UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





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




For
      the fiscal year ended December 31,
2008




 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the transition period from 
      to .


Commission
file number 001-31982


SCOLR
Pharma, Inc.


(Exact name of
registrant as specified in its charter)


Delaware
              (State
      or other jurisdiction
              of
      incorporation or organization)
            91-1689591
              (IRS
      Employer Identification No.)19204
      North Creek Parkway, Suite 100
              Bothell,
      WA
              (Address
      of principal executive offices)
            98011
              (Zip
      Code)


Registrant’s
telephone number, including area code: (425) 368-1050


Securities
      registered under Section 12(b) of the
              Exchange
      Act:
              Common
      Stock, $0.001 par value per share
              (Title
      of each class)
            Name
      of each exchange on which registered:
              NYSE Alternext US Exchange


Securities
registered under Section 12(g) of the Exchange Act:


Series
A Junior Participating Preferred Share Purchase Rights




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x




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   ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.     ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).    Large
accelerated filer   ̈    Accelerated
filer   ̈    Non-accelerated
filer   ̈Smaller 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   ̈    No  x




The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant as of June 30, 2008, was approximately $39.1 million,
based upon the closing sale price on the NYSE Alternext US reported for such
date. The number of shares outstanding of the registrant’s common stock was
41,098,270 as of March 6, 2009.






1
 Table of Contents




DOCUMENTS
INCORPORATED BY REFERENCE




Certain
information required by Item 5 of this report and the information required by
Part III of this annual report, to the extent not set forth herein, is
incorporated herein by reference from the registrant’s definitive proxy
statement relating to the registrant’s 2009 annual meeting of
stockholders.


2
 Table of Contents





SCOLR
Pharma, Inc.


FORM
10-K




TABLE OF CONTENTS




PagePART
      IItem 1.
                Business
                4Item 1A.
                Risk Factors
                13Item 1B.
                Unresolved Staff Comments
                20Item 2.
                Properties
                20Item 3.
                Legal Proceedings
                21Item 4.
                Submission of Matters to a Vote of Security
      Holders
                21PART
      IIItem 5.
                Market for the Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                22Item 7.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                22Item 8.
                Financial Statements and Supplementary
    Data
                27Item
      9.
                Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
                44Item
      9A.
                Controls and Procedures
                44PART
      IIIItem
      10.
                Directors and Executive Officers of the
      Registrant
                46Item
      11.
                Executive Compensation
                46Item
      12.
                Security Ownership of Certain Beneficial Owners and
      Management
                46Item
      13.
                Certain Relationships and Related
      Transactions
                46Item
      14.
                Principal Accountant Fees and Services
                46PART
      IVItem
      15.
                Exhibits and Financial Statement
    Schedules
                47




3
 Table of Contents




PART
I




In this
document, the words “we,” “our,” “ours,” and “us” refer only to SCOLR Pharma,
Inc. and not to any other person or entity.




Item 1.
            Business




This
report includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
“anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” and similar
expressions identify certain of such forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
plans, intentions or expectations will be achieved. Actual results, performance
or achievements could differ materially from historical results or those
contemplated, expressed or implied by the forward-looking statements contained
in this annual report. Important factors that could cause actual results to
differ materially from our forward-looking statements are set forth in this
annual report, including Item 1A, as well as those discussed elsewhere in
this annual report and others detailed from time-to-time in our periodic reports
filed with the SEC. Except as required by law, we undertake no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.




Overview




We are a
specialty pharmaceutical company that combines formulation experience and
knowledge with our proprietary and patented Controlled Delivery Technology
(CDT®) platforms to develop novel prescription, over-the-counter (OTC), and
nutritional products. Our CDT platforms are based on multiple issued and pending
patents and other intellectual property for custom designed controlled release
and/or enhanced performance of active pharmaceutical ingredients and nutritional
products.




Our
innovative drug delivery technologies enable us to customize the formulations of
tablets or capsules in order to release their active ingredients predictably
over a specified timeframe of up to 24 hours. Our platforms are designed to
offer a cost effective means to reduce the frequency of drug administration,
improve the effectiveness of the drug treatment, ensure greater patient
compliance with a treatment program, reduce side effects, and/or increase drug
safety. In addition, our technology can be incorporated into oral formulations
to increase the solubility characteristics of previously non-soluble and
sparingly-soluble drugs without employing costly or complex nano-crystalization,
micro-milling or coated particle technologies.




We have
developed multiple private label controlled release nutritional products
incorporating our CDT platforms that are sold by national retailers. In October
2005, we entered into a strategic alliance with a subsidiary of Perrigo Company
for the manufacture, marketing, distribution, sale and use of certain dietary
supplement products in the United States. We receive royalty payments based on a
percentage of Perrigo’s net profits derived from the sales of products covered
by our agreement.




Our lead
product candidate is a CDT-based controlled release formulation of ibuprofen, an
analgesic typically used for the treatment of pain, fever and inflammation. We
successfully completed our pivotal phase III trial to evaluate the safety and
efficacy of our 12 hour CDT 600mg controlled release ibuprofen for the OTC
market. There are currently no controlled release formulations of ibuprofen
approved for use in North America. In addition, we submitted our first
Abbreviated New Drug Application, or ANDA, for our 12-hour pseudoephedrine
product on August 5, 2008. In January 2009, the U.S. Food and Drug
Administration, or FDA, issued a Complete Response Letter which requested
additional information in the area of Chemical, Manufacturing and Controls, all
of which was identified by the FDA as “minor.” Pseudoephedrine is a decongestant
that is widely used to relieve sinus pressure related to allergies and the
common cold. We have also conducted preliminary development of CDT-based
controlled release formulations of ondansetron, rivastigmine, and risperidone,
as well as an immediate release formulation of raloxifene. Potential
formulations of ondansetron and raloxifene have been tested in clinical trials.
Ondansetron is the active ingredient drug in Zofran®, GlaxoSmithKline’s product
for anti-nausea and vomiting associated with chemotherapy and radiation
treatments for cancer. Raloxifene is the active ingredient in Evista®, Eli
Lilly’s product for osteoporosis which uses a different solubilization
technology. Rivastigmine is the active ingredient in Exelon®, the Novartis drug
for management of Alzheimer’s disease. Risperidone is the active ingredient in
Risperdal®, Janssen, L.P.’s product for the management of schizophrenia and
bipolar mania.




We
entered into a collaboration and license agreement with Dr. Reddy’s
Laboratories to pursue development and commercialization of an undisclosed oral
prescription drug with significant potential for the cardiopulmonary market
using our CDT technology. We are developing other products that we have not
disclosed for competitive reasons, and we are evaluating additional drugs as
potential development candidates for expanding our portfolio of CDT
applications.




4
 Table of Contents




We were
incorporated on October 12, 1994, in Delaware under the name Caddy Systems,
Inc. From April 1995 to July 2002, we operated under the name Nutraceutix, Inc.
In July 2002, we changed our name to SCOLR, Inc. and to SCOLR Pharma, Inc. in
July 2004. SCOLR is an acronym for “Self-Correcting Oral Linear Release,” an
important feature of our lead technology.




Our
principal executive offices are located at 19204 North Creek Parkway, Suite 100,
Bothell, Washington 98011. Our general telephone number is
(425) 368-1052. Our website is www.scolr.com.
Information contained on our website is not part of, and is not incorporated
into, this annual report. Our filings with the SEC are available without charge
on our website.




Corporate
Strategy




Our
strategy is to develop prescription, OTC, and nutraceutical products utilizing
our innovative oral drug delivery technologies. Our technologies enable us to
develop custom formulations of tablets or capsules that release their active
ingredients predictably over a specified timeframe of up to 24 hours. We believe
that our technologies are capable of significantly improving the delivery of
many prescription, OTC, and nutraceutical products.




We seek
collaborative arrangements and alliances with corporate partners, licensors, and
licensees to provide funding for the research, development, clinical testing,
manufacturing, marketing, and commercialization of our product candidates.
Controlled release drug delivery technologies such as our CDT platforms can be
applied to reformulate existing drugs and extend the patent protection, thereby
improving product release profiles and enhancing important revenue streams for
pharmaceutical companies. Many pharmaceutical and specialty pharmaceutical
companies have also successfully utilized controlled release technologies to
develop product line extensions.




We expect
to seek collaborations in order to advance the manufacturing, selling, and
marketing of our potential products. However, based on an evaluation of each
product opportunity and available funding, we may consider establishing limited
manufacturing or sales and marketing capabilities to better maintain control
over product development timelines and to capture more of their economic value
of the opportunity. We do not currently have commercialization or manufacturing
capabilities.




We spent
$6.3 million on product research and development in 2008 and $7.8 million in
2007.




Commercial
Relationships




An
important part of our strategy is to seek collaborations and strategic
partnerships to develop or market some of our products. We have entered into
collaborations and currently plan to enter into additional collaborations with
established third parties to manufacture and commercialize our existing and
potential products. We are engaged in discussions with pharmaceutical companies
regarding development of products incorporating our CDT platforms and other
types of marketing, manufacturing, or distribution opportunities. Following is a
summary of our recent collaborations.




Dr. Reddy’s Laboratories.On
October 18, 2007, we entered into a collaboration and license agreement with Dr.
Reddy’s Laboratories, an emerging global pharmaceutical company, to pursue the
development and commercialization of an undisclosed oral prescription drug
product. We have completed initial formulation work and product scale-up
activities for pilot clinical trials. Under the terms of the agreement, Dr.
Reddy’s is responsible for the development, manufacturing and marketing of the
drug product. The agreement provides us with significant participation in net
profits of the potential product after recovery of development and
commercialization expenses.




Perrigo Company.On October
20, 2005, we entered into a strategic alliance with a subsidiary of Perrigo
Company. Perrigo is a leading global healthcare supplier and one of the world’s
largest manufacturers of OTC pharmaceutical and nutritional products for the
store brand and contract manufacturing markets. Under the agreement, we granted
a license to our CDT technology to Perrigo for the manufacture, marketing,
distribution, and sale of specific dietary supplements in the United States. In
addition, Perrigo may request that we develop additional dietary supplement
products that use our technologies to be added to the agreement. Subject to
certain exceptions described in the agreement, the license we granted to Perrigo
is exclusive. We receive royalty payments based on Perrigo’s net profits derived
from the sales of products subject to the agreement. The first product shipments
by Perrigo began in the first quarter of 2006. Perrigo introduced three
additional once-daily CDT-based private label products during the fourth quarter
of 2006, and a fifth product was added late in 2007.




Wyeth Consumer Healthcare. In
December 2005, we entered a licensing agreement with Wyeth Consumer Healthcare,
a division of Wyeth, granting exclusive worldwide rights to use our CDT
platforms for the development, manufacture and commercialization of products
containing ibuprofen. On March 14, 2007, we received a notice of termination
from Wyeth that our agreement would be terminated (without cause) effective
April 16, 2007. Since




5
 
  December
2005 through the termination of the contract, we received more than $2.1 million
in milestone and other payments from Wyeth.




BioCryst. On
September 5, 2006, we entered into a research collaboration with BioCryst
Pharmaceuticals to develop an oral formulation of peramivir, using our CDT
platforms. Peramivir is a novel therapeutic being developed by BioCryst for
treatment of seasonal and life threatening influenza with a focus on intravenous
and intramuscular delivery. The goal of the collaboration is to develop a tablet
or capsule formulation for the oral administration of peramivir that improves
its oral bioavailability. While this alliance has not proceeded to the next
stage, we made significant progress in developing technology which offers the
potential to create oral formulations for similar antiviral compounds and other
injectable drugs.




Nutraceutix. We completed the
sale of our probiotics development and manufacturing activities to Nutraceutix,
Inc. as of December 31, 2003. In connection with the sale, we granted
Nutraceutix the right to manufacture and sell certain products utilizing our CDT
technologies. Subject to the rights of Nutraceutix to continue sales of certain
inventories for up to one year, the license terminated on December 31,
2007.




Our
CDT Platforms




We
believe that our proprietary CDT platforms have the potential to significantly
improve a large number of oral prescription, OTC, and nutritional
products.  Our proprietary CDT technologies can be used in solid oral
dosage formulations to yield tablets or capsules that release their active
agents in a custom designed, controlled manner over a specified timeframe of up
to 24 hours.




Oral
administration is the preferred route for drug delivery due to its convenience
and widely accepted use. However, many orally-administered, immediate release
drug products are rapidly utilized by the body, thereby requiring more frequent
administration throughout the day. Consequently, patient non-compliance can be a
significant problem for many of these products. Our oral controlled release
technologies can eliminate the need for multiple daily dosing by extending the
release of the active drug component so that the product maintains its
therapeutic usefulness over a longer period of time. In addition, lowering the
peak levels of certain drugs in the blood by extending their release profile may
reduce the adverse effects associated with peak levels of these
drugs.




Our CDT
platforms provide a robust, simple and cost effective approach to drug
tablet and capsule formulation that employ a simplified manufacturing processes
using conventional granulation, blending, and compression equipment in a two or
three-step process. Our controlled release tablet and capsule formulations
contain readily available and generally-regarded-as-safe (GRAS) excipients
(i.e., non-drug ingredients such as hydrophilic polymers, amino acids, or
electrolytes). These excipients are used to modulate the release rate of the
drug to provide delivery profiles, including controlled release with improved
linearity or zero-order kinetics, first order kinetics, delayed release and/or
bimodal release.




Our CDT
technologies can accommodate comparatively high volumes of an active ingredient
while being adaptable to deliver these active ingredients over a wide range of
release profiles and timeframes. We believe that our CDT-based tablet and
capsule formulations are capable of generating the controlled release profiles
required for reproducible, cost-effective, and optimized in-vivo delivery of drugs for
up to 24 hours.




In
addition, our proprietary amino-acid technologies can be incorporated into solid
oral formulations to increase the solubility characteristics of previously
non-soluble or sparingly-soluble compounds. Our amino acid technologies are
designed to allow the successful manufacture of these drugs without employing
costly micro-milling, nano-particulate, coated-particle, or other complex
solubility enhancing technologies.




Our CDT
platforms are based on multiple issued and pending patents and other
intellectual property for the programmed release or enhanced performance of
active pharmaceutical ingredients and nutritional products. In aggregate, our
amino acid, salt-based, and dual polymer technologies offer a range of
formulation alternatives capable of addressing some of the most challenging
hurdles in oral drug delivery, including zero order kinetics, poorly soluble
active ingredients, and ingredients that are difficult to tablet. We have also
done preliminary work on formulations that could provide enhanced
bioavailability for selected drug targets. Our issued patents are summarized
below.




•      
      Dual Polymer
      Patent—(U.S. Patent No. 6,337,091 issued 2002 and expiring in
      2017). This first generation of our technology is based on hydrophilic
      matrices which allow for the controlled diffusion of active ingredients
      from the matrix through progressive swelling and erosion of the tablets.
      The resulting CDT tablets or capsules employ combinations of conventional
      tableting materials selected specifically for the active ingredient(s) and
      the desired release profile. Various release patterns and rates can be
      achieved depending upon the matrix composition, the selection and ratio of
      polymers, ionic substrates, and
excipients.










6
 Table of Contents


•      
      Salt Patent—(U.S.
      Patent No. 6,090,411 issued July 18, 2000 and expiring in 2018).
      This technology provides for the controlled and programmable release of
      the active pharmaceutical ingredient (API) with zero-order kinetics
      through dry blending and direct compression of a salt, a polymer, and the
      API. We believe that this salt-based technology




1)
our technology employs a comparatively simple, two-step manufacturing process
(involving no granulation), and the dry blending of a selected salt and polymer
to create a dry matrix;




2)
our salt patent platform is broadly applicable to dietary supplements, OTC
products and prescription pharmaceuticals, and yields extremely rugged
tablets;




3)
the in-vitro
dissolution results of these tablets are not affected by drug solubility, pH,
tablet size or configuration, tablet hardness, or friability; and,




4)
our technology uses GRAS excipients manufactured with standard pharmaceutical
processing equipment thereby enabling cost-effective production.




•      
      Amino Acid
      Patents—(U.S. Patent No. 6,517,868 issued February 11,
      2003, U.S. Patent No. 6,936,275 issued August 30, 2005, and U.S.
      Patent 7,229,642 issued June 12, 2007). These technologies employ a
      controlled release matrix system based on the application of amino acids,
      gums and polymers which may improve drug solubility within the dosage form
      via hydrophobic/polar interaction. Our amino acid technologies are
      designed to offer simpler solutions to certain difficult formulation
      challenges. For example, our amino acid technologies are designed to
      successfully deliver poorly soluble drugs that are complex to formulate
      and difficult to manufacture using standard techniques and processes. The
      first of our amino acid patents will begin to expire in
    2019.




Product
Development




Our
proprietary drug delivery technologies are applicable to a wide range of drugs
with different physical and chemical properties, including water soluble and
insoluble drugs, as well as high dose and low dose drugs. Using our CDT
platforms, we can formulate drugs with precise release profiles. In selecting
product candidates for development, we generally focus on the applicability of
our platforms to a particular compound and benefits to patients, as well as
market size, patent protection, competition and other factors.




Our CDT
technologies have been used to develop several dietary supplement products that
are currently manufactured and distributed by third parties. We currently
receive royalties and other payments from the sale of products that incorporate
our CDT technology, including combinations of glucosamine and chondroitin,
calcium and other dietary products. These sales are being generated through our
alliance with Perrigo, including relationships with national retailers. Our CDT
glucosamine and chondroitin and calcium products are currently available
nationwide.




We have
also applied our CDT platforms to a portfolio of more than 20 pharmaceutical
targets on a developmental demonstration basis. These target candidates include
existing analgesic, cardiovascular, diabetes, anti-nausea, and pulmonary
products. We have an internal development program targeting a select group of
significant, existing drugs for reformulation in an effort to demonstrate the
applicability and viability of our CDT platforms and for licensing to potential
partners. We have engaged in development of CDT-based controlled release
formulation of a number of products, including ibuprofen, pseudoephedrine,
ondansetron, rivastigmine, and risperidone, as well as an immediate release
formulations of raloxifene. We are currently evaluating additional drugs as
potential CDT development candidates for expanding our growing portfolio of CDT
applications. Although we are proceeding with development of our lead products,
controlled release ibuprofen and pseudoephedrine, we are
deferring significant expenditures on new projects as pending additional
financing or partnership support.





The
following tables summarize information regarding our current primary target
candidates, clinical experience with other targets, and formulation work with
other drugs and dietary supplements. These tables are qualified in their
entirety by reference to the more detailed descriptions contained elsewhere in
this annual report.




7
 Table of Contents




Current
Development Targets


Product
            Application
            Potential
      Advantages
            Current
      Global Market Estimate(1)
            Comments12
      hr Ibuprofen
            OTC
      Analgesic
            -
      1st controlled release OTC ibuprofen
              - 1
      tablet vs. 3 every 12 hrs.
              -
      Lower cost
              -
      Patent protected
            >$1
      billion (Includes all ibuprofen-containing products)
            Successful
      Pivotal Phase III completed
              Actual
      Use Study required prior to FDA submission
              NDA
      505(B)2 planned 201012
      hr Pseudoephedrine
            OTC
      Decongestant
            -
      1/3rd size of current OTC products
              -
      Lower cost
              -
      Patent protected
            >$250 million
      (Includes all pseudoephedrine-containing products)
            ANDA
      submitted August 2008
              Complete
      Response Letter received January 2009 with minor (CMC) deficiencies
      notedDRL
      Collaboration: Undisclosed CDT-based Rx target
            Cardiopulmonary
            -
      Lower cost
              -
      Patent protected
              -
      Other non-disclosed
            Undisclosed
            Confidential





(1)
              Includes
      branded and generic products. Market data sources – Credit Suisse, IMS,
      Biopharm Insight, Verispan/VONA, IRI, SCOLR
  estimates.





Following
are additional targets with completed clinical work pending additional financing
or partnerships.





Clinical
Experience





Product
            Application
            CommentsIR
      Raloxifene
            Rx
      Osteoporosis
            Two
      pilot pharmacokinetic trials completedER
      Ondansetron
            Rx
      Anti-Nausea
            Two
      pilot pharmacokinetic trials completedER
      Phenylephrine
            OTC
      Decongestant
            Initial
      pilot pharmacokinetic trial completedER
      Niacin
            Cardiovascular
            In-vivo performance
      comparable to Niaspan®





Niaspan®
is a trademark of Abbott Laboratories.





Formulation
Experience





Product
            Application
            FeaturesFenofibrate
      (Tricor®)
            Hypercholesterolemia,
      Hypertriglyceridemia
            Novel
      immediate release tablet
              Novel
      solid dispersion formulationGabapentin
      (Lyrica®)
            Pain
      Management
            Novel
      12 hour controlled release tabletsTramadol
      (Ultram®)
            Pain
      Management
            Novel
      12 and 24 hour controlled release tabletsPropranolol
      (Inderal LA®)
            Beta-Blocker
            Comparable
      to reference listed drugMetoprolol
      (Toprol XL®)
            Beta-Blocker
            Comparable
      to reference listed drugDiltiazem
      HCl (Dilacor®)
            Ca
      channel Blocker
            Comparable
      to reference listed drugNifedipine
      (Procardia®)
            Ca
      channel Blocker
            Comparable
      to reference listed drugVerapamil
      (Covera-HS®)
            Ca
      channel Blocker
            Comparable
      to reference listed drugRivastigmine
      (Exelon®)
            Alzheimer’s
      Disease
            Novel
      24 hour controlled release tabletsRisperidone
      (Risperdal®)
            Schizophrenia/Bi-Polar
            Novel
      24 hour controlled release tabletsGlipizide
      (Glucotrol® XL)
            Diabetes
            Comparable
      to reference listed drugMetformin
      (Glucophage® XR)
            Diabetes
            Comparable
      to reference listed drugDimenhydrinate
      (Dramamine®)
            Motion
      Sickness
            Novel
      24 hour controlled release tabletsTheophylline
      (Theo-Dur®)
            Asthma,
      Bronchodilator
            Novel
      12 hour controlled release tablets




8
 Table of Contents




Tricor®
is a trademark of Abbott Laboratories; Lyrica®, Procardia®, Glucotrol®,
Dramamine® and Covera-HS® are trademarks of Pfizer; Ultram® and Risperdal® are
trademarks of J&J; Inderal LA® is a trademark of Wyeth; Toprol® is a
trademark of AstraZeneca; Dilacor® is a trademark of Watson; Exelon® is a
trademark of Novartis; Glucophage® is a trademark of Bristol-Myers.





Dietary
Supplements





Product
            Features
            StatusGlucosamine
      Chondroitin
              500/400
      (mg)
            24
      hour once daily tablets
            -
      On MarketGlucosamine
      Chondroitin MSM 500/400/200 (mg)
            24
      hour once daily tablets
            -
      On MarketGlucosamine
      Chondroitin
              (Sodium
      Free) 500/400 (mg)
            12
      hour controlled release tablets
            -
      On MarketGlucosamine
      Sulfate 750 (mg)
            12
      hour controlled release tablets
            -
      On MarketCalcium
      with Vitamin D
              600/500
      (mg/IU)
            24
      hour once daily tablets
            -
      On MarketVitamin
      C 500 (mg)
            12
      hour controlled release tablets (ascorbic acid delivered over 12
      hrs)
            -
      AvailableVitamin
      C 1000 (mg)
            24
      hour controlled release tablets (ascorbic acid delivered over 24
      hrs)
            -
      AvailableMineral
      Ascorbates 500 (mg)
            12
      hour controlled release tablets (ascorbic acid delivered over 12
      hrs)
            -
      AvailableNiacin
      250 (mg)
            12
      and 24 hour controlled release tablets
            -
      LicensedCaffeine
      200 (mg)
            10
      hour controlled release tablets (for 12 hours of energy)
            -
      AvailableGuarana,
      Green Tea (200 mg Caffeine eq.)
            10
      hour controlled release tablets (for 12 hours of energy)
            -
      AvailableNovasoy®
            Custom
      designed Pre-blends
            -
      On Market (ADM)Echinacea
      400 (mg)
            12
      hour controlled release tablets
            -
      AvailableGinkgo
      Biloba 120 (mg)
            12
      hour controlled release tablets
            -
      AvailableSt.
      John's Wort 300 (mg)
            12
      hour controlled release tablets
            -
      Available




Novasoy®
is a trademark of the Archer Daniels Midland Company.




Development
Status of Lead Products




Ibuprofen—We developed a
controlled release formulation of ibuprofen based on our CDT platforms and
continue preparations for submission of a New Drug Application, or NDA, for a
12-hour CDT-based ibuprofen product. Our pivotal Phase III clinical trial to
evaluate the efficacy of our formulation achieved both primary endpoints and key
secondary endpoints with no significant adverse events. The trial was a
randomized, placebo controlled, double blind, parallel group study designed to
evaluate the efficacy of multiple doses of ibuprofen 600 mg ER in dental pain
following third molar extraction. The first primary endpoint was to demonstrate
analgesic efficacy for the 8-12 hour period after the first dose as compared to
placebo. The second primary endpoint measured the durability of effect of
SCOLR’s formulation by the proportion of subjects in the controlled release
group with meaningful improvement in pain intensity from baseline at all three
assessment periods of 24, 36, and 48 hours. Both primary endpoints achieved
positive, statistically significant results, at the p<0.0001 level. While we
have undertaken the preparatory work for the actual use study required prior to
submission of our NDA, we do not expect to be able to complete the required
study without additional funding. There are currently no controlled release
formulations of ibuprofen approved for use in North America. Based on industry
sources, we estimate that global sales of ibuprofen are more than $1 billion per
year.




Pseudoephedrine—We filed our
first ANDA submission during August 2008. Our submission was accepted by the FDA
in September 2008 (after 36 business days) and we received a complete response
letter in January 2009. The complete response letter issued to us requests
additional information in the area of Chemical Manufacturing and Controls, all
of which was identified by the FDA as “minor.” The complete response letter is
used to inform applicants of changes required in the application before an
application can be approved, and




9
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communicates
that the drug application will not be approved in its current form. We have
initiated work to provide the additional information requested by the FDA. We
believe our formulation will offer attractive tablet size and cost saving
opportunities when compared to similar tablets already on the market. Based on
industry sources, we estimate that aggregate North American sales of products
containing pseudoephedrine have been more than $1 billion per year. However, our
ability to commercialize products containing pseudoephedrine may be adversely
impacted by legislative and market changes relating to diversion.




Raloxifene—We completed
initial pilot pharmacokinetic clinical evaluations of CDT-based immediate
release raloxifene formulations. While the results of those trials supported the
advancement of an additional formulation and clinical work, we suspended further
work on this compound pending additional funding or partnership interest.
Raloxifene is used to prevent and treat osteoporosis. Additional studies would
be required to provide further insight into the capabilities of the CDT-based
technology and our ability to enhance bioavailability as well as to support
development of a raloxifene product. Evista® is Eli Lilly’s immediate
release raloxifene product for osteoporosis utilizing a complex solubilization
technology. In 2007, Eli Lilly reported more than $1 billion in global sales of
Evista.




Ondansetron—We completed
initial pilot bioavailability testing of our refined 24-hour CDT-based
ondansetron formulation. The results indicate that our amino acid formulation
technology is capable of producing a once daily controlled release ondansetron
tablet. We suspended further work on this compound pending additional funding or
partnership interest. Ondansetron is the active ingredient in Zofran®, GlaxoSmithKline’s product for
anti-nausea and vomiting associated with chemotherapy and radiation treatments
for cancer.




Intellectual
Property




We
believe that patent and trade secret protection of our CDT platforms are
important to our business and that our success will depend in part on our
ability to maintain existing patent protection, obtain additional patents,
maintain trade secret protection, and operate without infringing the proprietary
rights of others. We have rights to five U.S. patents and three federal
trademark registrations. Our policy is to pursue registrations for all of the
trademarks associated with our key products and technologies. Our registered
trademarks include: “CDT,” the CDT logo and design, and “SCOLR.”




Our CDT
platforms are based on multiple issued and pending patents and other
intellectual property for the programmed release or enhanced performance of
active pharmaceutical ingredients and nutritional products. Our intellectual
property includes two U.S. patents licensed exclusively to us by Temple
University and two patent rights assigned to us by Dr. Reza Fassihi, a
Professor of Biopharmaceutics and Industrial Pharmacy at the Temple University
School of Pharmacy. Dr. Fassihi currently serves on our board of directors
and is a consultant. Dr. Fassihi is also one of the inventors of the two
patents licensed to us by Temple University. We are obligated to pay annual
license maintenance fees, share in some up-front payments from customers, and
pay royalties based on product sales with respect to the CDT patents licensed
from Temple University or assigned to us by Dr. Fassihi. In the
future, we plan to file further U.S. and foreign patent applications directed to
new or improved products or processes.




We
attempt to protect our proprietary position by filing U.S. and foreign patent
applications related to our proprietary technology inventions and improvements
that are important to the development of our business. Our success will depend
in part on our ability to obtain and maintain patent protection for our
technologies, preserve our trade secrets, and operate without infringing the
proprietary rights of others. However, the issuance of a patent is not
conclusive as to its validity or as to the enforceable scope of the claims of
the patent. Our competitors may challenge or circumvent any of our issued
patents and the patents may not provide us proprietary protection or a
commercial advantage. Furthermore, we cannot assure you that any of our future
processes or products will be patentable or will not infringe upon the patents
of third parties.




Competition




Our
business is highly competitive and is affected by new technologies, government
regulations, availability of financing, and other factors. In the drug delivery
field, examples of our major competitors include, Biovail, Inc., Pacira
Pharmaceutical Inc., Penwest, SkyePharma PLC, Depomed, Elan Corporation, PLC,
Flamel Technologies, Inc., Impax Laboratories, Inc., Labopharm, Inc., and KV
Pharmaceutical Company, as well as internal programs within many of the large
pharmaceutical companies. The successful development and commercialization of
major controlled-delivery prescription drugs can take five or more years and
millions of dollars of research and clinical trials. These major competitors
generally are better funded and equipped to fully realize the potential from new
and unique patented drug delivery systems and are in possession of significantly
stronger financial and research and development resources.




10
 Table of Contents




Manufacturing




We
currently have no internal commercial scale manufacturing capabilities.
Generally, either our collaborators manufacture the pharmaceutical products or
we use a contract manufacturer. Accordingly, we have to rely on third party
manufacturers of the pharmaceutical products we are evaluating in clinical
trials. We currently have agreements with Catalent Pharma Solutions, Inc. to
support our efforts. We also work with Perrigo regarding the manufacturing of
dietary supplements containing our CDT technology. Our dependence on third
parties for the manufacture of our potential products and clinical supplies may
adversely affect our ability to deliver such products in a timely or competitive
basis.





Environmental
Matters





Compliance
with federal, state and local requirements which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment have not had, nor are they
anticipated to have in the future, a material effect on our capital
expenditures, earnings or competitive position.




Sources
and Availability of Raw Materials and Principal Suppliers




Our
technology allows for the use of conventional, readily available, GRAS
excipients. A wide variety of materials can be used for our controlled delivery
formulation development and are available from a large number of manufacturers
and distributors. The active chemical raw materials essential to our business
are generally readily available from multiple sources in the United States and
throughout the world. Certain raw materials used in the manufacture of our
products are, however, available from limited sources and, in some cases a
single source. Any curtailment in the availability of such raw materials could
result in production or other delays and, in the case of products for which only
one raw material supplier exists or has been approved by the FDA, could result
in material loss of sales with consequent adverse effects on our business and
results of operations. During 2007 and 2006, regulatory restrictions impacted
our ability to obtain commercial quantities of pseudoephedrine and resulted in
delays to our development program. Also, because raw material sources for
pharmaceutical products must generally be identified and approved by regulatory
authorities, changes in raw material suppliers may result in production delays,
higher raw material costs, and loss of sales and customers. We obtain a portion
of our raw materials from foreign suppliers, and our arrangements with such
suppliers are subject to, among other risks, FDA approval, governmental
clearances, export duties, political instability, and restrictions on the
transfers of funds.




Government
Regulation




Government
authorities in the United States and other countries extensively regulate the
research, development, manufacture, labeling, promotion, advertising,
distribution, and marketing of drug products. We must receive separate
regulatory approval for each of our product candidates before we or our
collaborators can sell them in the United States or internationally. In the
United States, the FDA regulates drug products under the Federal Food, Drug, and
Cosmetic Act, or FDCA, and implements regulations and other laws. Failure to
comply with applicable U.S. requirements, both before and after approval, may
subject us to administrative and judicial sanctions, such as a delay in
approving or refusal by the FDA to approve pending applications, warning
letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, and/or criminal
prosecutions.




The
approval process requires substantial time, effort and financial resources, and
we cannot be sure that any approval will be granted on a timely basis, or at
all. There are several kinds of new drug applications, or NDAs, that may be
submitted to obtain FDA approval of our or our collaborators’ drugs, including
full NDAs; section 505(b)(2) NDAs; and abbreviated new drug applications,
or ANDAs. A “full” NDA is an NDA in which the information required for approval,
including investigations of safety and effectiveness, comes from studies
conducted by or for the sponsor or for which the sponsor has obtained a right of
reference. A section “505(b)(2)” NDA is an NDA in which at least some of the
information required for approval comes from studies not conducted by or for the
sponsor and for which the sponsor has not obtained a right of reference. An
abbreviated new drug application, or ANDA, usually utilizes for proof of safety
and effectiveness data demonstrating that the drug is “bioequivalent” to a drug
which the FDA has previously approved.




NDAs:Approval of a full NDA
by the FDA requires pre-clinical laboratory and animal tests and formulation
studies; submission to the FDA of an Investigational New Drug Application for
human clinical testing, which must be in effect before clinical trials can
begin; and adequate and well-controlled clinical trials to establish safety and
effectiveness of the product candidate for each indication for which approval is
sought. To obtain approval an applicant must submit their application to the
FDA; the FDA must complete a pre-approval inspection of manufacturing,
analytical, and clinical research facilities to ensure that they are in
compliance with cGMP, cGLP, local, state, and federal rules and regulations; and
the FDA must deem the product safe and effective.”




505(b)(2) NDAs:Section
505(b)(2) applications contain the full reports of investigations of safety and
effectiveness as a traditional NDA, but where at least some of the information
required for approval comes from studies




11
 
  not
conducted by or for the applicant and for which the applicant has not obtained
the right to reference. To obtain approval an applicant must submit its
application to the FDA; the FDA must complete a pre-approval inspection of
manufacturing, analytical, and clinical research facilities to ensure that they
are in compliance with cGMP, cGLP, local, state, and federal rules and
regulations; and the FDA must deem the product safe and effective.” Preparing a
505(b) (2) NDA is generally less costly and time-consuming than preparing a full
NDA.




ANDAs:The FDA may approve an
ANDA if the product is the same in important respects as an already approved
drug, or if the FDA has declared the drug suitable for an ANDA submission. An
ANDA contains information to show that the proposed product is identical in
active ingredient, dosage form, strength, route of administration, labeling,
quality, performance characteristics, and intended use to a previously approved
product. To obtain approval an applicant must submit their application to the
FDA; the FDA must complete a pre-approval inspection of manufacturing,
analytical, and clinical research facilities to ensure that they are in
compliance with cGMP, cGLP, local, state, and federal rules and regulations; and
the FDA must deem the product safe and effective. Conducting bioequivalence
studies is less time-consuming and costly than conducting pre-clinical and
clinical studies necessary to support an NDA.




The
testing and approval process requires substantial time, effort and financial
resources, and each may take several years to complete. The FDA may not grant
approval on a timely basis, or at all. We may encounter difficulties or
unanticipated costs in our efforts to secure necessary government approvals,
which could delay or preclude us from marketing our product candidates. The FDA
may limit the indications for use or place other conditions on any approvals
that could restrict the commercial application of our product
candidates.




We use
third party manufacturers to produce our product candidates in clinical and
commercial quantities. Future inspections by the FDA may indentify compliance
issues at the facilities of our contract manufacturers or collaborators that may
disrupt production on distribution, or require substantial resources to connect.
Also, new government requirements may be established that could delay or prevent
regulatory approval of our product candidates under development.




Other
FDA Requirements:




We and
our collaborators are required to comply with a number of FDA requirements both
before and after approval, regardless of the type of application submitted. For
example, we are required to report certain adverse reactions and production
problems, if any, to the FDA, and to comply with certain requirements concerning
advertising and promotion for our products. Also, quality control and
manufacturing procedures must continue to conform to cGMP after approval, and
the FDA periodically inspects manufacturing facilities to assess compliance with
cGMP. Accordingly, manufacturers must continue to expend time, money and effort
in all areas of regulatory compliance, including production and quality control
to comply with cGMP. In addition, discovery of issues such as safety problems
may result in changes in labeling or restrictions on a product manufacturer or
NDA holder, including removal of the product from the market. After approval,
certain changes to the approved product, such as adding new indications,
manufacturing changes, or additional labeling claims are subject to further FDA
review and approval. In addition, the FDA may require post-approval
studies.




Employees




As of
December 31, 2008, we employed 17 employees, all of whom are full time.
None of our employees is represented by labor unions. We believe our
relationship with employees is good. On January 30, 2009, Dr. Bruce S. Mora
joined us as Chief Executive Officer and President.




Executive
Officers




Our
executive officers are generally elected annually at the meeting of our board of
directors held in conjunction with the annual meeting of stockholders. The
following are our current executive officers and their ages as of March 1,
2009:




Name
                  Age
                  Office
                  Position
                    SinceBruce
      S. Morra
                  55
                  President
      and Chief Executive Officer
                  2009Richard
      M. Levy
                  50
                  Vice President of Finance and
      Chief Financial Officer
                  2005Alan
      M. Mitchel
                  52
                  Senior Vice President of Business and Legal Affairs
                  2005Stephen
      J. Turner
                  38
                  Vice
      President, Chief Technical Officer
                  2003




The
following sets forth the business experience, principal occupations and
employment of each of our current executive officers.




12
 Table of Contents




Bruce S.
Morra, Ph.D., M.B.A., was appointed our President and Chief Executive Officer in
January 2009. From 2004 to 2009, Dr. Morra was a consultant to companies in the
pharmaceutical, medical device, drug delivery, biotech and polymers industries.
From 2003 to 2004, Dr. Morra was president of West Pharmaceutical Services’ drug
delivery and contract clinical research businesses. From 2002 to 2003, he was
chief business officer of Progenitor Cell Therapy, LLC, a start-up company
performing stem cell and other cell therapy process, device and drug contract
research and manufacturing. From 1998 to 2004, Dr. Morra served as president,
chief operating officer and chief financial officer of Biopore Corporation and
its sister company Polygenetics, Inc. He serves on the boards of directors of
InforMedix Holdings, Inc. and Unigene Laboratories, Inc.  Dr. Morra
earned his Ph.D. and M.S. in Polymer Science and Engineering and his M.B.A. from
the University of Massachusetts, Ahmerst in 1980, after graduating magna cum
laude in Chemical Engineering from Princeton University in 1976.




Richard
M. Levy was appointed Chief Financial Officer and Vice President of Finance on
June 8, 2006, and served as interim Chief Financial Officer and Vice
President of Finance commencing December 15, 2005. Mr. Levy has
experience as chief financial officer, controller, consultant and auditor. He
served as the CFO for the specialty finance segment and corporate controller for
Washington Mutual Bank. Mr. Levy worked for Bank of America for seven
years. His experience there included serving as the senior vice president and
controller of Bank of America Texas operations and also included coordinating
all accounting activities and acting as chief financial officer for new
acquisitions. His work at Bank of America also included international financial
management experience in its international private banking and world banking
divisions. His corporate financial duties included serving as director and as
chief financial officer of various Bank of America subsidiaries. Mr. Levy
earned his BA in business economics and accounting from the University of
California, Santa Barbara and is licensed as a CPA.




Alan M.
Mitchel has worked for SCOLR Pharma since January 2005 as Senior Vice President
of Business and Legal Affairs and Chief Legal Officer. For more than five years
prior to joining us, Mr. Mitchel practiced corporate law with private law
firms in Seattle and Miami. Mr. Mitchel received an LLB from Duke
University School of Law.




Stephen
J. Turner has worked for SCOLR Pharma since the fall of 1999 and primarily has
been responsible for the commercialization and application of our CDT platforms.
In 2003, Mr. Turner was promoted to our Vice President and Chief Technical
Officer. In addition to Mr. Turner’s involvement in our growth and
application of our technology platforms, he is named on one patent issued to
SCOLR, has contributed to numerous additional patent filings, has published
articles in industry related publications, and has presented his research
findings at numerous academic seminars and symposia. Mr. Turner is an
active member in scientific organizations including AAPS (American Association
of Pharmaceutical Scientists) and the Controlled Release Society.
Mr. Turner holds a BS in biology with a minor in geochemistry from
Western Washington University.





Item
      1A.
            Risk
      Factors




This
annual report on Form 10-K contains forward looking statements that involve
risks and uncertainties. Our business, operating results, financial performance,
and share price may be materially adversely affected by a number of factors,
including but not limited to the following risk factors, any one of which could
cause actual results to vary materially from anticipated results or from those
expressed in any forward-looking statements made by us in this annual report on
Form 10-K or in other reports, press releases or other statements issued from
time to time. Additional factors that may cause such a difference are set forth
elsewhere in this annual report on Form 10-K.




We
do not have sufficient cash to fund the development of our drug delivery
operations. If we are unable to obtain additional financing during 2009, we will
be required to curtail or cease operations.




We
anticipate that, based on our current operating plan, our existing cash and cash
equivalents, together with expected royalties from third parties, will be
sufficient to fund our operations until late 2009. Our current operating plan
reflects reductions in personnel, marketing and other expenses implemented
during 2008. We are actively managing our liquidity by limiting our clinical and
development expenses to our lead products and supporting our existing alliances
and collaborations. We have deferred all significant expenditures on new
projects as well as major expenditures for our lead products pending additional
financing or partnership support. We plan to continue efforts to enter into
collaboration and licensing agreements for our product candidates, including
controlled release ibuprofen, that may provide additional funding for our
operations. If we are unsuccessful with these efforts, we may have to curtail
operations or cease operations.




We will
need to raise additional capital to fund operations, conduct clinical trials,
continue research and development projects, and commercialize our product
candidates. The timing and amount of our need for additional financing will
depend on a number of factors, including:




•
            the
      structure and timing of collaborations with strategic partners and
      licensees;




13
 Table of Contents




•
            our
      timetable and costs for the development of marketing operations and other
      activities related to the commercialization of our product
      candidates;




•
            the
      progress of our research and development programs and expansion of such
      programs;




•
            the
      emergence of competing technologies and other adverse market developments;
      and,




•
            the
      prosecution, defense and enforcement of potential patent claims and other
      intellectual property rights.




Additional
equity or debt financing may not be available to us on acceptable terms, or at
all. If we raise additional capital by issuing equity securities, substantial
dilution to our existing stockholders may result which could decrease the market
price of our common stock due to the sale of a large number of shares of our
common stock in the market, or the perception that these sales could occur.
These sales, or the perception of possible sales, could also impair our ability
to raise capital in the future. In addition, the terms of any equity financing
may adversely affect the rights of our existing stockholders. If we raise
additional funds through strategic alliance or licensing arrangements, we may be
required to relinquish rights to certain of our technologies or product
candidates, or to grant licenses on terms that are unfavorable to us, which
could substantially reduce the value of our business.




If we are
unable to obtain sufficient additional financing, we would be unable to meet our
obligations and we would be required to delay, reduce or eliminate some or all
of our business operations, including the pursuit of licensing, strategic
alliances and development of drug delivery programs.





We
have a history of substantial operating losses and we expect to continue to
incur substantial losses in the future, which may negatively impact our ability
to run our business.




We have a
history of operating losses and we expect to continue to incur significant
losses in the future. We plan to continue the costly process of simultaneously
conducting clinical trials and preclinical research for multiple product
candidates. Our product development program may not lead to commercial products,
either because our product candidates fail to be effective, are not attractive
to the market, or because we lack the necessary financial or other resources or
relationships to pursue our programs through commercialization. Our net losses
are likely to continue as we advance preclinical research and clinical trials,
apply for regulatory approvals, develop our product candidates, and support
commercialization of our potential products.




We have
funded our operations primarily through the issuance of equity securities and we
may not be able to generate positive cash flow in the future. We need to seek
additional funds through the issuance of equity securities or other sources of
financing. If we are unable to obtain necessary additional financing, our
ability to run our business will be adversely affected and we may be required to
reduce the scope of our research and business activity or cease operations.
These conditions raise substantial doubt about our ability to continue as a
going concern. Consequently, the audit report prepared by our independent
registered accounting firm relating to our financial statements for the year
ended December 31, 2008 included a going concern explanatory
paragraph.





Our
limited experience in preparing applications for regulatory approval of our
products, and our lack of experience in obtaining such approval, may increase
the cost of and extend the time required for preparation of necessary
applications.




Each OTC
or pharmaceutical product we develop will require a separate costly and time
consuming regulatory approval before we or our collaborators can manufacture and
sell it in the United States or internationally. The regulatory process to
obtain market approval for a new drug takes many years and requires the
expenditure of substantial resources. We have had only limited experience in
preparing applications and do not have experience in obtaining regulatory
approvals. As a result, we believe we will rely primarily on third party
contractors to help us prepare applications for regulatory approval, which means
we will have less control over the timing and other aspects of the regulatory
process than if we had our own expertise in this area. Our limited experience in
preparing applications and obtaining regulatory approval could delay or prevent
us from obtaining regulatory approval and could substantially increase the cost
of applying for such approval.




We
may not obtain regulatory approval for our products, which would materially
impair our ability to generate revenue.




We may
encounter delays or rejections during any stage of the regulatory approval
process based upon the failure of clinical data to demonstrate compliance with,
or upon the failure of the product to meet the FDA’s requirements for safety,
efficacy, quality, and/or bioequivalence; and, those requirements may become
more stringent due to changes in regulatory agency policy or the adoption of new
regulations. For example, after submission of a marketing application, in the
form of an NDA or ANDA, the FDA may deny the application, may require additional
testing or data, and/or may




14
 
  require
post marketing testing and surveillance to monitor the safety or efficacy of a
product. In addition, the terms of approval of any marketing application,
including the labeling content, may be more restrictive than we desire and could
affect the marketability of products incorporating our controlled release
technology.




Certain
products incorporating our technology will require the filing of an NDA. A full
NDA must include complete reports of preclinical, clinical, and other studies to
prove adequately that the product is safe and effective, which involves among
other things, full clinical testing, and as a result requires the expenditure of
substantial resources. In certain cases involving controlled release versions of
FDA-approved immediate release products, we may be able to rely on existing
publicly available safety and efficacy data to support an NDA for controlled
release products under Section 505(b)(2) of the FDCA when such data exists
for an approved immediate release or controlled release version of the same
active chemical ingredient. We can provide no assurance, however, that the FDA
will accept a Section 505(b)(2) NDA, or that we will be able to obtain
publicly available data that is useful. The Section 505(b)(2) NDA process
is a highly uncertain avenue to approval because the FDA’s policies on
Section 505(b)(2) have not yet been fully developed. There can be no
assurance that the FDA will approve an application submitted under
Section 505(b)(2) in a timely manner or at all. Our inability to rely on
the 505(b)(2) process would increase the cost and extend the time frame for FDA
approvals.





If
our clinical trials are not successful or take longer to complete than we
expect, we may not be able to develop and commercialize our
products.




In order
to obtain regulatory approvals for the commercial sale of potential products
utilizing our CDT platforms, we or our collaborators will be required to
complete clinical trials in humans to demonstrate the safety and efficacy, or in
certain cases, the bioequivalence, of the products. However, we or our
collaborators may not be able to commence or complete these clinical trials in
any specified time period, or at all, either because the appropriate regulatory
agency objects or for other reasons, including:




•
            unexpected
      delays in the initiation of clinical
sites;




•
            slower
      than projected enrollment of eligible
patients;




•
            competition
      with other ongoing clinical trials for clinical investigators or eligible
      patients;




•
            scheduling
      conflicts with participating
clinicians;




•
            limits
      on manufacturing capacity, including delays of clinical supplies;
      and,




•
            the
      failure of our products to meet required
  standards.




We also
rely on academic institutions and clinical research organizations to conduct,
supervise or monitor some or all aspects of clinical trials involving our
product candidates. We have less control over the timing and other aspects of
these clinical trials than if we conducted the monitoring and supervision on our
own. Third parties may not perform their responsibilities for our clinical
trials on our anticipated scheduled or consistent with a clinical trial
protocol.




Even if
we complete a clinical trial of one of our potential products, the clinical
trial may not indicate that our product is safe or effective to the extent
required by the FDA or other regulatory agency to approve the product. If
clinical trials do not show any potential product to be safe, efficacious, or
bioequivalent, or if we are required to conduct additional clinical trials or
other testing of our products in development beyond those that we currently
contemplate, we may be delayed in obtaining, or may not obtain, marketing
approval for our products. Our product development costs may also increase if we
experience delays in testing or approvals, which could allow our competitors to
bring products to market before we do and would impair our ability to
commercialize our products.




We
face intense competition in the drug delivery business, and our failure to
compete effectively would decrease our ability to generate meaningful revenues
from our products.




The drug
delivery business is highly competitive and is affected by new technologies,
governmental regulations, health care legislation, availability of financing,
litigation and other factors. Many of our competitors have longer operating
histories and greater financial, research and development, marketing and other
resources than we do. We are subject to competition from numerous other entities
that currently operate or intend to operate in the industry. These include
companies that are engaged in the development of controlled release drug
delivery technologies and products as well as other manufacturers that may
decide to undertake in-house development of these products. Some of our direct
competitors in the drug delivery industry include Biovail, Inc., Penwest,
SkyePharma PLC, Depomed, Elan, Flamel, Impax Laboratories, Inc., Labopharm, and
KV Pharmaceuticals, Inc. Many of the major pharmaceutical companies also have
internal drug delivery programs that may compete directly with our
business.




15
 Table of Contents




Many of
our competitors have more extensive experience than we have in conducting
preclinical studies and clinical trials, obtaining regulatory approvals, and
manufacturing and marketing pharmaceutical products. Many competitors also have
competing products that have already received regulatory approval or are in
late-stage development, and may have collaborative arrangements in our target
markets with leading companies and research institutions.




Our
competitors may develop or commercialize more effective, safer or more
affordable products, or obtain more effective patent protection, than we are
able to develop, commercialize or obtain. As a result, our competitors may
commercialize products more rapidly or effectively than we do, which would
adversely affect our competitive position, the likelihood that our products will
achieve market acceptance, and our ability to generate meaningful revenues from
our products.




If
we fail to comply with extensive government regulations covering the
manufacture, distribution and labeling of our products, we may have to withdraw
our products from the market, close our facilities or cease our
operations.




Our
products, potential products, and manufacturing and research activities are
subject to varying degrees of regulation by a number of government authorities
in the United States (including the Drug Enforcement Agency, FDA, Federal Trade
Commission, and Environmental Protection Agency) and in other countries. For
example, our activities, including preclinical studies, clinical trials,
manufacturing, distribution, and labeling are subject to extensive regulation by
the FDA and comparable authorities outside the United States. Also, our
statements and our customers’ statements regarding dietary supplement products
are subject to regulation by the FTC. The FTC enforces laws prohibiting unfair
or deceptive trade practices, including false or misleading advertising. In
recent years, the FTC has brought a number of actions challenging claims by
nutraceutical companies.




Each OTC
or pharmaceutical product we develop will require a separate costly and time
consuming regulatory approval before we or our collaborators can manufacture and
sell it in the United States or internationally. Even if regulatory approval is
received, there may be limits imposed by regulators on a product’s use or it may
face subsequent regulatory difficulties. Approved products are subject to
continuous review and the facilities that manufacture them are subject to
periodic inspections. Furthermore, regulatory agencies may require additional
and expensive post-approval studies. If previously unknown problems with a
product candidate surface, or the manufacturing or laboratory facility is deemed
non-compliant with applicable regulatory requirements, an agency may impose
restrictions on that product or on us, including requiring us to withdraw the
product from the market, close the facility, and/or pay substantial
fines.




We also
may incur significant costs in complying with environmental laws and
regulations. We are subject to federal, state, local and other laws and
regulations governing the use, manufacture, storage, handling, and disposal of
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. If an accident
occurs, we could be held liable for any damages that result and these damages
could exceed our resources.




Our
ability to commercialize products containing pseudoephedrine may be adversely
impacted by retail sales controls, legislation, and other measures designed to
counter diversion and misuse of pseudoephedrine in the production of
methamphetamine, an illegal drug.




We are
engaged in the development of a controlled release formulation of
pseudoephedrine. On March 10, 2006, Congress enacted the Patriot Act, which
included the Combat Methamphetamine Epidemic Act of 2005. Among its various
provisions, this national legislation placed restrictions on the purchase and
sale of all products containing pseudoephedrine and imposed quotas on
manufacturers relating to the sale of products containing pseudoephedrine. Many
states have also imposed statutory and regulatory restrictions on the
manufacture, distribution and sale of pseudoephedrine products. We believe that
such quotas and restrictions resulted in delays in obtaining materials necessary
for the development of our pseudoephedrine product. Our ability to commercialize
products containing pseudoephedrine and the market for such products may be
adversely impacted by existing or new retail sales controls, legislation and
market changes relating to diversion and misuse of pseudoephedrine in the
production of methamphetamine.




If
we cannot establish collaborative arrangements with leading individuals,
companies and research institutions, we may have to discontinue the development
and commercialization of our products.





We have
limited experience in conducting full scale clinical trials, preparing and
submitting regulatory applications, or manufacturing and selling pharmaceutical
products. In addition, we do not have sufficient resources to fund the
development, regulatory approval, and commercialization of our products. We
expect to seek collaborative arrangements and alliances with corporate and
academic partners, licensors and licensees to assist with funding research and
development, to conduct clinical testing, and to provide manufacturing,
marketing, and commercialization of our




16
 
  product
candidates. We may rely on collaborative arrangements to obtain the regulatory
approvals for our products.




For our
collaboration efforts to be successful, we must identify partners whose
competencies complement ours. We must also enter into collaboration agreements
with them on terms that are favorable to us and integrate and coordinate their
resources and capabilities with our own. We may be unsuccessful in entering into
collaboration agreements with acceptable partners or negotiating favorable terms
in these agreements.




If we
cannot establish collaborative relationships, we will be required to find
alternative sources of funding and to develop our own capabilities to
manufacture, market, and sell our products. If we were not successful in finding
funding and developing these capabilities, we would have to terminate the
development and commercialization of our products.




If
our existing or new collaborations are not successful, we will have to establish
our own commercialization capabilities, which would be expensive and time
consuming and could delay the commercialization of the affected
product.




Some of
our products are being developed and commercialized in collaboration with
corporate partners. Under these collaborations, we may be dependent on our
collaborators to fund some portion of development, to conduct clinical trials,
to obtain regulatory approvals for, and manufacture, market and sell products
using our CDT platforms.




We have
very limited experience in manufacturing, marketing and selling pharmaceutical
products. There can be no assurance that we will be successful in developing
these capabilities.




Our
existing collaborations may be subject to termination on short notice. If any of
our collaborations are terminated, we may be required to devote additional
resources to the product covered by the collaboration, seek a new collaborator
on short notice or abandon the product. The terms of any additional
collaborations or other arrangements that we establish may not be favorable to
us.




Our
collaborations or other arrangements may not be successful because of factors
such as:




•
            our
      collaborators may have insufficient economic motivation to continue their
      funding, research, development, and commercialization
      activities;




•
            our
      collaborators may discontinue funding any particular program, which could
      delay or halt the development or commercialization of any product
      candidates arising out of the
program;




•
            our
      collaborators may choose to pursue alternative technologies or products,
      either on their own or in collaboration with others, including our
      competitors;




•
            our
      collaborators may lack sufficient financial, technical or other
      capabilities to develop these product
  candidates;




•
            we
      may underestimate the length of time that it takes for our collaborators
      to achieve various clinical development and regulatory approval
      milestones; or,




•
            our
      collaborators may be unable to successfully address any regulatory or
      technical challenges they may
encounter.




We
have no manufacturing capabilities and will be dependent on third party
manufacturers.




We do not
have commercial scale facilities to manufacture any products we may develop in
accordance with requirements prescribed by the FDA. Consequently, we have to
rely on third party manufacturers of the products we are evaluating in clinical
trials. If any of our product candidates receive FDA or other regulatory
authority approval, we will rely on third-party contractors to perform the
manufacturing steps for our products on a commercial scale. We may be unable to
identify manufacturers on acceptable terms or at all because the number of
potential manufacturers is limited and the FDA and other regulatory authorities,
as applicable, must approve any replacement manufacturer, including us, and we
or any such third party manufacturer may be unable to formulate and manufacture
our drug products in the volume and of the quality required to meet our clinical
and commercial needs. We will be dependent upon these third parties to supply us
in a timely manner with products manufactured in compliance with current good
manufacturing practices (cGMPs) or similar manufacturing standards imposed by
foreign regulatory authorities where our products will be tested and/or
marketed. While the FDA and other regulatory authorities maintain oversight for
cGMP compliance of drug manufacturers, contract manufacturers may at times
violate cGMPs. The FDA and other regulatory authorities may take action against
a contract manufacturer who violates cGMPs. We currently rely on Catalent Pharma
Solutions, LLC (formerly Cardinal Health PTS, LLC) for the production of a
number of our product candidates. If Catalent or other third




17
 
  party
manufacturers are unable to provide adequate products and services to us, we
could suffer a delay in our clinical trials and the development of or the
submission of products for regulatory approval. In addition, we would not have
the ability to commercialize products as planned and deliver products on a
timely basis, and we may have higher product costs or we may be required to
cease distribution or recall some or all batches of our
products.




If
we fail to protect and maintain the proprietary nature of our intellectual
property, our business, financial condition and ability to compete would
suffer.




We
principally rely on patent, trademark, copyright, trade secret and contract law
to establish and protect our proprietary rights. We own or have exclusive rights
to several U.S. patents and patent applications and we expect to apply for
additional U.S. and foreign patents in the future. The patent positions of
pharmaceutical, nutraceutical, and bio-pharmaceutical firms, including ours, are
uncertain and involve complex legal and factual questions for which important
legal issues are largely unresolved. The coverage claimed in our patent
applications can be significantly reduced before a patent is issued, and the
claims allowed on any patents or trademarks we hold may not be broad enough to
protect our technology. In addition, our patents or trademarks may be
challenged, invalidated or circumvented, or the patents of others may impede our
collaborators’ ability to commercialize the technology covered by our owned or
licensed patents. Moreover, any current or future issued or licensed patents, or
trademarks, or existing or future trade secrets or know-how, may not afford
sufficient protection against competitors with similar technologies or
processes, and the possibility exists that certain of our already issued patents
or trademarks may infringe upon third party patents or trademarks or be designed
around by others. In addition, there is a risk that others may independently
develop proprietary technologies and processes that are the same as, or
substantially equivalent or superior to ours, or become available in the market
at a lower price. There is a risk that we have infringed or in the future will
infringe patents or trademarks owned by others, that we will need to acquire
licenses under patents or trademarks belonging to others for technology
potentially useful or necessary to us, and that licenses will not be available
to us on acceptable terms, if at all. We cannot assure you that:




•
            our
      patents or any future patents will prevent other companies from developing
      similar or functionally equivalent products or from successfully
      challenging the validity of our
patents;




•
            any
      of our future processes or products will be
  patentable;




•
            any
      pending or additional patents will be issued in any or all appropriate
      jurisdictions;




•
            our
      processes or products will not infringe upon the patents of third parties;
      or,




•
            we
      will have the resources to defend against charges of patent infringement
      by third parties or to protect our own patent rights against infringement
      by third parties.




We may
have to litigate to enforce our patents or trademarks or to determine the scope
and validity of other parties’ proprietary rights. Litigation could be very
costly and divert management’s attention. An adverse outcome in any litigation
could adversely affect our financial results and stock price.





We also
rely on trade secrets and proprietary know-how, which we seek to protect by
confidentiality agreements with our employees, consultants, advisors, and
collaborators. There is a risk that these agreements may be breached, and that
the remedies available to us may not be adequate. In addition, our trade secrets
and proprietary know-how may otherwise become known to or be independently
discovered by others.




Significant
expenses in applying for patent protection and prosecuting our patent
applications will increase our need for capital and could harm our business and
financial condition.




We intend
to continue our substantial efforts in applying for patent protection and
prosecuting pending and future patent applications both in the United States and
internationally. These efforts have historically required the expenditure of
considerable time and money, and we expect that they will continue to require
significant expenditures. If future changes in United States or foreign patent
laws complicate or hinder our efforts to obtain patent protection, the costs
associated with patent prosecution may increase significantly.




If
we fail to attract and retain key executive and technical personnel we could
experience a negative impact on our ability to develop and commercialize our
products and our business will suffer.




The
success of our operations will depend to a great extent on the collective
experience, abilities and continued service of relatively few individuals. We
are dependent upon the continued availability of the services of our employees,
many of whom are individually key to our future success. For example, if we lose
the services of Dr. Bruce S. Morra, our Chief Executive Officer and President,
or our Vice President and Chief Technical Officer, Stephen J. Turner, we could
experience a negative impact on our ability to develop and commercialize our CDT
technology, our financial results, and




18
 
  our stock
price. We also rely on members of our scientific staff for product research and
development. The loss of the services of key members of this staff could
substantially impair our ongoing research and development and our ability to
obtain additional financing. We do not carry key man life insurance on any of
our personnel.




Our
success also significantly depends upon our ability to attract and retain highly
qualified personnel. We face intense competition for personnel in the drug
delivery industry. To compete for personnel, we may need to pay higher salaries
and provide other incentives than those paid and provided by more established
entities. Our limited financial resources may hinder our ability to provide such
salaries and incentives. Our personnel may voluntarily terminate their
relationship with us at any time, and the process of locating additional
personnel with the combination of skills and attributes required to carry out
our strategy could be lengthy, costly, and disruptive. If we lose the services
of key personnel, or fail to replace the services of key personnel who depart,
we could experience a severe negative impact on our financial results and stock
price.




Future
laws or regulations may hinder or prohibit the production or sale of our
products.




We may be
subject to additional laws or regulations in the future, such as those
administered by the FDA or other federal, state or foreign regulatory
authorities. Laws or regulations that we consider favorable, such as the Dietary
Supplement Health and Education Act, DSHEA, may be repealed. Current laws or
regulations may be interpreted more stringently. We are unable to predict the
nature of such future laws, regulations or interpretations, nor can we predict
what effect they may have on our business. Possible effects or requirements
could include the following:




•
            the
      reformulation of certain products to meet new
  standards;




•
            the
      recall or discontinuance of certain products unable to be
      reformulated;




•
            imposition
      of additional record keeping
requirements;




•
            expanded
      documentation of the properties of certain products;
  or,




•
            expanded
      or different labeling, or scientific
  substantiation.




Any such
requirement could have a material adverse effect on our results of operations
and financial condition.




If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.




Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed.




The
NYSE Alternext U.S. (formerly the American Stock Exchange, or AMEX) may consider
delisting our common stock.





Section
1003 of the AMEX Company Guide (Application of Policies) provides that the AMEX
may cause our common stock to be delisted under certain circumstances, including
in connection with our failure to maintain stockholders' equity of at least
$6,000,000, or where our financial condition has become so impaired that it
appears questionable, in the opinion of the AMEX, as to whether we will be able
to continue operations and/or meet our obligations as they mature. In the event
we are unable to increase our revenue, obtain additional financing or otherwise
obtain funding for our ongoing operations, our stockholders' equity may fall
below the $6,000,000 threshold, or the AMEX may determine to delist our common
stock based on our financial condition.  If we are delisted from the
AMEX then our common stock will trade, if at all, only on the over-the-counter
markets, such as the OTC Bulletin Board securities market, and then only if one
or more registered broker-dealer market makers comply with quotation
requirements. In addition, delisting of our common stock could further depress
our stock price, substantially limit the liquidity of our common stock and
materially adversely affect our ability to raise capital on terms acceptable to
us, or at all. Delisting from AMEX could also have other negative results,
including the potential loss of confidence by suppliers and employees, the loss
of institutional investor interest and fewer business development
opportunities.





A
significant number of shares of our common stock are or will be eligible for
sale in the open market, which could drive down the market price for our common
stock and make it difficult for us to raise capital.





As of
December 31, 2008, 41,130,270 shares of our common stock were outstanding, and
there were 7,615,481 shares of our common stock issuable upon the exercise of
outstanding options, and warrants. Our stockholders may experience substantial
dilution if we raise additional funds through the sale of equity securities, and
sales of a large number of shares by us or by existing stockholders could
materially decrease the market price of our common stock and




19
 
  make it
more difficult for us to raise additional capital through the sale of equity
securities. The risk of dilution and the resulting downward pressure on our
stock price could also encourage stockholders to engage in short sales of our
common stock. By increasing the number of shares offered for sale, material
amounts of short selling could further contribute to progressive price declines
in our common stock.




Our
stock price is subject to significant volatility.




The
market price of our common stock could fluctuate significantly. Those
fluctuations could be based on various factors in addition to those otherwise
described in this report, including:




•
            general
      conditions in the healthcare
industry;




•
            general
      conditions in the financial
markets;




•
            our
      failure or the failure of our collaborative partners, for any reason, to
      obtain FDA approval for any of our products or products we
      license;




•
            for
      those products that are ultimately approved by the FDA, the failure of the
      FDA to approve such products in a timely manner consistent with the FDA’s
      historical approval process;




•
            our
      failure, or the failure of our third-party partners, to successfully
      commercialize products approved by the
FDA;




•
            our
      failure to generate product revenues anticipated by
    investors;




•
            problems
      with our sole contract
manufacturer;




•
            the
      exercise of our right to redeem certain outstanding warrants to purchase
      our common stock;




•
            the
      sale of additional debt and/or equity securities by
  us;




•
            announcements
      by us or others of the results of preclinical testing and clinical trials
      and regulatory actions, technological innovations or new commercial
      therapeutic products; and,




•
            developments
      or disputes concerning patent or any other proprietary
    rights.




Certain
provisions in our charter documents and otherwise may discourage third parties
from attempting to acquire control of our company, which may have an adverse
effect on the price of our common stock.




Our board
of directors has the authority, without obtaining stockholder approval, to issue
up to 5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
our stockholders. Our certificate of incorporation and bylaws also provide for
special advance notice provisions for proposed business at annual meetings. In
addition, Delaware and Washington law contain certain provisions that may have
the effect of delaying, deferring or preventing a hostile takeover of our
company. Further, we have a stockholder rights plan that is designed to cause
substantial dilution to a person or group that attempts to acquire our company
without approval of our board of directors, and thereby make a hostile takeover
attempt prohibitively expensive for a potential acquiror. These provisions,
among others, may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control of
our company, even if stockholders may consider such a change in control to be in
their best interests, which may cause the price of our common stock to
suffer.




Item 1B.
            Unresolved
      Staff Comments




None.




Item 2.
            Properties




Our
corporate headquarters, including administrative offices and research and
development facilities, are located approximately 20 miles northeast of Seattle,
Washington at 19204 North Creek Parkway, Suite 100, Bothell,
Washington 98011.





1. The
property, consisting of approximately 20,468 square feet, is leased until
January 31, 2016.




20
 Table of Contents




Item3.
            Legal
      Proceedings




We are
not a party to any material litigation.




Item4.
            Submission
      of Matters to a Vote of Securities
Holders




No
matters were submitted to our stockholders during the quarter ended
December 31, 2008.




21
 Table of Contents




PART
II




Item5.
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities




Our
common stock is traded on the NYSE Alternext US Exchange under the symbol “DDD.”
The last sale price of our common stock as reported on the NYSE Alternext US on
March 6, 2009, was $0.44 per share. The following table sets forth the range of
high and low close prices for our common stock as reported on the NYSE Alternext
US Exchange for each full quarterly period from January 1, 2007, through
December 31, 2008.




COMMON
STOCK




2008
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    1.41
                    
                    
                    $
                    1.03Second
      Quarter
                    
                    
                    1.30
                    
                    
                    
                    .93Third
      Quarter
                    
                    
                    1.19
                    
                    
                    
                    .79Fourth
      Quarter
                    
                    
                    1.04
                    
                    
                    
                    .492007First
      Quarter
                    
                    $
                    4.80
                    
                    
                    $
                    2.07Second
      Quarter
                    
                    
                    2.82
                    
                    
                    
                    2.21Third
      Quarter
                    
                    
                    3.00
                    
                    
                    
                    1.62Fourth
      Quarter
                    
                    
                    3.89
                    
                    
                    
                    1.17




As of
March 6, 2009, we had 1,198 stockholders of record. We have not paid or declared
any dividends upon our common stock since inception and do not contemplate or
anticipate paying any dividends upon the common stock in the foreseeable
future.




EQUITY
COMPENSATION PLAN INFORMATION




Information
relating to our equity compensation plans is incorporated by reference to the
definitive proxy statement for our 2009 annual meeting of stockholders.
Additional information regarding our equity compensation plans is provided in
Note 12 to our financial statements in this annual report.




Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




We are a
specialty pharmaceutical company. Our corporate objective is to combine our
formulation experience and knowledge with our proprietary and patented
Controlled Delivery Technology (CDT®) platforms to develop novel pharmaceutical,
OTC, and nutritional products. Our CDT platforms are based on multiple issued
and pending patents and other intellectual property for the programmed release
or enhanced performance of active pharmaceutical ingredients and nutritional
products. Our strategy includes a significant commitment to research and
development activities in connection with our drug delivery platforms. Our
results of operations going forward depend on our ability to commercialize our
products and technology and generate royalties, licensing fees, development
fees, milestone and similar payments.




We expect
our operating losses and negative cash flow to continue as we advance
preclinical research an actual use study and related work to support
applications for regulatory approvals and commercialization of our product
candidates. We will need to raise additional capital to fund operations,
continue research and development projects, and commercialize our products. The
issuance of a large number of additional equity securities could cause
substantial dilution to existing stockholders and could cause a decrease in the
market price for shares of our common stock, which could impair our ability to
raise capital in the future through the issuance of equity securities. We may
not be able to secure additional financing on favorable terms, or at all. If we
are unable to obtain necessary additional financing, our business will be
adversely affected and we may be required to reduce the scope of our development
activities or discontinue operations.





During
September 2008, we relocated our offices to Bothell, Washington and received the
remaining $3.1 million of the $4.1 million payment for termination of our lease
in Bellevue, Washington. We have taken other steps to reduce expenses, including
reductions in personnel and marketing, and the termination of a lease for
additional space in Bellevue, Washington. We are actively managing our liquidity
and capital resources by deferring significant expenses on development
activities pending additional financing or partnership
opportunities





Critical
Accounting Policies and Estimates




Our
financial statements are presented in accordance with accounting principles that
are generally accepted in the United States. All professional accounting
standards effective as of December 31, 2008, have been taken into




22
 
  consideration
in preparing the financial statements. The preparation of the financial
statements requires estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses and related disclosures. Some of
those estimates are subjective and complex, and, therefore, actual results could
differ from those estimates. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made and if different
estimates that reasonably could have been used, or changes in the accounting
estimates that are reasonably likely to occur periodically, could materially
impact the financial statements. We believe the following critical accounting
policies reflect our more significant estimates and assumptions used in the
preparation of our financial statements.




Revenue
Recognition




We
generate revenue from collaborative agreements, licensing fees, and from the
assignment of developed and patented technology. We must exercise judgment and
use estimates to determine the amount of revenue to recognize each period.
Revenue under collaborative arrangements may take the form of up-front payments,
payments for milestones, reimbursement of research and development costs, and
licensing payments. We recognize license revenue from intellectual technology
agreements. The payments received under these research collaboration agreements
are contractually not refundable even if the research effort is not successful.
Performance under our collaborative agreements is measured by scientific
progress, as mutually agreed upon by us and our collaborators.




Up-front Payments. Up-front
payments from our research collaborations include payments for technology
transfer and access rights. Non-refundable, up-front payments received in
connection with collaborative research and development agreements are deferred
and recognized as licensing fees on a straight-line basis over the relevant
periods specified in the agreement, generally the research term. When the
research term is not specified in the agreement and instead the agreement
specifies the completion or attainment of a particular development goal, we make
an estimate of the time required to achieve that goal considering our experience
with similar projects, level of effort and the development stage of the project.
We review the basis of our revenue recognition and adjust it as necessary based
on the status of the project against the estimated timeline as additional
information becomes available.




License Fees. Non-refundable
license fees where we have completed all future obligations are recognized as
revenue in the period when persuasive evidence of an agreement exists, delivery
has occurred, collectability is reasonably assured and the price is fixed and
determinable.




Royalty Income. Royalties
from licensees are based on reported sales of licensed products and revenue is
calculated based on contract terms when reported sales are reliably measurable
and collectability is reasonably assured.




Research and Development
Income. Revenues from milestone payments are recognized when the
milestone has been achieved, as long as the achievement of the milestone was not
reasonably assured at the inception of the arrangement, there was substantial
effort involved in achieving the milestone, the amount of the milestone payment
is reasonable in relation with the level of effort associated with the
achievement of the milestone, and the payment is non-refundable. Each milestone
event must have substance, and must represent the achievement of specific
defined goals. Reimbursements of research and development expenses we incur in
connection with collaborative agreements are recognized as revenue at the time
these amounts are determined to be measurable, reliable, and
collectable.




Our
judgment in determining the collectability of amounts due impacts the timing of
revenue recognition. Credit worthiness and collectability are assessed, and when
a party is not deemed credit worthy, revenue is recognized when payment is
received. We also assess whether fees are fixed or determinable prior to
recognizing revenue. We must make interpretations of our customer contracts and
use estimates and judgments in determining if the fees associated with a license
arrangement are fixed or determinable. In applying these criteria to revenue
transactions, we must exercise judgment and use estimates to determine the
amount of up-front payments, license fees, research and development income, and
royalty income revenue to be recognized each period.




Deferred
Taxes—Valuation Allowance




We make
estimates and use our judgment in determining the provision for income taxes,
deferred tax assets and liabilities, and any valuation allowance recorded
against net deferred tax assets. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
While we may consider any potential future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period in
which we made such determination. At December 31, 2008, we had recorded
full valuation totaling approximately $18.0 million against our net deferred tax
assets.




23
 Table of Contents




Results
of Operations




Fiscal
2008 Compared to Fiscal 2007




Revenues




Total
revenues for the year ended December 31, 2008, were $958,320, a decrease of
51%, compared to $2.0 million for the same period in 2007. This decrease is
primarily due to the higher level of research and development fees and licensing
revenues in 2007 relating to a license agreement terminated in March
2007.





Royalty
revenue from our CDT-based product sales of dietary supplement markets decreased
19%, or $219,164 to $958,320 for the year ended December 31, 2008, compared
to $1.2 million for the same period in 2007 as a result of royalties generated
through our alliance with Perrigo. Royalty payments from Perrigo are based
solely on Perrigo’s net profits of CDT-based products which involve
uncertainties and are difficult to predict. Revenues from Nutraceutix declined
in 2008 as our license terminated on December 31, 2007 and Nutraceutix had
limited rights to continue sales of certain inventory during 2008.




In the
first quarter of 2007, we received approximately $600,000 in research and
development milestone payments, and recognized previously deferred licensing fee
income of approximately $173,000 associated with our agreement with Wyeth
Consumer Healthcare. The December 2005 agreement with Wyeth provided for an
upfront fee of $250,000 which was recorded as deferred revenue and was being
amortized over the development period until the contract was terminated in March
2007, at which time the remaining balance was recorded to income.




Marketing
and Selling Expenses




Marketing
and selling expenses decreased 28%, or $264,021, to $672,675 for the year ended
December 31, 2008, compared to $936,696 for the same period in 2007,
primarily due to a decrease of $84,516 in advertising, tradeshow activities and
related travel. In addition, payroll and related expenses decreased $133,129 in
2008 due to the reduction in staff early in the year and non-cash share-based
compensation expense resulting from the lower fair value of stock options
granted.




Research
and Development Expenses




Research
and development expenses decreased 19%, or $1.5 million, to $6.3 million for the
year ended December 31, 2008, compared to $7.8 million for the same period
in 2007. The decrease of $1.5 million was primarily due to our decision to defer
development activities on certain projects pending additional funding. In
addition, non-cash, share based compensation expense decreased $211,843 related
to annual employee stock option grants due to the lower fair value of the stock
options.  These decreases were offset by an increase in outside
consulting expense of $221,197 related to regulatory activities associated with
our ibuprofen and pseudoephedrine projects.




General
and Administrative Expenses




General
and administrative expenses decreased 4%, or $198,259, to $4.4 million for the
year ended December 31, 2008, compared to $4.6 million for the same period
in 2007. This decrease is primarily due to a decrease in non-cash, share-based
compensation expense of $158,143 related to employee stock option grants due to
the lower fair value of the stock options and a lower bonus expense of $105,084.
These decreases were offset by an increase in personnel expense of $64,084 for
severance costs and annual increases in employee compensation.




Lease
Termination





In May
2008, we entered into a lease termination and surrender agreement, under which
we agreed to terminate the lease for our corporate facility for $4.1 million.
Under the terms of the agreement, we received $1.0 million upon execution of the
agreement and the remaining $3.1 million in September 2008, when we vacated
the premises. We incurred costs of $116,867 related to relocation to our new
facility and the lease buyout which were recognized in operating expense in
September 2008.





Other
Income (Expense), Net




Other
income decreased 68%, or $453,634, to $215,593 for the year ended
December 31, 2008, compared to $669,227 for the same period in 2007. This
decrease was primarily due to a decrease in interest income due to lower
cash   balances and interest rates.




24
 Table of Contents




Net
Loss




Net loss
decreased 42%, or $4.5 million, to $6.1 million for the year ended
December 31, 2008, compared to $10.6 million for the same period in 2007.
This decrease was primarily due to the gain of $4.1 million from the Lease
Termination and Surrender Agreement associated with our corporate
facility.




Liquidity and Capital
Resources




We had
approximately $6.4 million in cash and cash equivalents, and $473,711 in
restricted cash as of December 31, 2008. We are investing our cash and cash
equivalents in government-backed securities. We have limited capital resources
and operations to date have been funded primarily with the proceeds from public
and private equity and debt financings, and collaborative research agreements.
Based on our current operating plan, we anticipate that our existing cash and
cash equivalents, together with expected royalties from third parties, will be
sufficient to fund our operations until late 2009. We are pursing new
partnerships as well as collaborations, and exploring other financing options
that would enable us to provide additional funding for our operations. However,
we cannot be assured that financing will be available.





Our
business will require substantial additional investment that we have not yet
secured. Our plan is to raise capital and/or to pursue partnering opportunities.
Our current operating plan reflects reductions in personnel, marketing and other
operating expenses implemented in 2008. We are actively managing our liquidity
by limiting clinical and development expenses to our lead products and
supporting our existing alliances and collaborations. We have deferred all
significant expenditures on new projects pending additional financing or
partnership support. Without additional funding we do not expect to be able
to complete development of our current projects





We plan
to continue efforts to enter into collaboration and licensing agreements for our
product candidates and seek other sources of capital to provide additional
funding for our operations. We cannot be assured that financing will be
available on favorable terms or at all. Our failure to raise capital, including
financial support from partnerships or other collaborations, in 2009 will
materially adversely affect our business, financial condition and results of
operations, and could force us to reduce or cease operations. These conditions
raise substantial doubt about our ability to continue as a going concern.
Consequently, the audit report prepared by our independent registered public
accounting firm relating to our financial statements for the year ended December
31, 2008 included a going concern explanatory paragraph.




In
November 2005, the Securities and Exchange Commission declared effective our
registration statement that we filed using a “shelf” registration process which
expired on December 1, 2008.  Under this registration statement, we
offered from time-to-time, one or more offerings of common stock and/or warrants
to purchase common stock under this shelf registration up to an aggregate public
offering price of $40 million. Registered direct offerings were completed on
December 4, 2007, and April 21, 2006, for approximately $3.6 million and
$10.9 million respectively.




On
November 14, 2008, we filed a new shelf registration statement in the amount of
$40 million. At the time the new shelf registration was filed, $21.0 million
remained available for issuance under the November 2005 filing. On November 25,
2008, the Securities and Exchange Commission declared our registration statement
effective. Under this registration statement, we may offer from time-to-time,
one or more offerings of common stock and/or warrants to purchase common stock
under this shelf registration up to an aggregate public offering price of $40
million. If additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities will result in
dilution to our existing stockholders.




Cash flows from operating
activities—Net cash used in operating activities for the year ended
December 31, 2008, was approximately $4.7 million compared to $7.8 million for
the year end December 31, 2007. Expenditures for the year ended December 31,
2008, decreased approximately $2.0 million. In addition, during the year ended
December 31, 2008, operating revenues decreased approximately $1.0 million due
to lower royalty income and no research and development revenue. In addition, we
received a cash payment of $4.1 million related to our facility lease buyout,
which was recognized as a reduction to operating expense in September
2008.




Cash flows from investing
activities—Cash flows used by investing activities of $695,001 represents
restricted cash of $473,711 plus payments made for patent rights during the year
ended December 31, 2008. The restricted cash is collateral for the outstanding
letter of credit issued as collateral for our new facility lease. Cash flows
provided by investing activities of $407,088 during the year ended December 31,
2007, primarily represented the application of maturing short-term investments
to fund operating activities, off-set by purchases of patent rights and
equipment.




Cash flows from financing
activities— Cash flows used in financing activities of $39,961 represent
the cash received of $40,086 from the exercise of stock options and warrants
offset by payments made on our term loan during the year ended December 31,
2008. In the year ended December 31, 2007, cash flows from financing activities
primarily




25
 
  represented
the proceeds from the sale of common stock, a term loan to purchase a piece of
equipment to be used in our research and development activities, and the
exercise of stock options and warrants.




As of
December 31, 2008, we had $5.8 million of working capital compared to $11.1
million as of December 31, 2007. We have accumulated net losses of
approximately $64 million from our inception through December 31, 2008. We
have funded our operations primarily through the issuance of equity securities,
including $3.6 million and $10.9 million in net proceeds from our registered
direct offerings in December 2007 and April 2006, respectively, and $14.1
million from our private placement in February 2005.




New
Accounting Pronouncements





In
January 2008, the Financial Accounting Standards Board (FASB) ratified a
consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock,” to provide guidance for determining whether an
equity-linked financial instrument or embedded feature is considered indexed to
an entity’s own stock. The consensus establishes a two-step approach as a
framework for determining whether an instrument or embedded feature is indexed
to an entity’s own stock. The approach includes evaluating (1) the instrument’s
contingent exercise provisions, if any, and (2) the instrument’s settlement
provisions.





Entities
that issue financial instruments such as warrants or options on their own
shares, convertible debt, convertible preferred stock, forward contracts on
their own shares, or market-based employee stock option valuation instruments
will be affected by EITF Issue 07-5.





We intend
to adopt EITF Issue 07-5 effective January 1, 2009, and apply its provisions to
its outstanding instruments as of that date, as well as to instruments issued
subsequent to that date. We do not believe there will be a material impact to
its financial statements upon adoption on January 1, 2009.




In
February 2008, the FASB issued FASB Staff Position No. SFAS 157-2,
“Effective Date of FASB Statement No. 157”, which provides a one-year
deferral of the effective date of FAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Effective June 1,
2008, we adopted the provisions of SFAS No. 157 with respect to our
financial assets and liabilities recorded at fair value. We do not believe there
will be a material impact on our financial statements upon
adoption.




26
 Table of Contents




Item8.
            Financial
      Statements and Supplementary Data




CONTENTS




PageReport of Independent Registered Public
      Accounting Firm
              28Financial
      StatementsBalance Sheets
              29Statements of
Operations
              30Statement of Stockholders’
      Equity
              31Statements of Cash Flows
              32Notes to Financial Statements
              33




27
 Table of Contents




Report of Independent
Registered Public Accounting Firm




Board of
Directors and Shareholders of SCOLR Pharma, Inc.




We have
audited the accompanying balance sheets of SCOLR Pharma, Inc. (a Delaware
corporation) (the “Company”) as of December 31, 2008, and 2007, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SCOLR Pharma, Inc. as of December
31, 2008, and 2007, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2, the Company incurred a
net loss of $6.1 million during the year ended December 31, 2008, and, as of
that date, the Company had net working capital of $5.8 million. These factors,
among others, as discussed in Note 2 to the financial statements, raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




/s/ GRANT
THORNTON LLP









Seattle,
Washington




March 9,
2009




28
 Table of Contents




SCOLR
Pharma, Inc.


BALANCE SHEETS





December 31,2008
                                    
                                    
                                    2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                                    
                                    $
                                    6,363,243
                                    
                                    
                                    $
                                    11,825,371Accounts
      receivable
                                    
                                    
                                    177,253
                                    
                                    
                                    
                                    225,900Interest
      and other receivables
                                    
                                    
                                    1,157
                                    
                                    
                                    
                                    16Prepaid
      expenses
                                    
                                    
                                    286,539
                                    
                                    
                                    
                                    423,213Total
      current assets
                                    
                                    
                                    6,828,192
                                    
                                    
                                    
                                    12,474,500Property
      and equipment—net
                                    
                                    
                                    790,947
                                    
                                    
                                    
                                    748,931Intangible
      assets—net
                                    
                                    
                                    557,639
                                    
                                    
                                    
                                    464,023Restricted
      cash
                                    
                                    
                                    473,711
                                    
                                    
                                    
                                    —Total
      assets
                                    
                                    $
                                    8,650,489
                                    
                                    
                                    $
                                    13,687,454LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
                                    
                                    $
                                    238,701
                                    
                                    
                                    $
                                    757,420Accrued
      liabilities
                                    
                                    
                                    668,694
                                    
                                    
                                    
                                    586,849Current
      portion of term loan
                                    
                                    
                                    87,850
                                    
                                    
                                    
                                    80,047Total
      current liabilities
                                    
                                    
                                    995,245
                                    
                                    
                                    
                                    1,424,316Long-term
      portion of term loan
                                    
                                    
                                    23,269
                                    
                                    
                                    
                                    111,119Deferred
      rent
                                    
                                    
                                    310,010
                                    
                                    
                                    
                                    —Total
      liabilities
                                    
                                    
                                    1,328,524
                                    
                                    
                                    
                                    1,535,435Commitments
      and Contingencies (Notes 6 and 10)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Stockholders’
      EquityPreferred
      stock, authorized 5,000,000 shares, $0.01 par value, none issued or
      outstanding
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Common
      stock, authorized 100,000,000 shares, $0.001 par value, 41,130,270 and
      40,991,385 issued and outstanding as of December 31, 2008 and 2007,
      respectively
                                    
                                    
                                    41,130
                                    
                                    
                                    
                                    40,991Additional
      contributed capital
                                    
                                    
                                    71,255,901
                                    
                                    
                                    
                                    69,945,666Accumulated
      deficit
                                    
                                    
                                    (63,975,066
                                    )
                                    
                                    
                                    (57,834,638
                                    )Total
      stockholders’ equity
                                    
                                    
                                    7,321,965
                                    
                                    
                                    
                                    12,152,019Total
      liabilities and stockholders’ equity
                                    
                                    $
                                    8,650,489
                                    
                                    
                                    $
                                    13,687,454





The
accompanying notes are an integral part of these financial
statements.




29
 Table of Contents




SCOLR
Pharma, Inc.




STATEMENTS OF OPERATIONS





Year
      Ended December 31,2008
                                    
                                    
                                    2007RevenuesLicensing
      fees
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    173,077Royalty
                                    
                                    
                                    958,320
                                    
                                    
                                    
                                    1,177,484Research
      and development
                                    
                                    
                                    —
                                    
                                    
                                    
                                    621,222Total
      revenues
                                    
                                    
                                    958,320
                                    
                                    
                                    
                                    1,971,783Operating
      expensesMarketing
      and selling
                                    
                                    
                                    672,675
                                    
                                    
                                    
                                    936,696Research
      and development
                                    
                                    
                                    6,268,152
                                    
                                    
                                    
                                    7,768,346General
      and administrative
                                    
                                    
                                    4,356,647
                                    
                                    
                                    
                                    4,554,906Facility
      Lease terminationGain
      from lease buyout
                                    
                                    
                                    (4,100,000
                                    )
                                    
                                    
                                    —Expenses
      related to relocation and lease buyout
                                    
                                    
                                    116,867
                                    
                                    
                                    
                                    —Total
      facility lease buyout
                                    
                                    
                                    (3,983,133
                                    )
                                    
                                    
                                    —Total
      operating expenses
                                    
                                    
                                    7,314,341
                                    
                                    
                                    
                                    13,259,948Loss
      from operations
                                    
                                    
                                    (
      6,356,021
                                    )
                                    
                                    
                                    (11,288,165
                                    )Other
      income (expense)Interest
      expense
                                    
                                    
                                    (14,482
                                    )
                                    
                                    
                                    (15,724
                                    )Interest
      income
                                    
                                    
                                    229,837
                                    
                                    
                                    
                                    682,010Other
                                    
                                    
                                    238
                                    
                                    
                                    
                                    2,941Total
      other income (expense)
                                    
                                    
                                    215,593
                                    
                                    
                                    
                                    669,227Net
      loss
                                    
                                    $
                                    (6,140,428
                                    )
                                    
                                    $
                                    (10,618,938
                                    )Net
      loss per share, basic and diluted
                                    
                                    $
                                    (0.15
                                    )
                                    
                                    $
                                    (0.28
                                    )Shares
      used in calculation of basic and diluted net loss per
share
                                    
                                    
                                    41,038,797
                                    
                                    
                                    
                                    38,348,560





The
accompanying notes are an integral part of these financial
statements.




30
 Table of Contents




SCOLR
Pharma, Inc.


STATEMENT OF STOCKHOLDERS’ EQUITY


Years
Ended December 31, 2008 and 2007




Common
      StockNumber
      of Shares
                              
                              
                              Amount
                              
                              
                              Additional
                                Contributed
                                Capital
                              
                              
                              Accumulated
                                Deficit
                              
                              
                              Accumulated
                                Other
                                Comprehensive
                                Gain
      (Loss)
                              
                              
                              TotalBeginning
      Balance at January 1, 2007
                              
                              
                              38,048,146
                              
                              
                              $
                              38,048
                              
                              
                              $
                              64,472,277
                              
                              
                              $
                              (47,215,700
                              )
                              
                              $
                              55
                              
                              
                              $
                              17,294,680Issuance
      of common stock in direct offering
                              
                              
                              2,781,100
                              
                              
                              
                              2,781
                              
                              
                              
                              3,626,425
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,629,206Exercise
      of common stock options
                              
                              
                              120,333
                              
                              
                              
                              120
                              
                              
                              
                              137,866
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              137,986Exercise
      of warrants
                              
                              
                              41,806
                              
                              
                              
                              42
                              
                              
                              
                              (42
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Share-based
      compensation issued for employee services
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,674,453
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,674,453Share-based
      compensation issued for non-employee services
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              34,687
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              34,687Unrealized
      loss on short-term investments
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (55
                              )
                              
                              
                              (55
                              )Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (10,618,938
                              )
                              
                              
                              —
                              
                              
                              
                              (10,618,938
                              )Comprehensive
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (10,618,993
                              )Balance
      at December 31, 2007
                              
                              
                              40,991,385
                              
                              
                              $
                              40,991
                              
                              
                              $
                              69,945,666
                              
                              
                              $
                              (57,834,638
                              )
                              
                              $
                              —
                              
                              
                              $
                              12,152,019Exercise
      of common stock options
                              
                              
                              126,500
                              
                              
                              
                              127
                              
                              
                              
                              39,959
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              40,086Exercise
      of warrants
                              
                              
                              12,385
                              
                              
                              
                              12
                              
                              
                              
                              (12
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Share-based
      compensation issued for employee services
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,270,288
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,270,288Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (6,140,428
                              )
                              
                              
                              —
                              
                              
                              
                              (6,140,428
                              )Balance
      at December 31, 2008
                              
                              
                              41,130,270
                              
                              
                              $
                              41,130
                              
                              
                              $
                              71,255,901
                              
                              
                              $
                              (63,975,066
                              )
                              
                              $
                              —
                              
                              
                              $
                              7,321,965




The
accompanying notes are an integral part of this financial
statement.




31
 Table of Contents




SCOLR
Pharma, Inc.


STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
                                    
                                    
                                    2007Cash
      flows from operating activities:Net
      loss
                                    
                                    $
                                    (6,140,428
                                    )
                                    
                                    $
                                    (10,618,938
                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                    
                                    
                                    419,854
                                    
                                    
                                    
                                    401,643Loss
      on disposal of equipment
                                    
                                    
                                    1,091
                                    
                                    
                                    
                                    5,700Share-based
      compensation for non-employee services
                                    
                                    
                                    —
                                    
                                    
                                    
                                    34,687Share-based
      compensation for employee services
                                    
                                    
                                    1,270,288
                                    
                                    
                                    
                                    1,674,453Write-off
      of long-term assets
                                    
                                    
                                    38,424
                                    
                                    
                                    
                                    21,762Changes
      in assets and liabilities:Accounts
      and other receivables
                                    
                                    
                                    47,506
                                    
                                    
                                    
                                    654,280Prepaid
      expenses and other assets
                                    
                                    
                                    136,674
                                    
                                    
                                    
                                    (76,077
                                    )Accounts
      payable and accrued expenses
                                    
                                    
                                    (500,575
                                    )
                                    
                                    
                                    330,046Deferred
      revenue
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (185,577
                                    )Net
      cash used in operating activities
                                    
                                    
                                    (4,727,166
                                    )
                                    
                                    
                                    (7,758,021
                                    )Cash
      flows from investing activities:Purchase
      of equipment and furniture
                                    
                                    
                                    (3,933
                                    )
                                    
                                    
                                    (353,829
                                    )Patent
      and technology rights payments
                                    
                                    
                                    (217,357
                                    )
                                    
                                    
                                    (232,571
                                    )Purchase
      of short-term investments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,323,761
                                    )Maturities
      and sales of short-term investments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,317,249Restricted
      cash
                                    
                                    
                                    (473,711
                                    )
                                    
                                    
                                    —Net
      cash (used in) provided by investing activities
                                    
                                    
                                    (695,001
                                    )
                                    
                                    
                                    407,088Cash
      flows from financing activities:Proceeds
      from term loan
                                    
                                    
                                    —
                                    
                                    
                                    
                                    246,500Payments
      on long-term obligations and capital lease obligations
                                    
                                    
                                    (80,047
                                    )
                                    
                                    
                                    (55,334
                                    )Proceeds
      from issuance of common stock, net of issuance costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    3,629,206Proceeds
      from exercise of common stock options and warrants
                                    
                                    
                                    40,086
                                    
                                    
                                    
                                    137,986Net
      cash (used in) provided by financing activities
                                    
                                    
                                    (39,961
                                    )
                                    
                                    
                                    3,958,358Net
      (decrease) in cash
                                    
                                    
                                    (5,462,128
                                    )
                                    
                                    
                                    (3,392,575
                                    )Cash
      at beginning of period
                                    
                                    
                                    11,825,371
                                    
                                    
                                    
                                    15,217,946Cash
      at end of period
                                    
                                    $
                                    6,363,243
                                    
                                    
                                    $
                                    11,825,371Cash
      paid during the year for interest
                                    
                                    $
                                    13,127
                                    
                                    
                                    $
                                    14,128Non-cash
      investing and financing activities:Issuances
      of warrants in connection with common stock offering
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    918,457Capital
      assets financed through tenant improvement allowance
                                    
                                    $
                                    373,711
                                    
                                    
                                    $
                                    —




The
accompanying notes are an integral part of these financial
statements.




32
 Table of Contents




SCOLR
Pharma, Inc.




NOTES TO FINANCIAL STATEMENTS




December 31,
2008 and 2007




Note
1—Description of Business and Summary of Significant Accounting
Policies




SCOLR
Pharma, Inc. (the “Company”) is a specialty pharmaceutical company that develops
and formulates pharmaceutical, over-the-counter, and nutritional products. The
Company uses its patented Controlled Delivery Technologies (CDT®) to develop products and
license technologies to pharmaceutical and nutritional product companies. Prior
to 2004, the Company manufactured nutraceutical-based health and dietary
supplements for the animal and human nutrition markets. The Company’s transition
to a focused specialty pharmaceutical business was completed with the sale of
its probiotics business in 2003.




The
Company has incurred net losses since 2000. As of December 31, 2008, the
Company’s accumulated deficit was $64 million. The Company expects its operating
losses and negative cash flow to increase as it advances preclinical research
and clinical trials, applies for regulatory approvals, develops its product
candidates, expands its operations, and develops the infrastructure to support
commercialization of its products.




The
Company’s business is subject to the risks and uncertainties associated with
development of drug delivery systems and products. These risks include, but are
not limited to, a history of net losses, technological changes, dependence on
collaborations and key personnel, the successful commercialization of the
Company’s product candidates, compliance with government regulations, patent
infringement litigation and competition from current and potential competitors,
(many of which have greater resources) dependence on third party manufacturers,
and a requirement for additional funding.




A summary
of the Company’s significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.




Cash
and Cash Equivalents




The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates market value. The Company
holds cash and cash equivalents and marketable securities at several major
financial institutions, which often exceed FDIC insured limits. Historically,
the Company has not experienced any losses as a result of such concentration of
credit risk.




Accounts
Receivable




The
majority of the Company’s accounts receivable were due from companies that
provide royalty income from the use of the Company’s CDT technology. Payments
are received on a quarterly basis, usually within 45 days after the end of each
quarter, for royalty income receivables.




The
Company determines the allowance for doubtful accounts by considering a number
of factors, including the length of time trade accounts receivable are past due,
the customer’s previous loss history, the customer’s current ability to pay its
obligation, and the condition of the general economy and the industry as a
whole. The Company’s policy is to write off accounts receivable when they
become uncollectible, and payments subsequently received on such accounts are
credited to the provision for doubtful accounts.





Financial
Instruments




The
carrying values of financial instruments including cash and cash equivalents,
accounts and notes receivable, accounts payable, and debt obligations
approximate fair value.




Property
and Equipment




Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lives of
the respective leases or the service lives of the improvements, whichever is
shorter. Leased property under capital leases is amortized over the service
lives of the assets as the leases substantially transfer ownership and have
bargain purchase options. The straight-line method of depreciation is followed
for substantially all assets for financial reporting purposes. The estimated
useful lives in




33
 
  determining
depreciation and amortization are as follows:




Furniture
      and fixtures
            3-5
      yearsSoftware
            3
      yearsMachinery
      and equipment
            3-10 years




Intangible
Assets




Intangible
assets include capitalized costs, technical and product rights, patents, and
trademarks. Capitalized costs principally include legal fees incurred with the
application for patents and trademarks. Technical and product rights, patents,
and trademarks are stated at cost and amortized to operations over their
estimated useful lives or statutory lives, whichever is shorter. The Company
evaluates its long lived assets for impairments whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable using a
fair value approach.




Revenue
Recognition




The
Company generates revenue from collaborative agreements, licensing fees and from
the assignment of developed and patented technology. Revenue under collaborative
arrangements may take the form of royalty income, up-front payments, payments
for milestones, reimbursement of research and development costs, and licensing
payments. Payments received under collaborative research agreements are
generally not refundable even if the research effort is not
successful.




Revenues
recognized during 2008, and 2007, include amounts earned under royalty
arrangements with related and third parties under which such parties are
licensed to sell products that include technology developed or licensed by the
Company. Such royalty revenues are recognized when earned, as reported to the
Company by its licensees, and when collectability is reasonably
assured.




Revenues
recognized in 2007 also include non-refundable, up-front payments received in
connection with collaborative research and development agreements, which were
initially deferred and then recognized as licensing fees on a straight-line
basis over the relevant periods specified in the agreement, generally the
research term. Non-refundable license fees are recognized as revenue once no
future performance obligation exists, the price is fixed and determinable,
delivery has occurred, and collectability is reasonably assured.




For
revenue arrangements with multiple elements, the delivered element is considered
a separate unit of accounting only when the delivered element has stand-alone
value to the customer, there is objective and reliable evidence of the fair
value of the undelivered items, and delivery of the undelivered items is in the
control of the Company. If these conditions are met, consideration received is
allocated among the separate units based on their respective fair values, and
the applicable revenue recognition criteria are applied to each of the separate
units. Revenues from milestone payments are recognized when the milestone has
been achieved, as long as the achievement of the milestone was not reasonably
assured at the inception of the arrangement, there was substantial effort
involved in achieving the milestone, the amount of the milestone payment is
reasonable in relation with the level of effort associated with the achievement
of the milestone, and the payment is non-refundable. Each milestone event must
have substance and must represent the achievement of specific defined
goals.




Reimbursements
of research and development expenses incurred by the Company in connection with
collaborative agreements are recognized as revenue at the time these amounts are
determined to be measurable and reliable.




Income
Taxes




The
Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company’s assets
and liabilities, for net operating loss carryforwards, and tax credit
carryforwards. Deferred tax assets and liabilities, net operating loss
carryforwards, and tax credit carryforwards are measured using enacted tax rates
and laws that will apply when the assets and liabilities are expected to
reverse. The Company provides a valuation allowance when necessary to reduce
deferred tax assets to amounts expected to be realized.




Research
and Development Costs




Research
and development expenses consist of costs associated with products being
developed internally as well as those products being developed under
collaborative agreements with others. These expenses include related salaries
and benefits, clinical trial and related clinical trial manufacturing costs,
contract and other outside service fees, and facility related costs. Research
and development costs are expensed as incurred. In instances where the Company
enters into agreements with third parties for research, clinical trial, and
related clinical trial manufacturing costs, such costs are




34
 
  expensed
upon the earlier of when non-refundable amounts are due or as services are
performed. Amounts due to the Company under such arrangements may be either
fixed fee or fee for service, and may include upfront payments, monthly
payments, and payments upon the completion of milestones or receipt of
deliverables or termination costs incurred in the orderly termination of
services.




Advertising
Costs





The
policy of the Company is to expense advertising activities as incurred.
Advertising expenses for the years ended December 31, 2008 and 2007 were
$100,457 and $149.227, respectively.





Earnings
(Loss) Per Share




Basic
earnings (loss) per share is calculated based on the weighted average number of
shares outstanding during the year and income available to common shareholders.
Diluted earnings (loss) per share include the effect of potential common stock,
except when their effect is anti-dilutive. The weighted average shares for
computing basic earnings (loss) per share were 41,038,797 for the year ended
December 31, 2008, and 38,348,560 for the year ended December 31,
2007. At December 31, 2008, and 2007, options, and warrants to
purchase 7,615,481 and 7,301,745 shares of common stock, respectively, prior to
the application of the treasury stock method, were not included in the
calculation of diluted net loss per share as they were
anti-dilutive.




Share-Based
Compensation




Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of FASB Statement No. 123(R), Share-Based Payment, (“SFAS
123(R)”) using the modified-prospective-transition method. Under that transition
method, compensation cost recognized for the periods ended December 31,
2008 and 2007, includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of
FASB Statement No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and (b) compensation cost for all
share-based payments granted or modified subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R).




Share-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue
No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services (“EITF 96-18”), at the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. The fair value of options granted
to non-employees is measured as of the earlier of the performance commitment
date or the date at which performance is complete (“measurement date”). When it
is necessary under generally accepted accounting principles to recognize cost
for the transaction prior to the measurement date, the fair value of unvested
options granted to non-employees is remeasured at the balance sheet
date.




Use
of Estimates




The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for, but not limited to those
used in revenue recognition; the determination of the allowance for doubtful
accounts, depreciable lives of assets, estimates and assumptions used in the
determination of fair value of stock options and warrants, and deferred tax
valuation allowances. Future events and their effects cannot be determined with
certainty. Accordingly, the accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of the financial
statements may change as new events occur, as more experience is acquired, as
additional information is obtained and as the Company’s operating environment
changes. Actual results could differ from those estimates.




New
Accounting Pronouncements




In
January 2008, the Financial Accounting Standards Board (FASB) ratified a
consensus opinion reached by the Emerging Issues Task Force (EITF) on EITF Issue
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock,” to provide guidance for determining whether an
equity-linked financial instrument or embedded feature is considered indexed to
an entity’s own stock. The consensus establishes a two-step approach as a
framework for determining whether an instrument or embedded feature is indexed
to an entity’s own stock. The approach includes evaluating (1) the instrument’s
contingent exercise provisions, if any, and (2) the instrument’s settlement
provisions.




35
 Table of Contents





Entities
that issue financial instruments such as warrants or options on their own
shares, convertible debt, convertible preferred stock, forward contracts on
their own shares, or market-based employee stock option valuation instruments
will be affected by EITF Issue 07-5.




The
Company intends to adopt EITF Issue 07-5 effective January 1, 2009, and apply
its provisions to its outstanding instruments as of that date, as well as to
instruments issued subsequent to that date. The Company does not believe there
will be a material impact to its financial statements upon adoption on January
1, 2009.




In
February 2008, the FASB issued FASB Staff Position No. SFAS 157-2,
“Effective Date of FASB Statement No. 157”, which provides a one-year
deferral of the effective date of FAS No. 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Effective June 1,
2008, the Company adopted the provisions of SFAS No. 157 with respect to
the Company’s financial assets and liabilities recorded at fair value. The
Company does not believe there was a material impact to its financial statements
upon adoption.




Note
2—Liquidity




The
Company incurred a net loss of approximately $6.1 million for the year ended
December 31, 2008, and used cash from operations of approximately $4.7 million.
These amounts include the net lease settlement gain of $4.0 million. Cash flows
of $695,001 used by investing activities during the year ended December 31,
2008, represents $473,711 in restricted cash plus $217,357 in patent and
trademark related expenditures. The restricted cash is collateral for the letter
of credit issued to secure the Company’s obligations under the lease of the new
facility. Cash flow used by financing activities of $39,961 for the year ended
December 31, 2008, reflects net proceeds from the exercise of stock options and
warrants during the quarter, offset by payments on the term loan.





The
Company had approximately $6.4 million in cash and cash equivalents, and
$473,711 in restricted cash as of December 31, 2008. The Company is investing
its cash and cash equivalents in government-backed securities. These securities
are considered level 1 securities in accordance with FASB 157 “Fair Value
Measurements” as the securities have quoted prices in active
markets.





The
Company has a history of recurring losses and expects such net losses to
continue as the Company proceeds with preclinical development for multiple
product candidates and applies for regulatory approvals of product candidates.
 The Company will require substantial additional investment that it has not
yet secured. The Company plans to raise capital and/or to pursue partnering
opportunities. The Company’s current operating plan reflects reductions in
personnel, marketing and other operating expenses implemented in 2008. The
Company is actively managing liquidity by limiting clinical and development
expenses to its lead products and supporting existing alliances and
collaborations. The Company has deferred all significant expenditures on new
projects pending additional financing or partnership support. Without
additional funding the Company does not expect to be able to complete
development of its current projects.




The
Company plans to raise additional capital to fund operations, and continue
research and development projects and advance commercialization of its product
candidates. The Company may raise additional capital through public or private
equity financing, partnerships, debt financing, or other sources. If the Company
is unable to obtain necessary additional financing, its ability to run its
business will be adversely affected and it will be required to reduce the scope
of its business or discontinue operations.




The
Company has limited capital resources and operations to date have been funded
primarily with the proceeds of public and private equity financings and
collaborative research agreements. The Company anticipates that its existing
capital resources, without raising additional capital, or obtaining substantial
cash inflows from potential partners or products, will enable it to continue
operations until late 2009, unless unforeseen events arise that negatively
impact its liquidity. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Consequently, the audit report
prepared by the Company’s independent registered public accounting firm relating
to the Company’s financial statements for the year ended December 31, 2008
included a going concern explanatory paragraph.




The
business will require substantial additional financing that the Company have not
yet secured, but intend to pursue during 2009 through public or private
securities offerings and/or partnering opportunities. Expenses are expected to
be partially offset with income-generating license agreements. Further, the
Company will not have sufficient resources to develop fully any new products or
technologies unless the Company is able to raise substantial additional
financing on acceptable terms or secure funds from new or existing partners. The
Company cannot be assured that financing will be available on favorable terms or
at all.




In
November 2005, the Securities and Exchange Commission declared effective the
Company’s registration statement filed using a “shelf” registration process
which expired on December 1, 2008.  Under this registration




36
 
  statement,
the Company offered from time-to-time, one or more offerings of common stock
and/or warrants to purchase common stock under this shelf registration up to an
aggregate public offering price of $40 million. Registered direct offerings were
completed on December 4, 2007, and April 21, 2006, for approximately $3.6
million and $10.9 million respectively.





On
November 14, 2008, the Company filed a new shelf registration statement. At the
time the new shelf registration was filed, $21.0 million remained available for
issuance under the November 2005 registration statement. On November 25, 2008,
the Securities and Exchange Commission declared the Company’s registration
statement effective. Under the registration statement, the Company may
make, from time-to-time, one or more offerings of preferred stock, common stock,
debt securities and/or warrants to purchase common or preferred stock under this
shelf registration up to an aggregate public offering price of $40
million. If additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities will result in
dilution to the Company’s existing stockholders.





Note
3—Accounts Receivable




Accounts
receivable consists of royalty receivables at December 31, 2008 and 2007.
The Company did not have any write-offs or bad debt expense in 2008 and 2007. In
addition, the Company did not have an allowance for doubtful accounts in 2008 or
2007 as all accounts receivable were considered collectible.





Note 4—Property and
Equipment




Property
and equipment consist of the following at December 31:




2008
                        
                        
                        2007Furniture
      and fixtures
                        
                        $
                        70,813
                        
                        
                        $
                        70,813Software
                        
                        
                        40,852
                        
                        
                        
                        38,237Machinery
      and equipment
                        
                        
                        1,546,650
                        
                        
                        
                        1,555,854Leasehold
      improvements
                        
                        
                        422,476
                        
                        
                        
                        48,7652,080,791
                        
                        
                        
                        1,713,669Less
      accumulated depreciation and amortization
                        
                        
                        (1,289,844
                        )
                        
                        
                        (964,738
                        )$
                        790,947
                        
                        
                        $
                        748,931




For the
years ended December 31, 2008, and 2007 depreciation expense totaled
$334,537 and $329,710, respectively.




Note
5—Intangible Assets




Intangible
assets consist of the following at December 31:




2008
                      
                      
                      2007Patents
      and trademarks
                      
                      $
                      1,023,363
                      
                      
                      $
                      849,475Less
      accumulated amortization
                      
                      
                      (465,724
                      )
                      
                      
                      (385,452
                      )$
                      557,639
                      
                      
                      $
                      464,023




For the
years ended December 31, 2008, and 2007 amortization expense totaled
$85,317, and $71,307, respectively.




The
following is a schedule by years of future amortization expense for each of the
next five years based on existing intangible assets as of December 31,
2008.




Year
      Ending December 31,2009
                        
                        
                        85,3352010
                        
                        
                        75,8842011
                        
                        
                        71,1142012
                        
                        
                        67,3222013
                        
                        
                        64,3532014
      and thereafter
                        
                        
                        193,631Total
                        
                        $
                        557,639




The
Company reviews its strategy related to patent initiatives and may decide not to
pursue further research and development in certain areas, quarterly or when
circumstances change as it relates to the programs. As a result,




37
 
  capitalized
costs associated with certain patent filings with net book values of
approximately $38,000 and $22,000, were written-off in 2008, and 2007,
respectively. The write-offs were recorded to research and development
expense.




Note
6—Lease Obligations




In May
2008, the Company entered into a Lease Termination and Surrender Agreement,
under which the Company agreed to terminate the lease for its corporate facility
for consideration of $4.1 million. Under the terms of the agreement, the Company
received $1.0 million upon execution of the agreement and the remaining $3.1
million in September 2008, at the time the Company vacated the premises. The
$4.1 million cash settlement and $116,867 in costs that were incurred related to
the lease and relocation to the new space were recognized in operating expense
in September 2008.




In June
2008, the Company entered into an agreement to lease 20,468 rentable square feet
at 19204 North Creek Parkway, Bothell, Washington for the Company’s office
and research and development facilities. The lease commenced on September 19,
2008, for a term of 88 months ending on January 31, 2016. Under the terms of the
lease, the Company received four months of free rent. The Company has the option
to extend the lease term for one five-year period at the fair market rate at the
time of extension. The average rent under the lease term is approximately
$400,000 per year, subject to annual increases of approximately 3%. The related
rent expense is recognized on a straight-line basis over the term of the lease.
In connection with the lease agreement, the Company provided a $564,000
irrevocable, unconditional standby letter of credit which is secured by a money
market account classified in the balance sheet as a non-current asset in restricted cash. The
standby letter of credit was reduced by $90,289 in December 2008. At December
31, 2008, the standby letter of credit and the related security totaled
$473,711.  The stated amount of the standby letter of credit and the
related security will be reduced further over the term of the
lease.





The
Company conducts its operations utilizing leased office facilities and certain
equipment with terms expiring through 2016. The following is a schedule of
future minimum lease payments for facilities and equipment under operating
leases as of December 31, 2008:




Year
      Ending December 31,
                        
                        Operating
                          Leases2009
                        
                        $
                        340,5072010
                        
                        
                        414,7152011
                        
                        
                        420,4772012
                        
                        
                        420,8352013
                        
                        
                        426,8812014
      and thereafter
                        
                        
                        932,249Total
      future minimum lease payments
                        
                        $
                        2,955,664




Rent
expense for leased facilities and equipment was $455,176, and $433,514, for the
years ended December 31, 2008, and 2007, respectively.




Note
7 — Bank Term Loan




On
March 26, 2007, the Company executed a $250,000 bank term loan agreement
for the purchase of equipment to be used in its research and development
activities. The stated interest rate and effective interest rate of the loan are
8.25% and 9.34%, respectively. The loan matures in March 2010. Principal and
interest payments are to be made in 36 equal monthly payments of $7,877 each,
with a final payment due on the date of maturity. The obligations under the loan
are secured by the acquired equipment.




Note
8—Income Taxes




The
Company has incurred net operating losses. The Company continues to maintain a
valuation allowance for the full amount of the net deferred tax asset balance,
including its net operating losses as sufficient uncertainty exists regarding
its ability to realize such tax assets in the future. The Company expects the
amount of the net deferred tax asset balance and associated valuation allowance
to increase in future periods as the Company incurs future net operating
losses.




The
Company’s recorded provision for income taxes (zero in all years presented)
differs from the amount computed by applying the statutory federal income tax
rate of 34% to its net loss. The sources of the differences are as follows at
December 31:




38
 Table of Contents




2008
                      
                      
                      2007Tax
      benefit at statutory rate
                      
                      $
                      (2,087,746
                      )
                      
                      $
                      (3,610,439
                      )Stock
      based compensation
                      
                      
                      200,520
                      
                      
                      
                      263,132Expiring
      net operating loss
                      
                      
                      292,023
                      
                      
                      
                      92,392Other
      permanent differences
                      
                      
                      91,330
                      
                      
                      
                      9,453Increase
      in valuation allowance
                      
                      
                      1,503,873
                      
                      
                      
                      3,245,462Total
      provision
                      
                      $
                      —
                      
                      
                      $
                      —




Deferred
income tax assets and liabilities reflect the net effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
assets are also recorded for the future tax benefit of net operating losses and
tax credit carryforwards. The Company had no deferred tax liabilities in 2008
and 2007. Significant components of the Company’s deferred tax assets are as
follows at December 31:




2008
                      
                      
                      2007Deferred
      Tax AssetsNet
      operating loss carry forwards
                      
                      $
                      16,443,549
                      
                      
                      $
                      15,081,261Depreciation
      and amortization
                      
                      
                      148,201
                      
                      
                      
                      274,204Stock
      options
                      
                      
                      1,219,835
                      
                      
                      
                      1,073,786Other
      assets
                      
                      
                      206,881
                      
                      
                      
                      83,710Deferred
      tax assets
                      
                      $
                      18,018,466
                      
                      
                      $
                      16,512,961Valuation
      allowance
                      
                      
                      (18,018,466
                      )
                      
                      
                      (16,512,961
                      )Net
      deferred tax asset
                      
                      $
                      —
                      
                      
                      $
                      —




The
Company has established a valuation allowance for the full amount of the net
deferred tax asset balance as sufficient uncertainty exists regarding its
ability to realize such tax assets in the future. The net increase in the
valuation allowance for the years ending December 31, 2008, and 2007, was
$1,503,873, and $3,245,462, respectively.




At
December 31, 2008, the Company had available net operating loss
carryforwards of approximately $48.4 million of which $4.1 million related to
stock option deductions. Net operating loss carryforwards of $858,890,
and   $271,740, expired during 2008, and 2007, respectively. The
remaining net operating loss carryforwards will begin expiring in 2009 and may
be used to offset future federal taxable income through the year ending
December 31, 2027. The use of net operating losses may be limited in any
given year under Internal Revenue Code Section 382 upon the occurrence of
certain events, including significant changes in ownership interests which may
have occurred, or which may occur in future years.





Historically,
the Company has not incurred any interest or penalties associated with tax
matters and no interest or penalties were recognized during the year ended
December 31, 2008. However, the Company has adopted a policy whereby amounts
related to interest and penalties associated with tax matters are classified as
a general and administrative expense when incurred.




Tax years
that remain open for examination include 2005, 2006, 2007 and 2008. In addition,
tax years from 1993 to 2004 may be subject to examination in the event that the
Company utilizes the net operating losses from those years in its current or
future tax returns.




Note
9—Technical Rights, Patent License and Royalty Agreements




The
Company has agreements with Temple University (“Temple”) providing the
Company with exclusive worldwide rights for certain patents related to its
Controlled Delivery Technology (CDT®), with the right to
sublicense. On July 11, 2006, the Company completed an amendment to the
license agreement with Temple, dated September 6, 2000, relating to the
Company’s rights to U.S. Patent No. 6,090,411 (“salt patent”). The
amendment provides for a reduction in the amount of the royalty for sales of
prescription drugs covered by the license as well as a reduction in the annual
license maintenance fee payable to Temple University. Under the terms of
Temple University’s development policy, the inventors of the patent receive
50% of the royalty payments received by the University. In connection with the
amendment to the license agreement, the Company paid $400,000 in cash to the
inventors of the patent, including $200,000 to Dr. Reza Fassihi, a member
of the Company’s board of directors, and the inventors agreed to waive their
rights to payment of future royalties received by Temple University based on
sales of prescription drugs as well as the portion of the annual license
maintenance fee attributable to prescription drugs. These transactions were
recorded as research and development expense. Under the terms of the amended
agreements with Temple, the Company is required




39
 
  to make
minimum annual royalty payments of $48,750.




On
March 25, 2002, the Company entered into an exclusive patent license
agreement with Archer Daniels Midland Company (ADM). Under the terms of the
agreement, the Company granted ADM a license to manufacture, use, and sell
certain nutraceutical products covered by certain patents owned or licensed by
the Company. The Company amended its license agreement with ADM in August 2006
which resulted in the Company’s payment to ADM of $200,000, and accrual of
$250,000 associated with its obligation to pay ADM an additional $250,000. The
second $250,000 payment was expensed in the third quarter of 2006 and paid in
the third quarter of 2007. These transactions were recorded as research and
development expense.




In August
2005, the Company entered into an amendment to the license agreement it
originally granted to Nutraceutix. The amendment limited the rights previously
granted to Nutraceutix to manufacture and sell certain controlled release
dietary supplement products to certain designated customers of Nutraceutix,
eliminated the right to use the Company’s trademarks, resolved certain disputes,
and eliminated the remaining minimum payments due under the original agreement.
Commencing July 1, 2005, the Company began receiving royalty payments on
such sales at a reduced rate and such payments are recognized as royalty revenue
as they become due. During the years ended December 31, 2008, and 2007, the
Company recorded revenue in the amount of $64,155 and $163,668, respectively
under this agreement. Subject to the rights of Nutraceutix to continue sales of
certain inventories for up to one year, the license terminated on December 31,
2007.




On
October 20, 2005, the Company entered into a Manufacture, License and
Distribution Agreement with Perrigo Company of South Carolina, Inc. (“Perrigo”).
Under the agreement, the Company granted a license to its CDT technology to
Perrigo for the manufacture, marketing, distribution, sale, and use of specific
dietary supplement products in the United States. In addition, Perrigo may
request that the Company develop additional dietary supplement products that use
this technology to be added to the agreement. The Company receives royalties
based on a percentage of Perrigo’s net profits derived from the sales of
licensed products under the agreement. During the years ended December 31,
2008, and 2007, the Company recorded royalty revenues earned under this
agreement of $882,856, and $975,344, respectively.




During
the first quarter of 2007, the Company recognized research and development
income of $500,000 related to a milestone payment from Wyeth and approximately
$109,000 for reimbursement of research and development costs related to the
agreement. The $250,000 upfront fee was previously recorded as deferred revenue
and was being amortized as licensing fee income over the development period. As
a result of the termination of the agreement, the Company recognized the
approximately $173,000 remaining balance of previously deferred licensing fee
income during the first quarter of 2007.





On
September 5, 2006, the Company entered into a research collaboration with
BioCryst Pharmaceuticals (“BioCryst”), to develop an oral formulation of
peramivir, a promising antiviral compound using the Company’s CDT platforms.
Peramivir is a novel therapeutic being developed by BioCryst for treatment of
seasonal and life threatening influenza with a focus on intravenous and
intramuscular delivery. The goal of the collaboration is to develop a tablet or
capsule formulation for the oral administration of peramivir that improves oral
bioavailability.




On
October 18, 2007, the Company entered into a collaboration and license agreement
with Dr. Reddy’s Laboratories (“Dr. Reddy’s”) to pursue the development and
commercialization of an undisclosed oral prescription drug
product.  Under the terms of the agreement, Dr. Reddy’s will be
responsible for the development, manufacturing, and marketing of the drug
product. The Company will be responsible for the formulation and assist with the
scale-up activities of the product.





Note
10—Future Commitments




The
Company has certain material agreements with its manufacturing and testing
vendors related to its ongoing clinical trial work associated with its drug
delivery technology. Contract amounts are paid based on materials used and on a
work performed basis. Generally, the Company has the right to terminate these
agreements upon 30 days notice and would be responsible for services and
materials and related costs incurred prior to termination. Certain leases as
discussed in Note 6 related to leased office facilities have terms expiring
through 2016.




Note
11—Retirement Plan




The
Company has a defined contribution 401(k) retirement plan which covers all
employees. The Company matches 25% of employee contributions, up to 8% of
eligible compensation. The Company contributed $37,356, and $35,689, to the Plan
for the years ended December 31, 2008, and 2007, respectively.




40
 Table of Contents




Note
12—Share-Based Compensation




The
Company has granted equity incentive awards to its employees, consultants,
officers, and directors under its 2004 Equity Incentive Plan (the “2004 Plan”)
and its 1995 Stock Option Plan (the “1995 Plan”). The 2004 Plan was approved by
stockholders in June 2004, and replaced the 1995 Plan. Under the 2004 Plan,
equity-based incentive awards may be granted in the form of stock options, stock
appreciation rights, stock awards, performance awards, and outside director
options.




The
equity incentive awards granted to employees are generally granted at exercise
prices equal to the market value of the Company’s common stock on the date of
grant, vest over three years, and expire ten years from the date of
grant.




Under the
terms of the 2004 Plan, non-employee directors receive automatic annual grants
of stock options at exercise prices equal to the market value of the Company’s
common stock on the date of grant, which generally vest in equal monthly
installments over one year and expire ten years from the date of
grant.




The 2004
Plan initially authorized the issuance of up to 2,000,000 shares of common
stock, plus 388,441 shares which were previously reserved for issuance under the
1995 Plan not subject to outstanding options. On June 8, 2006, the
Company’s stockholders approved a 2,000,000 share increase in the maximum
aggregate number of shares that may be issued under the 2004 Equity Incentive
Plan. If any award under the 2004 Plan, or any award previously issued and
outstanding under the 1995 Plan, expires, lapses or otherwise terminates for any
reason without having been exercised or settled in full, or if shares subject to
forfeiture or repurchase are forfeited or repurchased by the Company, the shares
underlying the award will again become available for issuance under the 2004
Plan. As of December 31, 2008, the Company had 630,156 shares available for
future grants under both Plans.





The
following tables set forth the aggregate share-based compensation expense
resulting from equity incentive awards issued to the Company’s employees and to
non-employees for services rendered that is recorded in the Company’s results of
operations for the year ended December 31:




2008
                        
                        
                        2007Share-based
      compensation:Marketing
      and selling
                        
                        $
                        62,108
                        
                        
                        $
                        130,972Research
      and development
                        
                        
                        399,050
                        
                        
                        
                        610,895General
      and administrative
                        
                        
                        809,130
                        
                        
                        
                        932,586Share-based
      compensation for employees
                        
                        
                        1,270,288
                        
                        
                        
                        1,674,453General
      and administrative, non-employee services
                        
                        
                        —
                        
                        
                        
                        34,687Total
      share-based compensation expense
                        
                        $
                        1,270,288
                        
                        
                        $
                        1,709,140




The
share-based compensation expense for non-employee services reflects option
grants to outside consultants. There are no future performance conditions
associated with these grants and no consideration was received for the
options.




The fair
value of share-based awards is estimated using the Black-Scholes option pricing
model with the following assumptions for the years ended December 31, 2008,
and 2007. When estimating forfeitures, the Company considers the potential for
voluntary and involuntary terminations.




Black-Scholes Model Assumptions
                December 31,2008
              
              
              2007Expected
      volatility
              
              
              59%–74
              %
              
              
              56%–64
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %Risk-free
      interest rate
              
              
              1.87%–4.06
              %
              
              
              3.23%–5.26
              %Expected
      life
              
              6 – 10 years
              
              
              6 – 10 years




The
Company’s computation of expected volatility is based on historical realized
volatility. Prior to the implementation of SFAS 123(R), the Company estimated
that the expected lives of all options were equal to their contractual term. The
options granted to employees meet the definition of “plain vanilla” options
defined in the Securities and Exchange Commission’s Staff Accounting Bulletin
No. 107 (“SAB 107”). Therefore, management utilizes the shortcut method
described in SAB 107 in determining the expected life of employee options. The
shortcut method estimates the expected term based on the midpoint between the
vesting date and the end of the contractual term. The Company’s computation of
expected life for non-employee director’s awards and for outside consultant
awards under SFAS 123(R) continues to be based on the contractual term of the
award. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of the grant for issues with a term that approximates the
expected life used as the assumption in the model.




41
 Table of Contents




A summary
of the Company’s stock option activity for the two years ended December 31,
2008 is as follows:




Stock
      Options
                      
                      Shares
                      
                      
                      Weighted-
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted-
                        Average
                        Remaining
                        Contractual
                        Term (years)
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding
      at December 31, 2006
                      
                      
                      3,240,665
                      
                      
                      $
                      3.64Granted
                      
                      
                      734,167
                      
                      
                      $
                      2.10Exercised
                      
                      
                      (120,333
                      )
                      
                      $
                      1.15Forfeited
                      
                      
                      (227,096
                      )
                      
                      $
                      4.50Outstanding
      at December 31, 2007
                      
                      
                      3,627,403
                      
                      
                      $
                      3.36Granted
                      
                      
                      1,189,895
                      
                      
                      $
                      1.09Exercised
                      
                      
                      (40,000
                      )
                      
                      $
                      1.00Forfeited
                      
                      
                      (333,216
                      )
                      
                      $
                      2.28Outstanding
      at December 31, 2008
                      
                      
                      4,444,082
                      
                      
                      $
                      2.85
                      
                      
                      
                      6.80
                      
                      
                      $
                      14,400Outstanding
      vested or expected to vest options at December 31,
    2008
                      
                      
                      4,417,317
                      
                      
                      $
                      2.86
                      
                      
                      
                      6.79
                      
                      
                      $
                      14,400Options
      exercisable at December 31, 2008
                      
                      
                      3,443,427
                      
                      
                      $
                      3.22
                      
                      
                      
                      6.11
                      
                      
                      $
                      14,400




Cash
received from options exercised was $40,086 and $137,986, for the years ended
December 31, 2008, and 2007, respectively. No actual tax benefit was
realized for tax deductions from option exercise of the share-based payment
arrangements because the Company has recorded a full valuation allowance against
all deferred tax assets due to the uncertainty of realization of such assets.
The Company has a policy of issuing new shares to satisfy share option
exercises.





The
weighted-average grant date fair value of equity options granted during the
years ended December 31, 2008, and 2007, was $0.66 and $1.35, respectively.
The total intrinsic value of options exercised for the years ended
December 31, 2008, and 2007, was $4,800 and $223,103, respectively. The
total fair value of stock options vested during the years ended
December 31, 2008, and 2007, was $1,182,251, and $2,160,764,
respectively.




As of
December 31, 2008, there was $848,123 total unrecognized non-cash
compensation cost related to non-vested options granted under the 1995 Plan and
2004 Plan. That cost is expected to be recognized over a weighted-average period
of 1.68 years.





A summary
of the Company’s restricted stock activity for the year ended December 31,
2008 is as follows:




Restricted
      stock
                        
                        Shares
                        
                        
                        Weighted-Average
                          Grant
      date fair valueNon-vested
      at December 31, 2007
                        
                        
                        —
                        
                        
                        $
                        —Granted
                        
                        
                        86,500
                        
                        
                        
                        1.29Vested
                        
                        
                        —
                        
                        
                        
                        —Forfeited
                        
                        
                        —
                        
                        
                        
                        —Non-vested
      at December 31, 2008
                        
                        
                        86,500
                        
                        
                        $
                        1.29





The
proceeds received for the restricted stock are included in the statement of
stockholders’ equity as proceeds from the exercise of common stock
options. Common shares outstanding as of December 31, 2008, include the
86,500 restricted stock shares granted. The shares will become vested on the
third anniversary of the date of grant. The total fair value of restricted stock
vested during the years ended December 31, 2008, and 2007, was $0, and $0,
respectively. As of December 31, 2008, there was $58,763 total
unrecognized non-cash compensation cost related to non-vested restricted stock
granted under the 2004 Plan. That cost is expected to be recognized over a
weighted-average period of 2.12 years.





Note
13—Financing Events




Registered
Direct Offering




On
December 4, 2007, the Company raised approximately $4.2 million in gross
proceeds through a registered direct offering of 2,781,100 shares of the
Company’s common stock at a purchase price of $1.50 per share. Purchasers
of the Company’s stock also received warrants to purchase 1,390,550 shares of
common stock at an exercise price of $2.10




42
 
  per
share, exercisable for five years. Net proceeds of the offering were
approximately $3.6 million after placement agent fees of $250,300 and other
direct and incremental offering costs of approximately $283,000. ThinkEquity
Partners LLC acted as placement agent for the offering. Taglich Brothers, Inc.
provided financial advisory services and was paid a fee of $112,509, which was
deducted from the fee paid to the placement agent. Michael N. Taglich, a member
of the Company’s board of directors, is the president and a principal
shareholder of Taglich Brothers.  In connection with the offering, the
Company also issued warrants to purchase 1,390,550 shares of its common stock at
$2.10 per share, exercisable for five years, and valued at $918,457 using the
Black-Scholes option-pricing model. Under the terms of the warrant agreement, in
the event that another offering was completed within a period of twelve months,
the exercise price of the warrant would have been adjusted to be equal to the
price at which the common stock would have been sold in the new offering had an
offering occurred. The Black-Scholes valuation was based on the following
assumptions: volatility of 64%; term of five years; risk-free interest rate of
3.28%; and 0% dividend yield.




Shelf
Registration




On
October 27, 2005, the Company filed a shelf registration statement on Form
S-3 with the SEC, pursuant to which it may sell, from time to time, up to $40
million in common stock and/or common stock purchase warrants. The registration
statement was declared effective by the SEC in November 2005 and expired on
December 1, 2008. The specific terms of any future offering would be established
at the time of the offering. Registered direct offerings were completed on
December 4, 2007, and April 21, 2006, for approximately $3.6 million and
$10.9 million respectively.





On
November 14, 2008, the Company filed a new shelf registration statement in the
amount of $40 million. At the time the new shelf registration was filed, $21.0
million remained available for issuance under the November 2005 filing. On
November 25, 2008, the Securities and Exchange Commission declared the Company’s
registration statement effective.





Note
14—Warrants




During
the year ended December 31, 2008, a total of 140,238 warrants were
exercised, including 127,853 warrants that were surrendered to satisfy the
exercise price. As a result, 12,385 shares of common stock were issued during
the year ended December 31, 2008. The weighted average exercise price for
the year ended December 31, 2008, was $1.10. The Company had the following
warrants to purchase common stock outstanding at December 31,
2008:




Issue
      Date
                                
                                Issued
                                  Warrants
                                
                                
                                Exercise
                                  Price
                                
                                Term
                                
                                Outstanding
                                  Warrants
                                
                                Expiration
      DateSeptember 30, 2002
                                
                                
                                750,000
                                
                                
                                $
                                0.50
                                
                                10 years
                                
                                
                                750,000
                                
                                September 30, 2012February 24, 2004
                                
                                
                                1,046,773
                                
                                
                                
                                4.75
                                
                                5
      years
                                
                                
                                944,849
                                
                                February
      23, 2009February 8, 2005
                                
                                
                                75,000
                                
                                
                                
                                5.00
                                
                                5
      years
                                
                                
                                75,000
                                
                                February
      7, 2010April
      21, 2006
                                
                                
                                11,000
                                
                                
                                
                                7.50
                                
                                5
      years
                                
                                
                                11,000
                                
                                April
      20, 2011December
      4, 2007
                                
                                
                                1,390,550
                                
                                
                                
                                2.10
                                
                                5
      years
                                
                                
                                1,390,550
                                
                                December
      3, 2012Grand
      Total
                                
                                
                                3,273,323
                                
                                
                                
                                
                                
                                
                                
                                
                                3,171,399




Each
warrant entitles the holder to purchase one share of common stock at the
exercise price.




Note
15—Major Customers and Concentration of Credit Risk




In 2008,
two customers accounted for 93% and 7% of total revenue. These revenues relate
to the royalty income from the sale of products using our CDT technologies. In
2007, two customers accounted for 49% and 40% of net revenues.




The
Company maintains its cash balances in four financial institutions, which at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash.




Note
16—Related Party Transactions




The
Company’s CDT platforms are currently based on five patented drug delivery
technologies and includes intellectual property from two U.S. patents licensed
exclusively to the Company by Temple University and two U.S. patents assigned to
the Company by Dr. Reza Fassihi, a Professor of Biopharmaceutics and
Industrial Pharmacy at the Temple University School of Pharmacy.
Dr. Fassihi currently serves on the Company’s board of directors.
Dr. Fassihi is also one of the inventors of the two patents licensed to the
Company by Temple University.




The
Company entered into two license agreements with Temple University pursuant
to which the Company obtained exclusive worldwide rights to two patents issued
to Temple University which listed Dr. Fassihi as one of the




43
 
  inventors.
Under the terms of Temple University’s development policy, the inventors
receive 50% of the royalty payments received by the University. On July 11,
2006, the Company amended the license agreement with Temple University
relating to the salt patent. The amendment provides for a reduction in the
amount of the royalty for sales of prescription drugs covered by the license as
well as a reduction in the annual license maintenance fee payable to
Temple University.  In connection with the amendment to the license
agreement, the Company paid $400,000 in cash to the inventors of the patent,
including $200,000 to Dr. Fassihi, and the inventors agreed to waive their
rights to payment of royalties received by Temple University based on sales of
prescription drugs as well as the portion of the annual license maintenance fee
attributable to prescription drugs.  As a result of these arrangements, the
Company estimates that Dr. Fassihi received approximately $15,000 of the fees
paid to Temple for the dual polymer patent during 2007.




Dr.
Fassihi also assigned the Company all of his right, title and interest in and to
the technology known as “oral controlled release dosage form based on the
principle of controlled hydration” on May 24, 2001. Dr. Fassihi assigned all of
his right, title and interest in the technology known as “multiple compressed
asymmetric composite delivery system for release-rate modulation of bioactives”
to us on August 1, 2002. Dr. Fassihi received $50,000 in connection with
execution of this assignment agreement and filing of the patent and the Company
agreed to pay an additional fee upon issuance of the first patent.  The
Company is obligated to pay Dr. Fassihi a share of upfront payments from
customers and royalties based on product sales with respect to the intellectual
property assigned to us under each agreement.




In
addition, the Company has a consulting agreement with Dr. Fassihi. This
agreement was amended effective December 31, 2006, to provide for the
continuance of Dr. Fassihi’s consulting services. The agreement may be
terminated by either party on 30 days’ notice. In the years ended
December 31, 2008, and 2007, Dr. Fassihi was paid $48,000 each year
for consulting services. In addition, in 2006 Dr. Fassihi received a $200,000
payment associated with the amendment to the Temple University agreement
(see Note 9).




Item 9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures




None.




Item 9A.
            Controls
      and Procedures




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as of December 31, 2008. Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that our disclosure controls and procedures were effective as of
December 31, 2008.




Management’s
Report on Internal Control Over Financial Reporting




No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fourth quarter of our
fiscal year ended December 31, 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. Our internal control over financial reporting is a
process designed under the supervision of our principal executive and principal
financial officers to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting
principles.




As of
December 31, 2008, management assessed the effectiveness of our internal
control over financial reporting based on the framework established in “Internal
Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this evaluation,
management has determined that our internal control over financial reporting was
effective as of December 31, 2008.




Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:





i.
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;




44
 Table of Contents




ii.
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of consolidated financial statements in accordance with
      generally accepted accounting principles, and that our receipts and
      expenditures are being made only in accordance with authorizations of our
      management and directors; and




iii.
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the consolidated financial
      statements.


Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including
the possibility of human error and circumvention by collusion or overriding of
controls. Accordingly, even an effective internal control system may not prevent
or detect material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




45
 Table of Contents




PART
III




Item 10.
            Directors
      and Executive Officers of the
Registrant




The
information required by this item regarding our directors, executive officers
and corporate governance is incorporated by reference to the definitive proxy
statement for our 2009 annual meeting of stockholders. The information required
by this item regarding executive officers is set forth in Item 1 of this
annual report under the caption “Executive Officers.”




Item 11.
            Executive
      Compensation




The
information required by this item is incorporated by reference to the definitive
proxy statement for our 2009 annual meeting of stockholders.




Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
information required by this item is incorporated by reference to the definitive
proxy statement for our 2009 annual meeting of stockholders.




Item 13.
            Certain
      Relationships and Related
Transactions




The
information required by this item is incorporated by reference to the definitive
proxy statement for our 2009 annual meeting of stockholders.




Item 14.
            Principal
      Accountant Fees and Services




The
information required by this item is incorporated by reference to the definitive
proxy statement for our 2009 annual meeting of stockholders.




46
 Table of Contents




PART
IV




Item 15.
            Exhibits
      and Financial Statement Schedules




The
following exhibits are filed herewith:





Incorporated
      by ReferenceExhibit
                    No.
                  
                  Description
                  Filed
                    Herewith
                  
                  Form
                  
                  
                  Exhibit
                    No.
                  
                  
                  File
      No.
                  
                  Filing
      Date4.1
                  
                  Certificate
      of Incorporation as amended on July 31, 2004
                  
                  
                  10-QSB
                  
                  
                  
                  3
                  
                  
                  
                  001-31982
                  
                  8/13/20044.2
                  
                  Certificate
      of designation of Series A Junior Participating Preferred
      Stock
                  
                  
                  
                  10-K
                  
                  
                  
                  4.2
                  
                  
                  
                  001-31982
                  
                  3/11/20084.3
                  
                  Bylaws,
      as amended
                  
                  
                  10-QSB
                  
                  
                  
                  3
                  
                  
                  
                  001-31982
                  
                  5/17/20044.4
                  
                  Rights
      Agreement, dated as of November 1, 2002, by and between SCOLR, Inc. and
      OTR, Inc.
                  
                  
                  
                  10-K
                  
                  
                  
                  4.4
                  
                  
                  
                  001-31982
                  
                  3/11/20084.5
                  
                  Form
      of Common Stock Purchase Warrant dated as of February 8,
    2005
                  
                  
                  
                  8-K
                  
                  
                  
                  4.1
                  
                  
                  
                  001-31982
                  
                  2/11/20054.6
                  
                  Form
      of Warrant dated as of December 4, 2007
                  
                  
                  
                  8-K
                  
                  
                  
                  4.1
                  
                  
                  
                  001-31982
                  
                  11/30/200710.1
                  
                  Form
      of Common Stock Purchase Warrant dated June 25, 2003
                  
                  
                  
                  S-2
                  
                  
                  
                  10.3
                  
                  
                  
                  333-107906
                  
                  8/13/200310.2
                  
                  Form
      of Common Stock Purchase Warrant dated February 24, 2004
                  
                  
                  
                  8-K
                  
                  
                  
                  10.3
                  
                  
                  
                  001-31982
                  
                  2/26/200410.3
                  
                  Warrant
      Agreement dated September 30, 2002
                  
                  
                  
                  10-K
                  
                  
                  
                  10.3
                  
                  
                  
                  001-31982
                  
                  3/11/200810.4
                  
                  1995
      Stock Option Plan, together with amendment No. 1 thereto*
                  
                  
                  
                  10-K
                  
                  
                  
                  10.6
                  
                  
                  
                  001-319822
                  
                  3/13/200710.5
                  
                  Amendment
      No. 2 to Company 1995 Stock Option Plan*
                  
                  
                  
                  S-8
                  
                  
                  
                  4.2
                  
                  
                  
                  333-40290
                  
                  6/28/200010.6
                  
                  Form
      of Incentive Stock Agreement*
                  
                  
                  
                  S-2
                  
                  
                  
                  10.8
                  
                  
                  
                  333-107906
                  
                  8/13/200310.7
                  
                  Form
      of Nonqualified Stock Option Agreement*
                  
                  
                  
                  S-2
                  
                  
                  
                  10.9
                  
                  
                  
                  333-107906
                  
                  8/13/200310.8
                  
                  Research
      and Transfer Agreement dated September 11, 1998, among
      Temple University, Dr. Reza Fassihi, and the Company
                  
                  
                  
                  S-2
                  
                  
                  
                  10.11
                  
                  
                  
                  333-107906
                  
                  8/13/200310.9
                  †
                  License
      agreement dated December 22, 1998, as amended, between
      Temple University and the Company
                  
                  
                  
                  S-2
                  
                  
                  
                  10.12
                  
                  
                  
                  333-107906
                  
                  8/13/200310.10
                  †
                  License
      Agreement dated September 6, 2000, between Temple University and the
      Company
                  
                  
                  
                  S-2
                  
                  
                  
                  10.13
                  
                  
                  
                  333-107906
                  
                  8/13/200310.11
                  †
                  Master
      Research and Development Agreement dated May 1, 2001, between
      Temple University and the Company
                  
                  
                  
                  S-2
                  
                  
                  
                  10.14
                  
                  
                  
                  333-107906
                  
                  8/13/2003




47
 Table of Contents




Incorporated
      by ReferenceExhibit
                          No.
                        
                        Description
                        Filed
                          Herewith
                        
                        Form
                        
                        
                        Exhibit
                          No.
                        
                        
                        Description
                        
                        Filed
                          Herewith10.12
                        
                        Consulting
      Agreement dated December 22, 2000, between Dr. Reza Fassihi and the
      Company*
                        
                        
                        
                        S-2
                        
                        
                        
                        10.15
                        
                        
                        
                        333-107906
                        
                        8/13/200310.13
                        †
                        Intellectual
      Property Assignment and Assumption Agreement dated May 24, 2001, between
      Dr. Reza Fassihi and the Company
                        
                        
                        
                        S-2
                        
                        
                        
                        10.16
                        
                        
                        
                        333-107906
                        
                        8/13/200310.14
                        †
                        License
      Agreement dated September 1, 2001, between Temple University and the
      Company
                        
                        
                        
                        S-2
                        
                        
                        
                        10.17
                        
                        
                        
                        333-107906
                        
                        8/13/200310.15
                        †
                        Intellectual
      Property Assignment and Assumption Agreement dated August 1, 2002, between
      Dr. Reza Fassihi and the Company
                        
                        
                        
                        S-2
                        
                        
                        
                        10.18
                        
                        
                        
                        333-107906
                        
                        8/13/200310.16
                        
                        Additional
      Services Agreement dated August 7, 2002, between Dr. Reza Fassihi and the
      Company*
                        
                        
                        
                        S-2
                        
                        
                        
                        10.19
                        
                        
                        
                        333-107906
                        
                        8/13/200310.17
                        
                        Form
      of Option Agreement under the 2004 Equity Incentive Plan*
                        
                        
                        10-QSB
                        
                        
                        
                        10.2
                        
                        
                        
                        001-31982
                        
                        11/12/200410.18
                        
                        Form
      of Outside Director Option Agreement for Annual grants to directors under
      the 2004 Equity Incentive Plan*
                        
                        
                        10-QSB
                        
                        
                        
                        10.3
                        
                        
                        
                        001-31982
                        
                        11/12/200410.19
                        
                        Form
      of Non Employee Director Option Agreement for stock based fee awards under
      the 2004 Equity Incentive Plan*
                        
                        
                        10-QSB
                        
                        
                        
                        10.4
                        
                        
                        
                        001-31982
                        
                        11/12/200410.20
                        †
                        Amendment
      No. 1 to Intellectual Property Assignment and Assumption Agreement dated
      July 16, 2004, between Dr. Reza Fassihi and the Company.
                        
                        
                        10-QSB
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        11/12/200410.21
                        
                        Employment
      Agreement dated November 12, 2004, between Daniel O. Wilds and the
      Company*
                        
                        
                        
                        8-K
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        11/18/200410.22
                        
                        Employment
      Agreement dated January 10, 2005, between Alan M. Mitchel and the
      Company*
                        
                        
                        
                        8-K
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        1/11/200510.23
                        †
                        Manufacture,
      License and Distribution Agreement dated October 20, 2005, between the
      Company and Perrigo Company of South Carolina
                        
                        
                        
                        10-K
                        
                        
                        
                        10.33
                        
                        
                        
                        001-31982
                        
                        3/23/200610.24
                        
                        First
      Amendment to Lease, effective as of October 12, 2005
                        
                        
                        
                        10-K
                        
                        
                        
                        10.35
                        
                        
                        
                        001-31982
                        
                        3/23/200610.25
                        ††
                        Amendment
      to License Agreement dated as of June 1, 2006, (executed July 11, 2006)
      between SCOLR Pharma, Inc. and Temple University
                        
                        
                        
                        10-Q
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        11/7/200610.26
                        ††
                        Amendment
      to License Agreement dated as of August 10, 2006, between
      Temple University and the Company
                        
                        
                        
                        10-Q
                        
                        
                        
                        10.4
                        
                        
                        
                        001-31982
                        
                        11/7/2006




48
 Table of Contents





Incorporated
      by ReferenceExhibit
                        No.
                      
                      Description
                      
                      Filed
                        Herewith
                      
                      
                      Form
                      
                      
                      Exhibit
                        No.
                      
                      
                      Description
                      
                      Filed
                        Herewith10.27
                      
                      Amendment
      to Consulting Agreement effective as of December 31, 2006, between Dr.
      Reza Fassihi and the Company*
                      
                      
                      
                      
                      
                      10-K
                      
                      
                      
                      10.42
                      
                      
                      
                      001-31982
                      
                      31/13/200710.28
                      
                      Executive
      Employment Agreement dated April 14, 2008, between Richard M. Levy and the
      Company*
                      
                      
                      
                      
                      
                      8-K
                      
                      
                      
                      10.1
                      
                      
                      
                      001-31982
                      
                      4/16/200810.29
                      
                      Executive
      Employment Agreement dated April 14, 2008, between Stephen J. Turner and
      the Company*
                      
                      
                      
                      
                      
                      8-K
                      
                      
                      
                      10.2
                      
                      
                      
                      001-31982
                      
                      4/16/200810.30
                      
                      Standard
      Multi-Tenant Lease dated June 19, 2008, between Arden Realty Limited
      Partnership and the Company
                      
                      
                      
                      
                      
                      8-K
                      
                      
                      
                      10.1
                      
                      
                      
                      001-31982
                      
                      6/24/200810.31
                      
                      Lease
      Termination and Surrender Agreement dated April 30, 2008, between
      Newport Corporate Center, LLC and the Company
                      
                      
                      
                      
                      
                      10-Q
                      
                      
                      
                      10.2
                      
                      
                      
                      001-31982
                      
                      8/7/200810.32
                      
                      2004
      Equity Incentive Plan, as Amended*
                      
                      
                      X10.33
                      
                      Form
      of Restricted Stock Purchase Agreement under the 2004 Equity Incentive
      Plan*
                      
                      
                      X10.34
                      
                      Executive
      Employment Agreement dated January 30, 2009, between Bruce S. Morra and
      the Company*
                      
                      
                      X23.1
                      
                      Consent
      of Grant Thornton LLP
                      
                      
                      X31.1
                      
                      Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                      
                      
                      X31.2
                      
                      Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                      
                      
                      X32.1
                      
                      Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                      
                      
                      X32.2
                      
                      Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                      
                      
                      X




†
            Confidential
      treatment granted as to certain portions, which portions are omitted and
      filed separately with the SEC.


††
            Portions
      of such exhibit have been omitted pursuant to a request for confidential
      treatment filed with the SEC.


*
            Management
      contract or compensatory plan or
arrangement.




49
 Table of Contents




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.




SCOLR
      PHARMA, INC.By:
            /s/    BRUCE
      S. MORRABruce
      S. Morra
              Chief
      Executive Officer and President
              (Principal
      Executive Officer)




Date:
March 9, 2009




Signature
            Title
            Date/s/    BRUCE
      S. MORRA
            President,
      Chief Executive Officer and Director (Principal Executive
      Officer)
            March
      9, 2009Bruce
      S. Morra/s/    RICHARD
      M. LEVY
            Chief
      Financial Officer and Vice President—Finance (Principal Financial and
      Accounting Officer)
            March
      9, 2009Richard
      M. Levy/s/    RANDALL
      L-W. CAUDILL
            Director
            March
      9, 2009Randall
      L-W. Caudill/s/    REZA
      FASSIHI
            Director
            March
      9, 2009Reza
      Fassihi/s/    HERBERT
      L. LUCAS, JR.
            Director
            March
      9, 2009Herbert
      L. Lucas, Jr./s/    JEFFREY
      B. REICH
            Director
            March
      9, 2009Jeffrey
      B. Reich/s/    MICHAEL
      N. TAGLICH
            Chairman
      of the Board
            March
      9, 2009Michael
      N. Taglich/s/    WAYNE
      L. PINES
            Director
            March
      9, 2009Wayne
      L. Pines/s/    GREGORY
      L. WEAVER
            Director
            March
      9, 2009Gregory
      L. Weaver




50
 Table of Contents




EXHIBIT
INDEX


Incorporated
      by ReferenceExhibit
                      No.
                    
                    Description
                    Filed
                      Herewith
                    
                    Form
                    
                    
                    Exhibit
                      No.
                    
                    
                    File
      No.
                    
                    Filing
      Date4.1
                    
                    Certificate
      of Incorporation as amended on July 31, 2004
                    
                    
                    10-QSB
                    
                    
                    
                    3
                    
                    
                    
                    001-31982
                    
                    8/13/20044.2
                    
                    Certificate
      of designation of Series A Junior Participating Preferred
      Stock
                    
                    
                    
                    10-K
                    
                    
                    
                    4.2
                    
                    
                    
                    001-31982
                    
                    3/11/20084.3
                    
                    Bylaws,
      as amended
                    
                    
                    10-QSB
                    
                    
                    
                    3
                    
                    
                    
                    001-31982
                    
                    5/17/20044.4
                    
                    Rights
      Agreement, dated as of November 1, 2002, by and between SCOLR, Inc. and
      OTR, Inc.
                    
                    
                    
                    10-K
                    
                    
                    
                    4.4
                    
                    
                    
                    001-31982
                    
                    3/11/20084.5
                    
                    Form
      of Common Stock Purchase Warrant dated as of February 8,
    2005
                    
                    
                    
                    8-K
                    
                    
                    
                    4.1
                    
                    
                    
                    001-31982
                    
                    2/11/20054.6
                    
                    Form
      of Warrant dated as of December 4, 2007
                    
                    
                    
                    8-K
                    
                    
                    
                    4.1
                    
                    
                    
                    001-31982
                    
                    11/30/200710.1
                    
                    Form
      of Common Stock Purchase Warrant dated June 25, 2003
                    
                    
                    
                    S-2
                    
                    
                    
                    10.3
                    
                    
                    
                    333-107906
                    
                    8/13/200310.2
                    
                    Form
      of Common Stock Purchase Warrant dated February 24, 2004
                    
                    
                    
                    8-K
                    
                    
                    
                    10.3
                    
                    
                    
                    001-31982
                    
                    2/26/200410.3
                    
                    Warrant
      Agreement dated September 30, 2002
                    
                    
                    
                    10-K
                    
                    
                    
                    10.3
                    
                    
                    
                    001-31982
                    
                    3/11/200810.4
                    
                    1995
      Stock Option Plan, together with amendment No. 1 thereto*
                    
                    
                    
                    10-K
                    
                    
                    
                    10.6
                    
                    
                    
                    001-319822
                    
                    3/13/200710.5
                    
                    Amendment
      No. 2 to Company 1995 Stock Option Plan*
                    
                    
                    
                    S-8
                    
                    
                    
                    4.2
                    
                    
                    
                    333-40290
                    
                    6/28/200010.6
                    
                    Form
      of Incentive Stock Agreement*
                    
                    
                    
                    S-2
                    
                    
                    
                    10.8
                    
                    
                    
                    333-107906
                    
                    8/13/200310.7
                    
                    Form
      of Nonqualified Stock Option Agreement*
                    
                    
                    
                    S-2
                    
                    
                    
                    10.9
                    
                    
                    
                    333-107906
                    
                    8/13/200310.8
                    
                    Research
      and Transfer Agreement dated September 11, 1998, among
      Temple University, Dr. Reza Fassihi, and the Company
                    
                    
                    
                    S-2
                    
                    
                    
                    10.11
                    
                    
                    
                    333-107906
                    
                    8/13/200310.9
                    †
                    License
      agreement dated December 22, 1998, as amended, between
      Temple University and the Company
                    
                    
                    
                    S-2
                    
                    
                    
                    10.12
                    
                    
                    
                    333-107906
                    
                    8/13/200310.10
                    †
                    License
      Agreement dated September 6, 2000, between Temple University and the
      Company
                    
                    
                    
                    S-2
                    
                    
                    
                    10.13
                    
                    
                    
                    333-107906
                    
                    8/13/200310.11
                    †
                    Master
      Research and Development Agreement dated May 1, 2001, between
      Temple University and the Company
                    
                    
                    
                    S-2
                    
                    
                    
                    10.14
                    
                    
                    
                    333-107906
                    
                    8/13/2003
  51
 Table of Contents
  Incorporated
      by ReferenceExhibit
                            No.
                          
                          Description
                          Filed
                            Herewith
                          
                          Form
                          
                          
                          Exhibit
                            No.
                          
                          
                          Description
                          
                          Filed
                            Herewith10.12
                          
                          Consulting
      Agreement dated December 22, 2000, between Dr. Reza Fassihi and the
      Company*
                          
                          
                          
                          S-2
                          
                          
                          
                          10.15
                          
                          
                          
                          333-107906
                          
                          8/13/200310.13
                          †
                          Intellectual
      Property Assignment and Assumption Agreement dated May 24, 2001, between
      Dr. Reza Fassihi and the Company
                          
                          
                          
                          S-2
                          
                          
                          
                          10.16
                          
                          
                          
                          333-107906
                          
                          8/13/200310.14
                          †
                          License
      Agreement dated September 1, 2001, between Temple University and the
      Company
                          
                          
                          
                          S-2
                          
                          
                          
                          10.17
                          
                          
                          
                          333-107906
                          
                          8/13/200310.15
                          †
                          Intellectual
      Property Assignment and Assumption Agreement dated August 1, 2002, between
      Dr. Reza Fassihi and the Company
                          
                          
                          
                          S-2
                          
                          
                          
                          10.18
                          
                          
                          
                          333-107906
                          
                          8/13/200310.16
                          
                          Additional
      Services Agreement dated August 7, 2002, between Dr. Reza Fassihi and the
      Company*
                          
                          
                          
                          S-2
                          
                          
                          
                          10.19
                          
                          
                          
                          333-107906
                          
                          8/13/200310.17
                          
                          Form
      of Option Agreement under the 2004 Equity Incentive Plan*
                          
                          
                          10-QSB
                          
                          
                          
                          10.2
                          
                          
                          
                          001-31982
                          
                          11/12/200410.18
                          
                          Form
      of Outside Director Option Agreement for Annual grants to directors under
      the 2004 Equity Incentive Plan*
                          
                          
                          10-QSB
                          
                          
                          
                          10.3
                          
                          
                          
                          001-31982
                          
                          11/12/200410.19
                          
                          Form
      of Non Employee Director Option Agreement for stock based fee awards under
      the 2004 Equity Incentive Plan*
                          
                          
                          10-QSB
                          
                          
                          
                          10.4
                          
                          
                          
                          001-31982
                          
                          11/12/200410.20
                          †
                          Amendment
      No. 1 to Intellectual Property Assignment and Assumption Agreement dated
      July 16, 2004, between Dr. Reza Fassihi and the Company.
                          
                          
                          10-QSB
                          
                          
                          
                          10.1
                          
                          
                          
                          001-31982
                          
                          11/12/200410.21
                          
                          Employment
      Agreement dated November 12, 2004, between Daniel O. Wilds and the
      Company*
                          
                          
                          
                          8-K
                          
                          
                          
                          10.1
                          
                          
                          
                          001-31982
                          
                          11/18/200410.22
                          
                          Employment
      Agreement dated January 10, 2005, between Alan M. Mitchel and the
      Company*
                          
                          
                          
                          8-K
                          
                          
                          
                          10.1
                          
                          
                          
                          001-31982
                          
                          1/11/200510.23
                          †
                          Manufacture,
      License and Distribution Agreement dated October 20, 2005, between the
      Company and Perrigo Company of South Carolina
                          
                          
                          
                          10-K
                          
                          
                          
                          10.33
                          
                          
                          
                          001-31982
                          
                          3/23/200610.24
                          
                          First
      Amendment to Lease, effective as of October 12, 2005
                          
                          
                          
                          10-K
                          
                          
                          
                          10.35
                          
                          
                          
                          001-31982
                          
                          3/23/200610.25
                          ††
                          Amendment
      to License Agreement dated as of June 1, 2006, (executed July 11, 2006)
      between SCOLR Pharma, Inc. and Temple University
                          
                          
                          
                          10-Q
                          
                          
                          
                          10.1
                          
                          
                          
                          001-31982
                          
                          11/7/200610.26
                          ††
                          Amendment
      to License Agreement dated as of August 10, 2006, between
      Temple University and the Company
                          
                          
                          
                          10-Q
                          
                          
                          
                          10.4
                          
                          
                          
                          001-31982
                          
                          11/7/2006
  52
 Table of Contents
 
 Incorporated
      by ReferenceExhibit
                          No.
                        
                        Description
                        
                        Filed
                          Herewith
                        
                        
                        Form
                        
                        
                        Exhibit
                          No.
                        
                        
                        Description
                        
                        Filed
                          Herewith10.27
                        
                        Amendment
      to Consulting Agreement effective as of December 31, 2006, between Dr.
      Reza Fassihi and the Company*
                        
                        
                        
                        
                        
                        10-K
                        
                        
                        
                        10.42
                        
                        
                        
                        001-31982
                        
                        31/13/200710.28
                        
                        Executive
      Employment Agreement dated April 14, 2008, between Richard M. Levy and the
      Company*
                        
                        
                        
                        
                        
                        8-K
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        4/16/200810.29
                        
                        Executive
      Employment Agreement dated April 14, 2008, between Stephen J. Turner and
      the Company*
                        
                        
                        
                        
                        
                        8-K
                        
                        
                        
                        10.2
                        
                        
                        
                        001-31982
                        
                        4/16/200810.30
                        
                        Standard
      Multi-Tenant Lease dated June 19, 2008, between Arden Realty Limited
      Partnership and the Company
                        
                        
                        
                        
                        
                        8-K
                        
                        
                        
                        10.1
                        
                        
                        
                        001-31982
                        
                        6/24/200810.31
                        
                        Lease
      Termination and Surrender Agreement dated April 30, 2008, between
      Newport Corporate Center, LLC and the Company
                        
                        
                        
                        
                        
                        10-Q
                        
                        
                        
                        10.2
                        
                        
                        
                        001-31982
                        
                        8/7/200810.32
                        
                        2004
      Equity Incentive Plan, as Amended*
                        
                        
                        X10.33
                        
                        Form
      of Restricted Stock Purchase Agreement under the 2004 Equity Incentive
      Plan*
                        
                        
                        X10.34
                        
                        Executive
      Employment Agreement dated January 30, 2009, between Bruce S. Morra and
      the Company*
                        
                        
                        X23.1
                        
                        Consent
      of Grant Thornton LLP
                        
                        
                        X31.1
                        
                        Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                        
                        
                        X31.2
                        
                        Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002
                        
                        
                        X32.1
                        
                        Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                        
                        
                        X32.2
                        
                        Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                        
                        
                        X
  †
              Confidential
      treatment granted as to certain portions, which portions are omitted and
      filed separately with the SEC.
 ††
              Portions
      of such exhibit have been omitted pursuant to a request for confidential
      treatment filed with the SEC.
 *
              Management
      contract or compensatory plan or
arrangement.