any equity issued from
this stock plan will also reduce Elites equity interest in Novel.

Substantially all of
our product candidates are at an early stage of development and only a portion
of these are in clinical development.

ELI-154 and
ELI-216 are pre-Phase III and two of our generic products are still at an early
stage of development. Other than Lodrane 24® and Lodrane 24D®, which are
commercial drug products, and a generic drug product for which an ANDA was
filed in 2008, we will need to perform additional development work for the
additional product candidates in our pipeline before we can seek the regulatory
approvals necessary to begin commercial sales.

If we are unable to
satisfy regulatory requirements, we may not be able to commercialize our
product candidates.

We need FDA
approval prior to marketing our product candidates in the United States of
America. If we fail to obtain FDA approval to market our product candidates, we
will be unable to sell our product candidates in the United States of America
and we will not generate any revenue from the sale of such products.

12

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This
regulatory review and approval process, which includes evaluation of
preclinical studies and clinical trials of our product candidates is lengthy,
expensive and uncertain. To receive approval, we must, among other things,
demonstrate with substantial evidence from well-controlled clinical trials that
our product candidates are both safe and effective for each indication where
approval is sought. Satisfaction of these requirements typically takes several
years and the time needed to satisfy them may vary substantially, based on the
type, complexity and novelty of the pharmaceutical product. We cannot predict
if or when we might submit for regulatory approval any of our product
candidates currently under development. Any approvals we may obtain may not
cover all of the clinical indications for which we are seeking approval. Also,
an approval might contain significant limitations in the form of narrow
indications, warnings, precautions, or contra-indications with respect to
conditions of use.

The FDA has
substantial discretion in the approval process and may either refuse to accept
an application for substantive review or may form the opinion after review of
an application that the application is insufficient to allow approval of a
product candidate. If the FDA does not accept our application for review or
approve our application, it may require that we conduct additional clinical,
preclinical or manufacturing validation studies and submit the data before it
will reconsider our application. Depending on the extent of these or any other
studies that might be required, approval of any applications that we submit may
be delayed by several years, or we may be required to expend more resources
than we have available. It is also possible that any such additional studies,
if performed and completed, may not be considered sufficient by the FDA to make
our applications approvable. If any of these outcomes occur, we may be forced
to abandon our applications for approval.

We will also
be subject to a wide variety of foreign regulations governing the development,
manufacture and marketing of our products. Whether or not an FDA approval has
been obtained, approval of a product by the comparable regulatory authorities
of foreign countries must still be obtained prior to manufacturing or marketing
the product in those countries. The approval process varies from country to
country and the time needed to secure approval may be longer or shorter than
that required for FDA approval. We cannot assure you that clinical trials
conducted in one country will be accepted by other countries or that approval
of our product in one country will result in approval in any other country.

Before we can obtain
regulatory approval, we need to successfully complete clinical trials, outcomes
of which are uncertain.

In order to
obtain FDA approval to market a new drug product, we must demonstrate proof of
safety and effectiveness in humans. To meet these requirements, we must conduct
extensive preclinical testing and adequate and well-controlled clinical
trials. Conducting clinical trials is a lengthy, time-consuming, and expensive
process. Completion of necessary clinical trials may take several years or
more. Delays associated with products for which we are directly conducting
preclinical or clinical trials may cause us to incur additional operating
expenses. The commencement and rate of completion of clinical trials may be
delayed by many factors, including, for example:

| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ineffectiveness
 of our product candidate or perceptions by physicians that the product
 candidate is not safe or effective for a particular indication;
| |   |                                                                                                                                                         
| |  | inability to
 manufacture sufficient quantities of the product candidate for use in
 clinical trials;                                                   
| |   |                                                                                                                                                         
| |  | delay or
 failure in obtaining approval of our clinical trial protocols from the FDA or
 institutional review boards;                                   
| |   |                                                                                                                                                         
| |  | slower than
 expected rate of patient recruitment and enrollment;                                                                                       
| |   |                                                                                                                                                         
| |  | inability to
 adequately follow and monitor patients after treatment;                                                                                   
| |   |                                                                                                                                                         
| |  | difficulty
 in managing multiple clinical sites;                                                                                                        
| |   |                                                                                                                                                         
| |  | unforeseen
 safety issues;                                                                                                                              
| |   |                                                                                                                                                         
| |  | government
 or regulatory delays; and                                                                                                                   
| |   |                                                                                                                                                         
| |  | clinical
 trial costs that are greater than we currently anticipate.                                                                                    

13

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Even if we
achieve positive interim results in clinical trials, these results do not
necessarily predict final results, and positive results in early trials may not
be indicative of success in later trials. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after achieving promising results in earlier trials. Negative or
inconclusive results or adverse medical events during a clinical trial could
cause us to repeat or terminate a clinical trial or require us to conduct
additional trials. We do not know whether our existing or any future clinical
trials will demonstrate safety and efficacy sufficiently to result in marketable
products. Our clinical trials may be suspended at any time for a variety of
reasons, including if the FDA or we believe the patients participating in our
trials are exposed to unacceptable health risks or if the FDA finds
deficiencies in the conduct of these trials.

Failures or
perceived failures in our clinical trials will directly delay our product
development and regulatory approval process, damage our business prospects,
make it difficult for us to establish collaboration and partnership relationships,
and negatively affect our reputation and competitive position in the
pharmaceutical community.

Because of
these risks, our research and development efforts may not result in any
commercially viable products. Any delay in, or termination of, our preclinical
or clinical trials will delay the filing of our drug applications with the FDA
and, ultimately, our ability to commercialize our product candidates and
generate product revenues. If a significant portion of these development
efforts are not successfully completed, required regulatory approvals are not
obtained, or any approved products are not commercially successful, our
business, financial condition, and results of operations may be materially
harmed.

If our collaboration
or licensing arrangements are unsuccessful, our revenues and product
development may be limited.

We have
entered into several collaborations and licensing arrangements for the
development of generic products. However, there can be no assurance that any of
these agreements will result in FDA approvals, or that we will be able to
market any such finished products at a profit. Collaboration and licensing
arrangements pose the following risks:


    collaborations
        and licensing arrangements may be terminated, in which case we will experience
        increased operating expenses and capital requirements if we elect to pursue
      further development of the related product candidate;
    collaborators
        and licensees may delay clinical trials and prolong clinical development,
        under-fund a clinical trial program, stop a clinical trial or abandon a
      product candidate;
    expected
        revenue might not be generated because milestones may not be achieved and
        product candidates may not be developed;
    collaborators
        and licensees could independently develop, or develop with third parties,
        products that could compete with our future products;
    the terms of
        our contracts with current or future collaborators and licensees may not be
        favorable to us in the future;
    a
        collaborator or licensee with marketing and distribution rights to one or
        more of our products may not commit enough resources to the marketing and
        distribution of our products, limiting our potential revenues from the
      commercialization of a product;
    disputes may
        arise delaying or terminating the research, development or commercialization
        of our product candidates, or result in significant and costly litigation or
      arbitration;
    one or more
        third-party developers could obtain approval for a similar product prior to
        the collaborator or licensee resulting in unforeseen price competition in
      connection with the development product; and
    Epic may
        decide that the further or continuing development of one or more of the eight
        designated drug products being developed by Epic at our Facility is no longer
        commercially feasible, delaying a potential source of revenue to us pursuant
        to the Epic Strategic Alliance Agreement; in addition, there can be no
        assurance that any drug product designated by the parties as a replacement
        would be as strong a candidate for commercial viability as the drug product
      that it replaced.


If we are unable to
protect our intellectual property rights or avoid claims that we infringed on
the intellectual property rights of others, our ability to conduct business may
be impaired.

14

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Our success
depends on our ability to protect our current and future products and to defend
our intellectual property rights. If we fail to protect our intellectual
property adequately, competitors may manufacture and market products similar to
ours.

We currently
hold five patents and we have three patents pending. We intend to file further
patent applications in the future. We cannot be certain that our pending patent
applications will result in the issuance of patents. If patents are issued,
third parties may sue us to challenge our patent protection, and although we
know of no reason why they should prevail, it is possible that they could. It
is likewise possible that our patent rights may not prevent or limit our present
and future competitors from developing, using or commercializing products that
are similar or functionally equivalent to our products.

In addition,
we may be required to obtain licenses to patents, or other proprietary rights
of third parties, in connection with the development and use of our products
and technologies as they relate to other persons technologies. At such time as
we discover a need to obtain any such license, we will need to establish
whether we will be able to obtain such a license on favorable terms, if at all.
The failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products.

We rely
particularly on trade secrets, unpatented proprietary expertise and continuing
innovation that we seek to protect, in part, by entering into confidentiality
agreements with licensees, suppliers, employees and consultants. We cannot
provide assurance that these agreements will not be breached or circumvented.
We also cannot be certain that there will be adequate remedies in the event of
a breach. Disputes may arise concerning the ownership of intellectual property
or the applicability of confidentiality agreements. We cannot be sure that our
trade secrets and proprietary technology will not otherwise become known or be
independently developed by our competitors or, if patents are not issued with
respect to products arising from research, that we will be able to maintain the
confidentiality of information relating to these products. In addition, efforts
to ensure our intellectual property rights can be costly, time-consuming and/or
ultimately unsuccessful.

Litigation is common
in our industry, particularly the generic pharmaceutical industry, and can be
protracted and expensive and could delay and/or prevent entry of our products
into the market, which, in turn, could have a material adverse effect on our
business.

Litigation
concerning patents and proprietary rights can be protracted and expensive.
Companies that produce brand pharmaceutical products routinely bring litigation
against applicants that seek FDA approval to manufacture and market generic
forms of their branded products. These companies allege patent infringement or
other violations of intellectual property rights as the basis for filing suit
against an applicant. Because the eight drug products being developed by Epic
at our Facility are generics, such drug products may be subject to such
litigation brought by companies that produce brand pharmaceutical products. If
Epic were to become subject to litigation in connection with any drug products
it is developing at our Facility under the Epic Strategic Alliance Agreement,
Epic may choose to, or be required to, decrease or cease its development and
commercialization of such product for an indefinite period of time, which may
prevent or delay the first commercial sale of such product and cause us to
receive reduced or no product fees payable to us by Epic based on the
commercial sales of such product in accordance with the Epic Strategic Alliance
Agreement.

Likewise,
other patent holders may bring patent infringement suits against us alleging
that our products, product candidates and technologies infringe upon
intellectual property rights. Litigation often involves significant expense and
can delay or prevent introduction or sale of our products.

There may also
be situations where we use our business judgment and decide to market and sell
products, notwithstanding the fact that allegations of patent infringement(s)
have not been finally resolved by the courts. The risk involved in doing so can
be substantial because the remedies available to the owner of a patent for
infringement include, among other things, damages measured by the profits lost
by the patent owner and not by the profits earned by the infringer. In the case
of a willful infringement, the definition of which is subjective, such damages
may be trebled. Moreover, because of the discount pricing typically involved
with bioequivalent products, patented brand products generally realize a
substantially higher profit margin than bioequivalent products. An adverse
decision in a case such as this or in other similar litigation could have a
material adverse effect on our business, financial position and results of
operations and could cause the market value of our Common Stock to decline.

15

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The pharmaceutical
industry is highly competitive and subject to rapid and significant
technological change, which could impair our ability to implement our business
model.

The
pharmaceutical industry is highly competitive, and we may be unable to compete
effectively. In addition, the pharmaceutical industry is undergoing rapid and
significant technological change, and we expect competition to intensify as
technical advances in each field are made and become more widely known. An
increasing number of pharmaceutical companies have been or are becoming
interested in the development and commercialization of products incorporating
advanced or novel drug delivery systems. We expect that competition in the
field of drug delivery will increase in the future as other specialized
research and development companies begin to concentrate on this aspect of the
business. Some of the major pharmaceutical companies have invested and are
continuing to invest significant resources in the development of their own drug
delivery systems and technologies and some have invested funds in specialized
drug delivery companies. Many of our competitors have longer operating
histories and greater financial, research and development, marketing and other
resources than we do. Such companies may develop new formulations and products,
or may improve existing ones, more efficiently than we can. Our success, if
any, will depend in part on our ability to keep pace with the changing technology
in the fields in which we operate.

As we expand
our presence in the generic pharmaceuticals market our product candidates may
face intense competition from brand-name companies that have taken aggressive
steps to thwart competition from generic companies. In particular, brand-name
companies continue to sell or license their products directly or through
licensing arrangements or strategic alliances with generic pharmaceutical
companies (so-called authorized generics). No significant regulatory approvals
are required for a brand-name company to sell directly or through a third party
to the generic market, and brand-name companies do not face any other
significant barriers to entry into such market. In addition, such companies
continually seek to delay generic introductions and to decrease the impact of
generic competition, using tactics which include:

| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtaining
 new patents on drugs whose original patent protection is about to expire;                                                                                                 
| |   |                                                                                                                                                                                      
| |  | filing
 patent applications that are more complex and costly to challenge;                                                                                                           
| |   |                                                                                                                                                                                      
| |  | filing suits
 for patent infringement that automatically delay approval of the FDA;                                                                                                  
| |   |                                                                                                                                                                                      
| |  | filing
 citizens petitions with the FDA contesting approval of the generic versions
 of products due to alleged health and safety issues;                                           
| |   |                                                                                                                                                                                      
| |  | developing
 controlled-release or other next-generation products, which often reduce
 demand for the generic version of the existing product for which we may be
 seeking approval;
| |   |                                                                                                                                                                                      
| |  | changing
 product claims and product labeling;                                                                                                                                       
| |   |                                                                                                                                                                                      
| |  | developing
 and marketing as over-the-counter products those branded products which are
 about to face generic competition; and                                                      
| |   |                                                                                                                                                                                      
| |  | making
 arrangements with managed care companies and insurers to reduce the economic
 incentives to purchase generic pharmaceuticals.                                                

These
strategies may increase the costs and risks associated with our efforts to
introduce our generic products under development and may delay or prevent such
introduction altogether.

If our product
candidates do not achieve market acceptance among physicians, patients, health
care payors and the medical community, they will not be commercially successful
and our business will be adversely affected.

The degree of
market acceptance of any of our approved product candidates among physicians,
patients, health care payors and the medical community will depend on a number
of factors, including:

| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | acceptable
 evidence of safety and efficacy;                        
| |   |                                                                     
| |  | relative
 convenience and ease of administration;                   
| |   |                                                                     
| |  | the
 prevalence and severity of any adverse side effects;           
| |   |                                                                     
| |  | availability
 of alternative treatments;                            
| |   |                                                                     
| |  | pricing and
 cost effectiveness;                                    
| |   |                                                                     
| |  | effectiveness
 of sales and marketing strategies; and               
| |   |                                                                     
| |  | ability to
 obtain sufficient third-party coverage or reimbursement.

16

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If we are
unable to achieve market acceptance for our product candidates, then such
product candidates will not be commercially successful and our business will be
adversely affected.

We are dependent on a
small number of suppliers for our raw materials and any delay or unavailability
of raw materials can materially adversely affect our ability to produce
products.

The FDA
requires identification of raw material suppliers in applications for approval
of drug products. If raw materials were unavailable from a specified supplier,
FDA approval of a new supplier could delay the manufacture of the drug
involved. In addition, some materials used in our products are currently
available from only one supplier or a limited number of suppliers.

Further, a
significant portion of our raw materials may be available only from foreign
sources. Foreign sources can be subject to the special risks of doing business
abroad, including:

| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | greater
 possibility for disruption due to transportation or communication problems;                                                                                                      
| |   |                                                                                                                                                                                           
| |  | the relative
 instability of some foreign governments and economies;                                                                                                                      
| |   |                                                                                                                                                                                           
| |  | interim
 price volatility based on labor unrest, materials or equipment shortages,
 export duties, restrictions on the transfer of funds, or fluctuations in
 currency exchange rates; and
| |   |                                                                                                                                                                                           
| |  | uncertainty
 regarding recourse to a dependable legal system for the enforcement of
 contracts and other rights.                                                                          

In addition,
recent changes in patent laws in certain foreign jurisdictions (primarily in
Europe) may make it increasingly difficult to obtain raw materials for research
and development prior to expiration of applicable United States or foreign
patents. Any delay or inability to obtain raw materials on a timely basis, or
any significant price increases that cannot be passed on to customers, can materially
adversely affect our ability to produce products. This can materially adversely
affect our business and operations.

Even after regulatory
approval, we will be subject to ongoing significant regulatory obligations and
oversight.

Even if
regulatory approval is obtained for a particular product candidate, the FDA and
foreign regulatory authorities may, nevertheless, impose significant
restrictions on the indicated uses or marketing of such products, or impose
ongoing requirements for post-approval studies. Following any regulatory
approval of our product candidates, we will be subject to continuing regulatory
obligations, such as safety reporting requirements, and additional
post-marketing obligations, including regulatory oversight of the promotion and
marketing of our products. If we become aware of previously unknown problems
with any of our product candidates here or overseas or our contract
manufacturers facilities, a regulatory agency may impose restrictions on our
products, our contract manufacturers or on us, including requiring us to
reformulate our products, conduct additional clinical trials, make changes in
the labeling of our products, implement changes to or obtain re-approvals of
our contract manufacturers facilities or withdraw the product from the market.
In addition, we may experience a significant drop in the sales of the affected
products, our reputation in the marketplace may suffer and we may become the
target of lawsuits, including class action suits. Moreover, if we fail to comply
with applicable regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution. Any of these events could harm
or prevent sales of the affected products or could substantially increase the
costs and expenses of commercializing and marketing these products.

If key personnel were
to leave us or if we are unsuccessful in attracting qualified personnel, our
ability to develop products could be materially harmed.

Our success
depends in large part on our ability to attract and retain highly qualified
scientific, technical and business personnel experienced in the development,
manufacture and marketing of oral, controlled-release drug delivery systems and
generic products. Our business and financial results could be materially harmed
by the inability to attract or retain qualified personnel.

17

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If we were sued on a
product liability claim, an award could exceed our insurance coverage and cost
us significantly.

The design,
development and manufacture of our products involve an inherent risk of product
liability claims. We have procured product liability insurance; however, a
successful claim against us in excess of the policy limits could be very
expensive to us, damaging our financial position. The amount of our insurance
coverage, which has been limited due to our limited financial resources, may be
materially below the coverage maintained by many of the other companies engaged
in similar activities. To the best of our knowledge, no product liability claim
has been made against us as of June 30, 2009.

Risks
Related to Our Common Stock

Future sales of our
Common Stock could lower the market price of our Common Stock.

Sales of
substantial amounts of our shares in the public market could harm the market
price of our Common Stock, even if our business is doing well. A significant
number of shares of our Common Stock are eligible for sale in the public market
under Rule 144, promulgated under the Securities Act of 1933, as amended (the Securities Act), subject in some
cases to
volume and other limitations. These sales, or the perception in the market that
the holders of a large number of shares intend to sell shares, could reduce the
market price of our Common Stock.

Our stock price has
been volatile and may fluctuate in the future.

The market
price for the publicly traded stock of pharmaceutical companies is generally
characterized by high volatility. There has been significant volatility in the
market prices for our Common Stock. For the twelve months ended March 31, 2009,
the closing sale price on the American Stock Exchange (AMEX) of our Common Stock fluctuated from
a high of $0.83 per share to a low of $0.03 per share. The price per share of
our Common Stock may not exceed or even remain at current levels in the future.
The market price of our Common Stock may be affected by a number of factors,
including:

| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | Results of
 our clinical trials;                                                                                                   
| |   |                                                                                                                                    
| |  | Approval or
 disapproval of our ANDAs or NDAs;                                                                                     
| |   |                                                                                                                                    
| |  | Announcements
 of innovations, new products or new patents by us or by our competitors;                                            
| |   |                                                                                                                                    
| |  | Governmental
 regulation;                                                                                                          
| |   |                                                                                                                                    
| |  | Patent or
 proprietary rights developments;                                                                                        
| |   |                                                                                                                                    
| |  | Proxy
 contests or litigation;                                                                                                     
| |   |                                                                                                                                    
| |  | News
 regarding the efficacy of, safety of or demand for drugs or drug
 technologies;                                              
| |   |                                                                                                                                    
| |  | Economic and
 market conditions, generally and related to the pharmaceutical industry;                                             
| |   |                                                                                                                                    
| |  | Healthcare
 legislation;                                                                                                           
| |   |                                                                                                                                    
| |  | Changes in
 third-party reimbursement policies for drugs;                                                                          
| |   |                                                                                                                                    
| |  | Fluctuations
 in our operating results;                                                                                            
| |   |                                                                                                                                    
| |  | Commercial
 success of the eight drug products of Epic identified under the Epic
 Strategic Alliance Agreement; and                
| |   |                                                                                                                                    
| |  | Our ability
 to consummate the second and third closings of the transactions contemplated
 by the Epic Strategic Alliance Agreement

The voluntary
delisting from the American Stock Exchange listing of our Common Stock in order
to commence quotation of our Common Stock on the OTC Bulletin Board could have
a material adverse affect on the market for our Common Stock and our market
price.

On May 21,
2009, we announced that our Common Stock would begin trading on the
over-the-counter markets, on the OTC Bulletin Board, under the symbol ELTP:US.
We believe that our commencement of the quotation of our Common Stock on the
OTC Bulletin Board, in accordance with the terms of the Epic Strategic Alliance
Agreement, is an important step in our continuing efforts to reduce costs.
However, our voluntary delisting from the American Stock Exchange listing of
the Common Stock in order to commence quotation the Common Stock on the OTC
Bulletin Board could have a material adverse affect on the market for our
Common Stock and our market price.

18

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The OTC
Bulletin Board market is a regulated quotation service that displays real-time
quotes, last-sale prices and volume information for over 3,000 companies. Our
move to the OTC Bulletin Board market does not affect our business operations
and will not change our SEC reporting requirements.

Raising of additional
funding through sales of our securities could cause existing holders of our
Common Stock to experience substantial dilution.

Any financing
that involves the further sale of our securities could cause existing holders
of our Common Stock to experience substantial dilution. On the other hand, if
we incurred debt, we would be subject to risks associated with indebtedness,
including the risk that interest rates might fluctuate and cash flow would be
insufficient to pay principal and interest on such indebtedness.

The issuance of
additional warrants and shares to Epic under the Epic Strategic Alliance
Agreement will cause existing holders of our Common Stock to experience
substantial dilution.

If Elite and
Epic consummate the second and third closings under the Epic Strategic Alliance
Agreement, Elite will issue to Epic an aggregate of 2,000 shares of Series E
Preferred Stock, convertible into an aggregate of 40,000,000 shares of Common
Stock, and warrants to purchase an additional 80,000,000 shares of Common Stock.
If Epic converts such shares of Series E Preferred Stock into shares of Common
Stock and exercises such warrants shares of Common Stock, the existing holders
of our Common Stock will experience substantial dilution.

In addition,
with respect to the products developed by Epic at the Facility under the Epic
Strategic Alliance Agreement, Elite may issue to Epic (a) warrants to purchase
up to an aggregate of 56,000,000 shares of its Common Stock upon the receipt by
Elite from Epic of written notices of Epics receipt of an acknowledgment from
the FDA that the FDA accepted for filing an ANDA for certain controlled-release
and immediate-release products developed by Epic at Elites facility and (b) up
to an aggregate of 40,000,000 additional shares of its Common Stock following
the receipt by Elite from Epic of written notices of Epics receipt from the
FDA of approval for certain controlled-release and immediate-release products
developed by Epic at the Facility. The existing holders of our Common
Stock will also experience substantial dilution upon the issuance of such
warrants and such additional shares of its Common Stock to Epic in accordance
with the Epic Strategic Alliance Agreement.

The issuance of
additional shares of our Common Stock or our preferred stock could make a
change of control more difficult to achieve.

The issuance
of additional shares of our Common Stock or the issuance of shares of an
additional series of preferred stock could be used to make a change of control
of us more difficult and expensive. Under certain circumstances, such shares
could be used to create impediments to, or frustrate persons seeking to cause,
a takeover or to gain control of us. Such shares could be sold to purchasers
who might side with our Board of Directors (the Board or Board of
Directors) in opposing a takeover bid that the Board of Directors
determines not to be in the best interests of our stockholders. It might also
have the effect of discouraging an attempt by another person or entity through
the acquisition of a substantial number of shares of our Common Stock to
acquire control of us with a view to consummating a merger, sale of all or part
of our assets, or a similar transaction, since the issuance of new shares could
be used to dilute the stock ownership of such person or entity.

19

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If penny stock
regulations become applicable to our Common Stock they will impose restrictions
on the marketability of our Common Stock and the ability of our stockholders to
sell shares of our stock could be impaired.

The SEC has
adopted regulations that generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share subject to certain exceptions. Exceptions
include equity securities issued by an issuer that has (i) net tangible assets
of at least $2,000,000, if such issuer has been in continuous operation for
more than three years, (ii) net tangible assets of at least $5,000,000, if such
issuer has been in continuous operation for less than three years, or (iii)
average revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require that prior to any transaction
involving a penny stock, a risk of disclosure schedule must be delivered to the
buyer explaining the penny stock market and its risks. Our Common Stock is
currently trading at under $5.00 per share. Although we currently fall under
one of the exceptions, if at a later time we fail to meet one of the
exceptions, our Common Stock will be considered a penny stock. As such, the
market liquidity for our Common Stock will be limited to the ability of
broker-dealers to sell it in compliance with the above-mentioned disclosure
requirements.

You should be
aware that, according to the SEC, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include:

| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Control of
 the market for the security by one or a few broker-dealers;                                                                                                  
| |   |                                                                                                                                                                          
| |  | Boiler
 room practices involving high-pressure sales tactics;                                                                                                          
| |   |                                                                                                                                                                          
| |  | Manipulation
 of prices through prearranged matching of purchases and sales;                                                                                             
| |   |                                                                                                                                                                          
| |  | The release
 of misleading information;                                                                                                                                  
| |   |                                                                                                                                                                          
| |  | Excessive
 and undisclosed bid-ask differentials and markups by selling broker-dealers;
 and                                                                             
| |   |                                                                                                                                                                          
| |  | Dumping of
 securities by broker-dealers after prices have been manipulated to a desired
 level, which hurts the price of the stock and causes investors to suffer
 loss.

We are aware
of the abuses that have occurred in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, we will strive within the confines of practical
limitations to prevent such abuses with respect to our Common Stock.

Epic will have the
ability to exert substantial influence over Elite.

Under the Epic
Strategic Alliance Agreement, Elite agreed that it and its Board of Directors
will take any and all action necessary so that (i) the size of the Board of
Directors will be set and remain at seven directors, (ii) three individuals
designated by Epic (the Epic Directors)
will be appointed to the Board of Directors and (iii) the Epic Directors will
be nominated at each annual or special meeting of stockholders at which an
election of directors is held or pursuant to any written consent of the
stockholders; provided, however, that if at any time following the initial
closing of the Epic Strategic Alliance Agreement and ending on the later of (a)
the date immediately following the first anniversary of the Initial Closing
Date and (b) the Third Closing Date, the Purchaser owns less than (1) a number
of shares of Series E Preferred Stock equal to ninety percent of the aggregate
number of shares of Series E Preferred Stock purchased by the Purchaser at all
of the then applicable Closings or (2) following the conversion by the
Purchaser of the Series E Preferred Stock, a number of shares of Common Stock
equal to ninety percent of the number of shares of Common Stock so converted,
neither Elite nor its Board of Directors will be obligated to nominate Epic
Directors or take any other action with respect to those actions described in
(i), (ii) and/or (iii) above. No Epic Director may be removed from office for
cause unless such removal is directed or approved by (A) a majority of the
independent members of the Board of Directors and (B) all of the non-affected
Epic Director(s). Any vacancies created by the resignation, removal or death of
an Epic Director will be filled by the appointment of an additional Epic
Director. Any Epic Director may be removed from office upon the request of the
Purchaser, with or without cause. Epic, by virtue of having the right to
designate the three Epic Directors, will have the ability to exert substantial
influence over the election of the other members of Elites Board of Directors,
the outcome of issues submitted to our stockholders for approval and the
management and affairs of Elite.

20

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In addition,
the Series E Certificate provides that on any matter presented to the
holders of our Common Stock for their action or consideration at any meeting of
our stockholders (or by written consent of stockholders in lieu of meeting),
Epic, as a holder of Series E Preferred Stock, will be entitled to cast the
number of votes equal to the number of shares of Common Stock into which the
shares of Series E Preferred Stock held by Epic are convertible as of the
record date for determining the stockholders entitled to vote on such matter.
Except as provided by law or by the other provisions of the Series E
Certificate, Epic will vote together with the holders of Common Stock, as a
single class. In addition, pursuant to the Epic Strategic Alliance Agreement
and the Series E Certificate, Elite has agreed that, between the date of the
initial closing under the Epic Strategic Alliance Agreement and the date which
is the earlier of (x) the date the Epic Directors constitute a majority of the
Board of Directors and (y) ninety days following the fifth anniversary of the
Initial Closing Date, except as Epic otherwise agrees in writing, Elite may
conduct its operations only in the ordinary and usual course of business
consistent with past practice. Further, pursuant to the Epic Strategic Alliance
Agreement and the Series E Certificate, Elite must obtain the prior written
consent of Epic in order to take the actions specifically enumerated therein.
Accordingly, such concentration of ownership Epic will have the ability to
exert further influence over Elite and may have the effect of preventing a
change of control of Elite.

In
addition, with respect to the products developed by Epic at our Facility under
the Epic Strategic Alliance Agreement, Elite may issue to Epic (a) warrants to
purchase up to an aggregate of 56,000,000 shares of its Common Stock upon the
receipt by Elite from Epic of written notices of Epics receipt of an
acknowledgment from the FDA that the FDA accepted for filing an ANDA for
certain controlled-release and immediate-release products developed by Epic at
the Facility and (b) up to an aggregate of 40,000,000 additional shares of its
Common Stock following the receipt by Elite from Epic of written notices of
Epics receipt from the FDA of approval for certain controlled-release and
immediate-release products developed by Epic at the Facility. If Elite is
required to issue such warrants and such additional shares of its Common Stock
to Epic in accordance with the Epic Strategic Alliance Agreement, Epic may
beneficially own in excess of 50% of the issued and outstanding Common Stock or
other voting securities of Elite. Under the Epic Strategic Alliance Agreement,
at such time as Epic owns more than 50% of the issued and outstanding Common
Stock or other voting securities of Elite, the number of Epic Directors that
the Purchaser will be entitled to designate under the Alliance Agreement will
be equal to a majority of the Board of Directors.

Holders of our
preferred stock may exercise their veto rights to make it more difficult for us
to take an action or consummate a transaction that may be deemed by the Board
to be in our best interest or the best interest of the other stockholders.

The holders of
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
have certain veto rights that may be exercised to prevent us from taking an
action or consummating a transaction that may be deemed by the Board to be in
our best interest and the best interest of the holders of our Common Stock if
the holders of our preferred stock believe such action or transaction would be
adverse to their own interests. If the holders of our preferred stock exercise
their veto rights to prevent us from taking any such action or consummating any
such transaction, our ability to achieve our strategic objectives may be
hindered. The ability of holders of our preferred stock to affect our actions
through use of their veto rights might limit the price that certain investors
would be willing to pay in the future for shares of our Common Stock.

In addition,
pursuant to the Epic Strategic Alliance Agreement and the Series E Certificate,
Elite has agreed that, between the date of the initial closing under the Epic
Strategic Alliance Agreement and the date which is the earlier of (x) the date
the Epic Directors constitute a majority of the Board of Directors and (y) ninety
days following the fifth anniversary of the Initial Closing Date, except as
Epic otherwise agrees in writing, Elite may conduct its operations only in the
ordinary and usual course of business consistent with past practice. Further,
pursuant to the Epic Strategic Alliance Agreement and the Series E Certificate,
Elite must obtain the prior written consent of Epic in order to take the
certain actions specifically enumerated therein. Notwithstanding the foregoing,
if at any time after Epic has acquired 25% or more of the shares of the
capital stock of Elite, on an as-converted basis, pursuant to the terms of
Alliance Agreement or the Warrants, the Epics ownership percentage of the
shares of capital stock of Elite falls below 20% of the shares of the capital
stock of Elite, on an as-converted basis, as a result of transfers made by
Epic, then the prior written consent of Epic will not be required prior to
the consummation of such actions under the Epic Strategic Alliance Agreement.

21

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Pursuant to
the Alliance Agreement, subject to the satisfaction of certain conditions
precedent contained therein, the Purchaser will not, without the prior written
consent of Elite, transfer any Common Stock acquired by it upon conversion of
the Series E Preferred Stock or otherwise acquired or purchased under the
Alliance Agreement or the other transaction documents for a period commencing
on the Initial Closing Date and ending on the later of (a) the date immediately
following the first anniversary of the Initial Closing Date and (b) the Third
Closing Date (such period, the Lock-Up
Period).

Section 203 of the
Delaware General Corporation Law may deter a third party from acquiring us.

Section 203 of
the Delaware General Corporation Law prohibits a merger with a 15% shareholder
within three years of the date such shareholder acquired 15%, unless the merger
meets one of several exceptions. The exceptions include, for example, approval
by the holders of two-thirds of the outstanding shares (not counting the 15%
shareholder), or approval by the Board of Directors prior to the 15%
shareholder acquiring its 15% ownership. This provision makes it difficult for
a potential acquirer to force a merger with or takeover of us, and could thus
limit the price that certain investors might be willing to pay in the future
for shares of our Common Stock.

ITEM 2.
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


On June 3,
2009, Elite issued and sold to one accredited investor, in a private placement
pursuant to an exemption from registration under Section 4(2) of the Securities
Act, 1,000 shares of its Series E Convertible Preferred Stock, par value $0.01
per share (the Series E Preferred Stock), at a price of $1,000 per share,
each share convertible, at $0.05 per share (the Conversion Price), into
20,000 shares of Common Stock, par value $0.01 per share. In addition, on June
3, 2009 Elite issued a warrant to the same investor for the purchase 20,000,000
shares of Common Stock (the Initial Warrant), exercisable on or
prior to June 3, 2016, at a per share exercise price of $0.0625 (the Exercise
Price), subject to adjustments for certain events, including, but
not limited to, dividends, stock splits, combinations and the like. For
additional details concerning these securities, please refer the paragraph
entitled Infusion
of Additional Capital Necessary for Product Development inPart I,
Item 2 above.

In July 2009,
we issued 4,236,856 shares of our common stock to the holders of our Series B,
C and D Preferred Stock. These shares were issued pursuant to an exemption from
registration under Regulation D. The shares were issued in satisfaction of the
Companys obligation to pay $299,460 in dividends earned and accrued during the
quarter ended June 30, 2009. The Company did not receive any proceeds in
exchange for the issuance of these securities.

The Registrant
expects to also pay the dividends to the holders of the Companys Series C
Preferred Stock relating to the quarters ended December 31, 2008 and March 31,
2009 by means of the issuance of common shares and is in the process of
executing the necessary waivers to do so. The Registrant expects to have such
required waivers executed subsequent to the filing of this Report.

|        |                                
|------- | -------------------------------
|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

None.

|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

|        |                  
|------- | -----------------
|ITEM 5. | OTHER INFORMATION

None.

22

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|        |         
|------- | --------
|ITEM 6. | EXHIBITS

The exhibits
listed in the index below are filed as part of this report.

|        |            
|------- | -----------
|Exhibit |            
|Number  | Description
|        |            

|     |                                                                                                                                                                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | Amendment to
 Strategic Alliance Agreement, dated as of April 20, 2009, by and among the
 Registrant, Epic Pharma, LLC and Epic Investments, LLC, incorporated by
 reference to Exhibit 10.1 to the Current Report on Form 8-K, dated April 30,
 2009 and filed with the SEC on May 6, 2009    
|     |                                                                                                                                                                                                                                                                                                
|10.2 | Second
 Amendment to Strategic Alliance Agreement, dated as of June 1, 2009, by and
 among the Registrant, Epic Pharma LLC and Epic Investments, LLC, incorporated
 by reference to Exhibit 10.1 to the Current Report on Form 8-K, dated June 1,
 2009 and filed with the SEC on June 5, 2009.
|     |                                                                                                                                                                                                                                                                                                
|10.3 | Third
 Amendment to Strategic Alliance Agreement, dated as of Aug 18, 2009, by and
 among the Registrant, Epic Pharma LLC and Epic Investments, LLC.                                                                                                                                           
|     |                                                                                                                                                                                                                                                                                                
|31.1 | Certification
 of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                
|31.2 | Certification
 of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                
|32.1 | Certification
 of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                
|32.2 | Certification
 by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.                                                                                                                                                                                          

23

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|      |                 |                                                            
|----- | --------------- | -----------------------------------------------------------
|      |                 | ELITE PHARMACEUTICALS,
 INC.                               
|      |                 |                                                            
|Date: | August 19, 2009 | /s/ Chris Dick                                             
|      |                 |                                                            
|      |                 | Chris Dick                                                 
|      |                 | Chief
 Operating Officer and Acting Chief Executive Officer
|      |                 | (Principal Executive
 Officer)                             
|      |                 |                                                            
|Date: | August 19, 2009 | /s/ Carter J. Ward                                         
|      |                 |                                                            
|      |                 | Carter J. Ward                                             
|      |                 | Chief Financial Officer                                    
|      |                 | (Principal Financial and
 Accounting Officer)              

24

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