**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

             

xANNUAL REPORT PURSUANT TO SECTION 13 OR            15 (D) OF

THE            SECURITIES EXCHANGE ACT OF 1934

FOR            THE FISCAL YEAR ENDED DECEMBER 31, 2007

 

oTRANSITION REPORT            PURSUANT TO SECTION 13 OR 15 (d) OF

THE            SECURITIES EXCHANGE ACT OF 1934

For            transition period from __________ to __________

 

Commission file number1-32302

 

| **ANTARES PHARMA, INC.**                                                          |
|-----------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its                            charter) |

 

| Delaware                                                                                |   |                                    | 41-1350192 |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
| State or other jurisdiction of incorporation or                            organization |   | (I.R.S. Employer Identification Number) |

 

| 250 Phillips Boulevard, Suite 290, Ewing, NJ                            08618  |
|--------------------------------------------------------------------------------|
| (Address of principal executive offices) (Zip                            Code) |

 

|   | Registrant’s telephone number, including area                            code: | (609) 359-3020 |
|--------|--------------------------------------------------------------------------------------|----------------|

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: Common            Stock, $.01 Par Value

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:            None

 

Indicate by check mark if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities Act.            YESoNOx

 

Indicate by check mark if the registrant is not required to file reports            pursuant to Section 13 or Section 15(d) of the Act.            YESoNOx

 

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. YESxNOo

 

Indicate by check mark if disclosure of delinquent filers pursuant to            Item 405 of Regulation S-K is not contained herein, and will not be contained, to the            best of the 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.x

 

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

Large accelerated filer o Accelerated            filer  o        Non-accelerater            filer  o                   Smaller reporting companyx

                                                                                             (do not check if a smaller

                                                                                                             reporting company)

                                     

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

 

Aggregate market value of the voting and non-voting common stock held by            nonaffiliates of the registrant as of June 30, 2007, was approximately $72,300,000            (based upon the last reported sale price of $1.58 per share on June 30, 2007, on The            American Stock Exchange).

 

There            were 65,529,666 shares of common stock outstanding as of March 21, 2008.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the definitive proxy statement for the registrant’s            2008 annual meeting of stockholders to be filed within 120 days after the end of the            period covered by this annual report on Form 10-K are incorporated by reference into            Part IIIof this annual report on Form 10-K.

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**PART I**

             

| *Item 1.* | *BUSINESS* |
|-----------|------------|

 

**SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS**

 

This            report contains forward-looking statements within the meaning of Section 27A of the            Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the            Exchange Act, and the Private Securities Litigation Reform Act of 1995 that are subject            to risks and uncertainties. You should not place undue reliance on those statements            because they are subject to numerous uncertainties and factors relating to our            operations and business environment, all of which are difficult to predict and many of            which are beyond our control. These statements often include words such as            “may,” “believe,” “expect,”            “anticipate,” “intend,” “plan,”            “estimate” or similar expressions. These statements are based on            assumptions that we have made in light of our industry experience as well as our            perceptions of historical trends, current conditions, expected future developments and            other factors we believe are appropriate under the circumstances. As you read and            consider this report, you should understand that these statements are not guarantees of            performance results. They involve risks, uncertainties and assumptions. Although we            believe that these forward-looking statements are based on reasonable assumptions, you            should be aware that many factors could affect our actual financial results or results            of operations and could cause actual results to differ materially from those in the            forward-looking statements. You should keep in mind that forward-looking statements            made by us in this report speaks only as of the date of this report. Actual results            could differ materially from those currently anticipated as a result of a number of            risk factors, including, but not limited to, the risks and uncertainties discussed            under the caption “Risk Factors.” New risks and uncertainties come up from            time to time, and it is impossible for us to predict these events or how they may            affect us. We have no duty to, and do not intend to update or revise the            forward-looking statements in this report after the date of this report. In light of            these risks and uncertainties, you should keep in mind that any forward-looking            statement in this report or elsewhere might not occur.

 

**Overview**

 

Antares Pharma, Inc. (“Antares,” “we,”            “our” or “us”) is a specialized pharma product development and            pipeline company with patented drug delivery platforms including Advanced Transdermal            Delivery (ATDTM) gels, oral disintegrating (Easy TecTM) tablets, disposable            pressure assisted auto injection systems (VibexTM), reusable needle-free injection            systems (VISION® and ValeoTM) and disposable pen injection systems.            Two of these platforms have generated FDA approved products. These platforms and            products are summarized and briefly described below:

 

**Delivery Platforms**

 

| Transdermal Drug

Delivery Systems                           | Advanced Transdermal Delivery

(ATDTM)                                                                       | Systemic or

Topical |
|--------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|----------------------|
| Oral Disintegrating Tablets                                  | Easy TecTM                                                                                                   |
| Parenteral Medicines                                         | Needle-Free Reusable Injectors (MJ Platform)

Medi-Jector VISION® and                            ValeoTM |
| Pressure Assisted Auto Injectors

(AJ Platform) VibexTM |
| Disposable Pen Injectors                                     |
| Vaccine Intradermal Injectors                                |

 

 

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Products 

 

 

 

 

 

 

 

 

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Transdermal Systems

 

Our transdermal systems consist of an unique formulation in semisolid            dosage forms (preferably gels) that deliver medication efficiently and minimize            gastrointestinal impact, as well as, the initial liver metabolism effect of some orally            ingested drugs. Our gels are hydro-alcoholic and contain a combination of permeation            enhancers to promote rapid drug absorption through the skin following application            typically to the arms, shoulders, or abdomen. Our transdermal gel systems provide the            option of delivering both systemically (penetrating into and through the subcutaneous            tissues and then into the circulatory system) as well as locally (e.g. topically for            skin and soft tissue injury, infection and local inflammation). Typically, the gel is            administered daily, and is effective on a sustained release basis over approximately a            24-hour period of time. Our gel systems are known as our Advanced Transdermal Delivery            (“ATDTM”) gels.

 

Oral Disintegrating Tablets

 

Our Easy TecTM oral disintegrating tablets are designed to help            patients who experience difficulty swallowing pills, tablets or capsules, while            providing the same effectiveness as conventional oral dosage forms. Our tablet features            a “disintegrant addition” that facilitates the disintegration of the oral            drug to promote quick and easy administration in saliva without water. This could play            an important role in our ability to target the pediatric, geriatric and analgesic            markets. We believe that the ability of Easy TecTM tablets to be manufactured            without specialized equipment and their non-effervescent (highly moisture sensitive)            qualities represents several significant processing and packaging advantages over            conventional competitors. Our Easy TecTM tablets may also be of interest to            pharmaceutical firms seeking line extensions in the marketplace. There may also be            further benefits if Easy TecTM can be formulated with certain actives to provide            buccal absorption.

 

Pressure Assisted Injection Devices 

 

Our injection device platform features four distinct products: reusable            needle-free injectors, disposable pressure assisted auto injectors, disposable pen            injectors and vaccine intradermal injectors. Each is briefly described            below:

 

| **•** | *Reusable needle-free injectors*deliver precise medication doses through high-speed,                            pressurized liquid penetration of the skin without a needle. These                            reusable, variable-dose devices are engineered to last for two years                            and are designed for easy use, facilitating self-injection with a                            disposable syringe to assure safety and efficacy. The associated                            sterile plastic disposables, needle-free syringes and adapters are                            designed for use as appropriate for the drug and indication. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

We have sold the Medi-Jector VISION® for use in more than            30 countries to deliver either insulin or human growth hormone (“hGH”). The            Medi-Jector VISION® employs a disposable plastic needle-free syringe,            which offers high precision liquid medication delivery through an opening that is            approximately half the diameter of a standard, 30-gauge needle. The product is            available over-the-counter (“OTC”) or by prescription in the United States            for use by patients with diabetes, and available through our partners in Europe, Japan            and Asia for hGH. To date, we believe that more than 100 million such injections have            been performed worldwide.

             

| **•** | *Disposable pressure assisted auto injectors                            (“VibexTM”)*employ the same                            basic technology developed for the Medi-Jector VISION®,                            a controlled pressure delivery of drugs into the body utilizing a                            spring power source. Combining pressure with a tiny hidden needle                            supports the design of a disposable, single-use injection system                            compatible with conventional glass drug containers. The VibexTM                            system is designed to economically provide highly reliable fast                            subcutaneous injections with minimal discomfort and improved                            convenience in conjunction with the enhanced safety of a shielded                            needle. After use, the device can be disposed of without the typical                            “sharps” disposal concerns. We and our potential partners                            have successfully tested the device in multiple patient preference                            studies. We continue to explore product extensions within this                            category, including the targeting of various body sites and devices                            with multiple dose, variable dose and user-fillable                            applications. |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **•** | *Disposable pen injectors*are needle-based devices designed to deliver multiple                            injections from multi-dose drug cartridges. The devices contain                            mechanisms that specify the dose to be delivered by defining the amount                            of movement by the stopper in the cartridge with each device actuation,                            similar to dose control mechanisms in the Medi-Jector                            VISION®. In contrast to the VISION®                            reusable needle-free injectors, the cartridge drug container |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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is integral to the pen injector and after utilizing all the drug from            the cartridge, the entire device is then disposed.

             

| **•** | *Vaccine intradermal injectors*are a variation of the VibexTM disposable pressure                            assisted auto injection technology and are being developed to deliver                            vaccines into the dermal and subdermal layers of the skin (a preferred                            site of administration in the vaccine industry). We believe that this                            proprietary device will offer easier and more rapid dosing compared                            with conventional needle-based devices. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**History**

 

On January 31, 2001, we (Antares, formerly known as Medi-Ject            Corporation or “Medi-Ject”) completed a business combination to acquire the            three operating subsidiaries of Permatec Holding AG (“Permatec”),            headquartered in Basel, Switzerland. The transaction was accounted for as a reverse            acquisition, as Permatec's shareholders initially held a majority of the outstanding            stock of Antares. Medi-Ject was at that time, focused on delivering drugs across the            skin using needle-free technology, and Permatec specialized in delivering drugs across            the skin using transdermal patch and gel technologies as well as developing oral            disintegrating tablet technology. With both companies focused on drug delivery but with            a focus on different sectors, it was believed that a business combination would be            attractive to both pharmaceutical partners and to our stockholders. Upon completion of            the transaction our name was changed from Medi-Ject Corporation to Antares Pharma,            Inc.

 

Our Parenteral Medicines (device) division is located in Minneapolis,            Minnesota, where we develop and manufacture with partners novel pressure assisted            injectors, with and without needles, which allow people to self-inject drugs. We make a            reusable, needle-free, spring-action injector device known as the Medi-Jector            VISION®, which is legally marketed for use with insulin and human growth            hormone. Using an adapter, the liquid drug is drawn from a conventional vial into the            plastic needle-free syringe, through a small hole at the end of the syringe. When the            syringe is held against an appropriate part of the body and the spring is released, a            piston drives the fluid stream into the tissues beneath the skin, from where the drug            is dispersed into systemic circulation. A person may re-arm the device and repeat the            process or attach a new sterile syringe between injections. We have had success in            achieving distribution of our device for use with human growth hormone through licenses            to pharmaceutical partners, and it has resulted in continuing market growth and, we            believe, a high degree of customer satisfaction. Distribution of growth hormone            injectors occurs in Europe, Japan and other Asian countries through our pharmaceutical            company relationships.

 

We have also developed variations of the needle-free injector by adding            a very small hidden needle to a pre-filled, single-use disposable injector, called the            VibexTM pressure assisted auto injection system. This system is an alternative to            the Vision® system for use with unit dose injectable drugs and is            suitable for branded and branded generic injectables. Recently we also developed a            disposable multi-dose pen injector for use with standard multi-dose cartridges. We have            entered into multiple licenses for these devices mainly in the U.S. and Canada with            Teva Pharmaceuticals.

 

Our Pharma division is located in Basel, Switzerland, where we develop            pharmaceutical products utilizing our transdermal systems. Our first transdermal and            oral disintegrating tablet products were developed under Permatec’s name in the            mid-1990s. Permatec’s research efforts moved away from the transdermal patch            field and focused on transdermal gel formulations, which allow the delivery of            estrogens, progestins, testosterone and other drugs in a gel base without the need for            occlusive or potentially irritating adhesives. Several licensing agreements with            pharmaceutical companies of various sizes have led to successful clinical evaluation of            our formulations. In 2006 the FDA approved our first transdermal gel product for the            treatment of vasomotor symptoms in post-menopausal women. We are also developing our            own transdermal gel-based products for the market and have initiated a pivotal safety            and efficacy trial for AnturolTM, our oxybutynin transdermal gel product for            overactive bladder.

 

We believe that our transdermal gels minimize first pass liver            metabolism, gastro intestinal effects and skin erythema. Other advantages include            cosmetic elegance and ease of application as compared to transdermal patches and have            potential applications in such therapeutic markets as hormone replacement, overactive            bladder, osteoporosis, cardiovascular, pain management and central nervous system            therapies. We also believe that our proprietary ODT tablets can enable delivery of            certain drugs orally in the area of opioid analgesia and nonsteroidal anti-inflammatory            drugs.

 

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We operate in the specialized drug delivery sector of the pharmaceutical            industry. Companies in this sector generally leverage technology and know-how in the            area of drug formulation and product development to pharmaceutical manufacturers            through licensing and development agreements while continuing to develop their own            products for the marketplace. We also view many pharmaceutical and biotechnology            companies as collaborators and primary customers. We have negotiated and executed            licensing relationships in the needle-free devices segment in the U.S., Europe and            Asia, the auto injector segment in the U.S. and Canada, the transdermal gels segment            (several development programs in place worldwide, including the United States and            Europe) and the Easy TecTM ODT segment worldwide. In addition, we continue to            market our re-usable needle-free devices for the self administration of insulin in the            U.S. market through distributors and have licensed our technology in the diabetes and            obesity fields.

 

We are a Delaware corporation. Principal executive offices are located            at Princeton Crossroads Corporate Center, 250 Phillips Boulevard, Suite 290, Ewing, New            Jersey 08618; telephone (609) 359-3020. We have wholly-owned subsidiaries in            Switzerland (Antares Pharma AG and Antares Pharma IPL AG) and the Netherland Antilles            (Permatec NV).

 

**Industry Trends**

 

Based upon experience in the industry, we believe the following            significant trends in healthcare have important implications for the growth of our            business.

 

When a drug loses patent protection, the branded version of the drug            typically faces competition from generic alternatives. It may be possible to preserve            market share by altering the delivery method, e.g., a single daily controlled release            dosage form rather than two to four pills a day. We expect branded and specialty            pharmaceutical companies will continue to seek differentiating drug delivery            characteristics to defend against generic competition and to optimize convenience to            patients. The altered delivery method may be an injection device or a novel oral or            transdermal formulation that may offer therapeutic advantages, convenience or improved            dosage schedules. Major pharmaceutical companies now focus on life cycle management of            their products to maximize return on investment and often consider phased product            improvement opportunities to maintain competitiveness.

 

Major pharmaceutical companies market directly to consumers and            encourage the use of innovative, user-friendly drug delivery systems, offering patients            a wider choice of dosage forms. We believe the patient-friendly attributes of our            transdermal gels, ODT tablets and injection technologies meet these market            needs.

 

We believe transdermal gel formulations offer patients more choices and            added convenience with no compromise of efficacy. Our ATDTM gel technology is            based upon so-called GRAS (“Generally Recognized as Safe”) substances,            meaning the toxicology profiles of the ingredients are known and widely used. We            believe this approach has a major regulatory benefit and may reduce the cost and time            of product development and approval.

 

Other industry trends include the increasing difficulty in getting drugs            approved by the FDA as well as the continuing need to demonstrate long term safety thus            resulting in longer time lines to approval. Thus dosing and specifically minimum            effective dose is becoming an ever increasing trend.

 

Many drugs, including selected hormones and protein biopharmaceuticals,            are degraded in the gastrointestinal tract and may only be administered through the            skin, the lungs or by injection. Pulmonary delivery is complex and has recently been            commercialized for limited therapeutic proteins intended for systemic delivery.            Injection therefore remains the mainstay of protein delivery. The growing number of            protein biopharmaceuticals requiring injection may have limited commercial potential if            patient compliance with conventional injection treatment is not optimal. The failure to            take all prescribed injections can lead to increased health complications for the            patient, decreased drug sales for pharmaceutical companies and increased healthcare            costs for society. In addition, it is becoming increasingly recognized that            conventional needles and syringes are inherently unreliable and require special and            often costly disposal methods. Industry expectations are that improvements in protein            delivery systems will continue to be accepted by the market.

 

In addition to the increase in the number of drugs requiring            self-injection, recommended changes in the frequency of injections may contribute to an            increase in the number of self-injections. Biosimilar drug legislation

 

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continues to gather momentum in Congress. In order to differentiate            biosimilars, novel patented delivery systems are becoming more important to extend            product proprietary position as well as secure patient preference.

 

The importance of vaccines in industrialized and emerging nations is            expanding as the prevalence of infectious diseases increases. New vaccines and improved            routes of administration are the subject of intense research in the pharmaceutical            industry and we have been researching the feasibility of using our devices for vaccines            and new vaccine ingredients including evaluating opportunities in bio-terrorism            initiatives.

 

Patented pharmaceutical products continue to be challenged by generic            companies once substantial proprietary sales are generated. All of our proprietary            delivery systems may provide pharmaceutical companies the ability to protect and extend            the life of a product.

 

**Market Opportunity**

 

According to a February 2008 Thomson Pharma Drug Report, the worldwide            market for urinary incontinence was $1.9 billion in 2006 and is estimated to be $3.1            billion by 2011. Older incontinence drugs, such as oral oxybutynin, are plagued by            anticholinergic effects including moderate to severe dry mouth, constipation and            somnolence. In a 2006 Cowen & Co. publication it was estimated that half of the 20            million U.S. adults suffering from overactive bladder either are too embarrassed to            discuss the symptoms or are not aware that pharmacological treatment is available. It            was further estimated that only 47% of U.S. incontinence patients sought treatment in            2005 and that 16% of incontinence patients were compliant with their treatment in 2005            estimated to increase to only 18% by 2010.

 

According to a February 2008 Thomson Pharma Drug Report, the worldwide            hormone replacement market is expected to grow from $1.9 billion in 2006 to $2.1            billion by 2011. Further growth in this sector may be achieved by the use of            testosterone products in both male and female applications. According to a            comprehensive study by Cowen & Co. in 2006, the female sexual dysfunction            (“FSD”) market is estimated to be 78 million sufferers worldwide rising to            95 million by 2010. Additionally, the worldwide sexual dysfunction market is projected            to grow to $5.6 billion by 2010. The importance of gel products containing            testosterone for men has been exemplified with the success of Androgel®            (Unimed-Solvay) and Testim® (Auxilium Pharmaceuticals) for treatment of male            hypogonadism, where combined sales were recently estimated at approximately $500            million per year. A new market opportunity also exists with the use of low dose            testosterone for treatment of FSD, a disorder according to published reports that            affects an estimated 40-55% of all women and for which no drug is currently approved in            the U.S. Antares Pharma, along with its U.S. partner BioSante, has a low dose            testosterone product named Libi-GelTM, which has completed Phase II testing for            FSD and is currently in Phase III clinical trials. We have the exclusive market rights            in Europe and elsewhere outside the United States for Libi-GelTM. As evidenced in            Europe we believe that patient demand for transdermal hormone therapy products will            continue to increase. Evidence of this belief is the recent commercial launch, in            France, Italy, Spain, U.K., Germany and others, by Proctor and Gamble of the            Intrinsa® Patch, a testosterone transdermal patch for FSD. Gel products are also            being formulated to address equally large opportunities in other sectors of the            pharmaceutical industry, including cardiovascular, pain, infectious diseases, addiction            and central nervous system therapies.

 

The central nervous system ("CNS") consists of the brain and spinal            cord. Disorders of this system are many, varied and frequently severe, affecting a            large portion of the population. These debilitating disorders include diseases such as            Parkinson’s disease, restless leg syndrome, epilepsy and migraine and psychotic            disorders such as anxiety, bipolar disorder, depression and schizophrenia. In addition,            chronic pain is a neurological response to disease or injury; or it may have no readily            apparent cause. Regardless of the cause, chronic pain can have devastating effects on            those suffering from it.

 

Current treatments for CNS disorders vary in effectiveness, but there            are many conditions for which there are few safe and effective drugs. It has been            estimated that nearly $36 billion is spent annually on prescription CNS drugs.            According to Wolters Kluwer Health data, the total US market for pain management            pharmaceuticals, excluding over-the-counter products, totaled in excess of $20 million            in 2007. Many CNS and chronic pain drugs merely treat the symptoms and do not provide            cures. According to the World Health Organization, diseases of the CNS will constitute            an increasing medical need this century, attributable to an exponential increase of            these diseases after the age of 65 combined with an aging population.

 

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Our parenteral/device focus is specifically on the market for delivery            of self-administered injectable drugs. The largest and most mature segments of this            market consist of insulin for patients with diabetes and human growth hormone for            children with growth retardation. According to a February 2008 Thomson Pharma Drug            Report, the worldwide insulin market is estimated to go down from $8.9 billion in 2006            to $7.9 billion in 2011, however new non-insulin related treatments for diabetes are            expected to expand the market for diabetic products. We believe that the number of            injections will increase with time as the result of new diabetes management techniques,            which recommend more frequent injections.

 

We believe that a significant portion of needles and syringes that are            used for the administration of drugs could be replaced with user friendly injectors            promoting better compliance and decreasing sharps concerns, but only a small percentage            of people who self-administer drugs currently use needle-free/auto injector systems. We            believe that this lack of market penetration is due to older technology not meeting            customer needs owing to cost and performance limitations as well as the small size of            the companies directly marketing to consumers not being able to gain a significant            “share of voice” in the marketplace. We believe that our technology            overcomes most of these limitations of the past and that our business model of working            with pharmaceutical company partners has the potential for improved market penetration.            Further, we anticipate developing our own pharmaceutical products using our pressure            assisted auto injectors in the future.

 

According to a February 2008 Thomson Pharma Drug Report, the worldwide            hGH market in 2006 was estimated at $2.4 billion. Our pharmaceutical partner in Europe,            Ferring Pharmaceuticals BV (“Ferring”), has made significant inroads using            our injectors in the hGH market, and we expect similar progress in other geographic            regions where partnerships have already been established. Other injectable drugs that            are presently self-administered and may be suitable for injection with our systems            include therapies for the prevention of blood clots and the treatment of multiple            sclerosis, migraine headaches, inflammatory diseases, impotence, infertility, AIDS and            hepatitis. We also believe that many injectable drugs currently under development will            be administered by self-injection once they reach the market. This is supported by the            continuing development of important chronic care products that can only be given by            injection, the ongoing effort to reduce hospital and institutional costs by early            patient release, and the gathering momentum of new classes of drugs that require            injection. A partial list of such drugs introduced in recent years that all require            self injection include Enbrel® (Amgen, Wyeth) for treatment of rheumatoid            arthritis, Aranesp® (Amgen) for treatment of anemia, Kineret® (Amgen) and            Humira® (Abbott) for rheumatoid arthritis, ForteoTM (Lilly) for treatment of            osteoporosis, Intron® A (Schering Plough) and Roferon® (Roche) for hepatitis C,            Lantus® (Aventis Pharma) and Byetta® (Lilly) for diabetes, Rebif® (Serono)            for multiple sclerosis, Copaxone® (Teva) for multiple sclerosis and Gonal-F®            for fertility treatment.

 

**Products and Technology**

 

We are leveraging our experience in drug delivery systems to enhance the            product performance of established drugs as well as new drugs in development. Our            current technology platforms include transdermal Advanced Transdermal Delivery            (ATDTM) gels; oral disintegrating tablets (Easy TecTM); disposable pressure            assisted auto injection systems (VibexTM); disposable pen injection systems; and            reusable needle-free injection systems (Medi-Jector VISION® and            ValeoTM).

 

TRANSDERMAL DRUG DELIVERY

 

Transdermal drug delivery has emerged as a generally safe and            patient-friendly method of drug delivery. The commercialization of transdermal products            for controlled drug delivery began over two decades ago. In more recent years            transdermal gels, creams and sprays have become increasingly more popular as            alternative delivery systems. Among transdermal products currently marketed are            nitroglycerin for angina, scopolamine for motion sickness, fentanyl for pain control,            nicotine for smoking cessation, estrogen for HT, clonidine for hypertension, lidocaine            for topical anesthesia, testosterone for hypogonadism, and a combination of estradiol            and a norelgestimate for contraception. Skin penetration enhancers are often used to            enhance drug permeation through the dermal layers.

 

The primary goal of transdermal drug delivery is to effectively            penetrate the surface of the skin via topical administration. When successful,            transdermal drug delivery provides an easy and painless method of administration. The            protective capabilities of the skin, however, often act as a barrier to effective            delivery. Since the primary role of the skin is to provide protection against infection            and physical damage, the organ can prevent certain

 

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pharmaceuticals from entering the body as well. As a result, a limited            number of active substances are able to cross the skin’s surface.

 

Despite these limitations, transdermal drug delivery is still viewed as            a highly attractive route of administration for certain therapeutics. As a high            concentration of capillaries is located immediately below the skin, transdermal            administration provides an easy means of access to systemic circulation. Transdermal            systems can be designed to minimize absorption of the active drug in the blood            circulation as is needed in topical applications. This allows a build-up of drug in the            layers underlying the skin, leading to an increased residence time in the targeted            tissue. Transdermal systems can also be designed to release an active ingredient over            extended periods of time, providing benefits similar to depot injections and implants,            without the need for an invasive procedure. If required, patients are also able to            interrupt dosing by removing a patch or discontinuing the application of a gel.            Finally, this delivery technology typically minimizes first-pass metabolism by the            liver as well as many of the gastrointestinal concerns of many orally ingested            drugs.

 

Transdermal Gels

 

While transdermal patches remain an important aspect of the transdermal            drug delivery market, transdermal gels have recently emerged as a viable means of            administering an increasingly wide array of active pharmaceutical treatments. The            concept of transdermal gels parallels that of the transdermal patch in the creation of            a drug reservoir to provide sustained delivery of therapeutic quantities of a drug.            While a patch provides this from an external reservoir, gel formulations typically            create a subdermal reservoir of the medication. Transdermal patches, however, have            recently resulted in increasingly more adverse events, specifically skin irritation            events associated principally with the occlusive nature of patches            and the use of adhesives that contain residual solvents and irritant            monomers. Most of these factors are minimized in transdermal gels.

 

Gels also provide drug developers with an opportunity to explore a wide            variety of potential applications. Due to the physicochemical properties of the            excipients employed in gels, combined with the enhanced solubilization properties, a            broad range of active agents can be formulated. These solubilization properties allow            for higher concentrations of the active ingredient to be incorporated for delivery. The            enhanced viscosity in gels further enhances the patient’s ability to apply the            product with little-to-no adverse cosmetic effect. There is also relatively little            limitation in the surface area to which a gel can be applied, as opposed to patches,            allowing greater quantities of drug to be transported if required.

 

We have developed our ATDTM gel technology that utilizes a            combination of permeation enhancers to further bolster a pharmaceutical agent’s            ability to penetrate the skin, which leads to a sustained plasma profile of the active            agent, without the skin irritation and cosmetic concerns often associated with            patches.

 

Advanced Transdermal Delivery (ATDTM) System

 

Our ATDTM system successfully penetrates the skin to deliver a            variety of treatments. The gels consist of a hydro-alcoholic base including a            combination of permeation enhancers. The gels are also designed to be absorbed quickly            through the skin after application typically to the arms, shoulders, or abdomen and            release the active ingredient into the blood stream predictably over approximately a 24            hour period of time. The following is a summary of the competitive advantages of our            ATDTM gel system:

 

|   |                                                                                                                       |   |
|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
|   | Competitive Advantages of ATDTM Gel                            System                                                 |   |
|   | **•**      Discrete                                                                     |   |
|   | **•**      Easy application                                                             |   |
|   | **•**      Cosmetically appealing compared with patches                                 |   |
|   | **•**      Reduced skin irritancy compared with patches                                 |   |
|   | **•**      Application of once per day for most products                                |   |
|   | **•**      Potential for delivery of larger medication                            doses |   |
|   | **•**      Potential for delivery of multiple active                            drugs   |   |
|   | **•**      Ability to be either systemic or topical                                     |   |
|   |                                                                                                                       |   |

 

 

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Our ATDTM gels can deliver both a single active ingredient as well            as a combination of active ingredients with different release profiles, and have            demonstrated potential in a variety of therapeutic areas. One of our licensed gels, an            estrogen gel for women to treat vasomotor symptoms associated with menopause called            Elestrin®, was approved by the FDA in December 2006 and commercially            launched in mid-2007. In addition, we have signed a development and license agreement            for a gel product based on our ATDTM system that is being developed to treat a            central nervous system (“CNS”) disorder. Other current ATDTM drug gels            in development encompass an oxybutynin gel for treatment of overactive bladder            (AnturolTM), a low dose testosterone gel to treat low libido in women            (Libi-GelTM), a contraceptive gel, another CNS product (AP1126) and an alprazolam            gel for anti-anxiety. We have also licensed an ibuprofen gel in 11 countries.            ATDTM gels may be extended to a variety of fields, including the treatment of            cardiovascular disease and chronic pain, in which potent compounds may require            alternatives to oral and injectable delivery for the following reasons:

 

|   | **•** | poor oral uptake; |
|--------|------------|-------------------|

|   | **•** | high first-pass liver effect; |
|--------|------------|-------------------------------|

|   | **•** | requirement for less frequent administration; |
|--------|------------|-----------------------------------------------|

|   | **•** | desire to provide an alternative dosage form; |
|--------|------------|-----------------------------------------------|

|   | **•** | reducing peak plasma levels to avoid side effects;                            and |
|--------|------------|-----------------------------------------------------------------------------------|

|   | **•** | reduction in gastrointestinal side effects. |
|--------|------------|---------------------------------------------|

 

We have also formulated several combination gels demonstrating the            ability to deliver multiple actives with different release profiles.

 

ORAL DRUG DELIVERY

 

The majority of all drugs are administered orally. Despite this, there            remain limitations for those patients who have difficulty swallowing conventional oral            dosage forms or where an underlying disease state (for example, migraine, Parkinsonism            or cancer) impacts a person’s ability to swallow. Additionally, where patients            are resistant to oral drug delivery, the phenomenon of “cheeking” (hiding a            pill between the cheek and gum) and subsequent drug disposal is quite well known. New            generations of oral product forms are being developed to address these            issues.

 

Oral Disintegrating Tablets

 

Fast-dissolving tablet technology is an oral delivery method that offers            an alternative to patients who experience difficulty ingesting conventional oral dosage            forms. As a result, formulators are focusing on the development of tablet dosage            formulations for oral administration that dissolve rapidly in saliva without need for            the patient to drink water. This formulation is easy to take and possesses similar            therapeutic benefits to traditional oral technologies, thus appealing to a wide            demographic population.

 

One of the primary realities influencing the development of            fast-dissolving technologies is the increased life expectancy of a growing geriatric            population. As many elderly individuals experience difficulty taking conventional oral            dosage forms, such as solutions, suspensions, tablets and capsules, the need for more            user-friendly formulations is expanding. While swallowing difficulties often affect the            elderly population, many young individuals also experience difficulty as a result of            underdeveloped muscular and nervous systems. Other groups, including the mentally ill,            the developmentally disabled and uncooperative patients also require special attention.            Other circumstances, such as motion sickness, allergic attacks and an unavailable            source of water also necessitate fast-dissolving oral formulations.

 

The development of a fast-dissolving tablet also provides pharmaceutical            companies with an opportunity for product line extensions. A wide range of drugs (e.g.            neuroleptics, cardiovascular drugs, analgesics, antihistamines, and drugs for erectile            dysfunction) may be considered candidates for this technology.

 

*Easy TecTM Oral Disintegrating Tablets*

 

Our patented Easy TecTM technology is based on the simultaneous use            of two disintegrants in an oral formulation. We believe two primary advantages of Easy            TecTM over competing technologies are that Easy TecTM

 

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tablets can be manufactured with conventional tableting equipment and no            unique packaging requirements are necessary. We also believe that Easy TecTM            possesses several other key advantages over competing technologies;

 

|   |                                                                                                                                       |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | Easy TecTM Competitive Advantages                                                                                                     |   |
|   | **•**      Higher drug dose loading is possible                                                         |   |
|   | **•**      Friability within pharmaceutical                            specifications                   |   |
|   | **•**      Moisture sensitivity lower compared with many competitor                            products |   |
|   | **•**      Blister packaging sufficient to prevent moisture                            uptake           |   |
|   | **•**      Cost-effective, easy, time-saving process                                                    |   |
|   | **•**      Easily transferable to final product site                                                    |   |
|   | **•**      No specific facility required, compared to effervescent                            products  |   |
|   | **•**      Ability to formulate with permeation                            enhancers                    |   |
|   |                                                                                                                                       |   |

 

In addition to being easy to take, such products are perceived as being            fast acting because of rapid dispersion in the mouth. There may also be further            benefits if Easy TecTM can be formulated with certain actives to provide buccal            absorption. We believe that there may be attractive opportunities to develop our own            ODT products using generic active ingredients as part of our specialty pharmaceutical            strategy and to achieve product approval based on an Abbreviated New Drug Application            (“ANDA”) or 505(b)(2) filing in the United States and equivalent regulatory            submissions in other parts of the world. We have formulated our first Easy TecTM            based product, a non-steroidal anti inflammatory (NSAID) generic currently called            AP-159 for the treatment of pain. Additionally, we have signed a global license            agreement with an unnamed partner in the area of opioid analgesia.

 

INJECTION DRUG DELIVERY

 

According to industry sources, an estimated 9-12 billion needles and            syringes are sold each year. While the need for these components will always exist,            burgeoning development efforts are focused on easing the dependence on needles in favor            of more user-friendly injection systems. Currently available data suggest that auto            injectors match the performance of needle and syringe based systems with regard to drug            bioavailability, and offers benefits in the speed and quality of injections as well as            the lack of requirement for needle disposal.

 

Pressure Assisted Auto Injection

 

The most significant challenge beyond discovery of new molecules is how            to effectively deliver them by means other than conventional injection technology. The            majority of these molecules have not, to date, been amenable to oral administration due            to a combination of several factors, including breakdown in the gastrointestinal tract,            fundamentally poor absorption, or high first pass liver metabolism. Pulmonary delivery            of these molecules, as an alternative to injections, has also been pursued. It remains            to be seen how clinical success will be accepted by patients, doctors and third party            payers. Many companies have expended considerable effort in searching for less invasive            ways to deliver such molecules that may allow them to achieve higher market acceptance,            particularly for those requiring patient self-administration.

 

Pressure assisted auto injection is a form of parenteraldrug delivery            that continues to gain acceptance among the medical community. Encompassing a wide            variety of sizes and designs, this technology operates by using pressure to force the            drug, in solution or suspension, through the skin and deposits the drug into the            subcutaneous tissue.

 

Needle-Free Injectors

 

Needle-free injection represents a combination of an accepted technology            - injection, with the elimination of the part of the injection – the needle, that            concerns patient’s that have to self administer and health care professionals            concerned about risks to themselves. Improving patient comfort through needle-free            injection may increase compliance and mitigate the problem of daily injections.            Needle-free delivery eliminates the risk of needlestick injuries as well, which occurs            frequently in institutions in the U.S., and can result in disease transmission to            healthcare workers.

 

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One of the primary factors influencing development in the category of            needle-free injection is the inherent problematic dependence on needles. It is also            recognized that greater willingness to accept injection therapy could have a beneficial            impact on disease outcomes. For example, patients with diabetes appear to be reluctant            to engage in intensive disease management, at least in part because of concerns over            increased frequency of injections. Similarly, patients with diabetes who are            ineffectively managed with oral hypoglycemic agents are reluctant to transition to            insulin injections in a timely manner because of injection concerns.

 

The advent of these technologies has, to date, had a minor influence            within the injectable sector, and they have failed to produce the deep market            penetration that many within the industry believe they are capable of gaining. Several            factors are believed to contribute to this lack of market penetration, beginning with            older needle-free injection systems. Many of the early needle-free injection systems            had an assortment of drawbacks associated with both performance and cost efficiency.            With potential consumers aware of these historical shortcomings, current technologies            promising greater efficiency and lower prices have failed to gain wide acceptance in            the industry.

 

| Medi-Jector VISION®                            (MJ7) |
|----------------------------------------------------------|

 

The Medi-Jector VISION® has been sold for use in more            than 30 countries to deliver either insulin or human growth hormone. The product            features a reusable, spring-based power source and disposable needle-free syringes,            which eliminate the need for routine maintenance of the nozzle and allow for easy            viewing of the medication dose prior to injection. The device’s primary advantage            over earlier devices is its ease of use and cost efficiency. The product is also            reusable, with each device designed to last for approximately 3,000 injections (or            approximately two years) while the needle-free syringe, when used with insulin or            growth hormone, is disposable after approximately one week when used by a single            patient for injecting from multi-dose vials.

 

The Medi-Jector VISION® administers injectables by using            a spring to push the active ingredient in solution or suspension through a micro-fine            opening in the needle-free syringe. The opening is approximately half the diameter of a            standard 30-gauge needle. A fine liquid stream then penetrates the skin, and the dose            is dispersed into the layer of fatty, subcutaneous tissue. The drug is subsequently            distributed throughout the body, successfully producing the desired effect.

 

We believe this method of administration is a particularly attractive            alternative to the needle and syringe for the groups of patients described            below.

 

|   |                                                                                                                                |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | Patient Candidates for Needle-Free Injection                                                                                        |   |
|   | **•**      Young adults and children                                                             |   |
|   | **•**      Patients looking for an alternative to                            needles             |   |
|   | **•**      Patients mixing drugs                                                                 |   |
|   | **•**      Patients unable to comply with a prescribed needle                            program |   |
|   | **•**      Patients transitioning from oral medication                                           |   |
|   | **•**      New patients beginning an injection treatment                            program      |   |
|   |                                                                                                                                |   |

 

The Medi-Jector VISION® is primarily used in the U.S. to            provide a needle-free means of administering insulin to patients with diabetes.            Patients with insulin-dependent diabetes are often required to make a life-long            commitment to daily self-administration of insulin. In an effort to improve both the            comfort and performance of this injectable, needle-free injection could become an            important alternative method of choice for administration.

 

The Medi-Jector VISION® is primarily used in Europe,            Asia, Japan and elsewhere to provide a needle-free means of administering human growth            hormone to patients with growth retardation. We typically sell our injection devices to            partners in these markets who manufacture and/or market human growth hormone directly.            The partners then market our device with their growth hormone. We receive benefits from            these agreements in the form of product sales and royalties on sales of their products.            In 2006 we filed a 510(k) in the U.S. for our device for use with hGH.

 

12

 

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*MJ8 (ValeoTM) Needle-Free Injection Systems*

 

In addition to the Medi-Jector VISION®, we are also            developing the Medi-Jector MJ8 (ValeoTM) with unique needle-free injection            capabilities. The Medi-Jector ValeoTM accepts a conventional drug cartridge to            create a completely self-contained, multi-dose, needle-free injection system. The            Medi-Jector ValeoTM aspires to provide more user-friendly capabilities.

 

Disposable (VibexTM) Injectors

 

Beyond reusable needle-free injector technologies, we have designed            disposable, pressure assisted auto injector devices to address acute medical needs,            such as allergic reactions, migraine headaches, acute pain, emesis and other daily            therapies, as well as potentially for the delivery of vaccines. Our proprietary            VibexTM disposable product combines a low-energy, spring-based power source with a            small, hidden needle, which delivers the needed drug solution subcutaneously or, in the            case of vaccines, subdermally.

 

In order to minimize the anxiety and perceived pain associated with            injection-based technologies, the VibexTM system features a triggering collar that            shields the needle from view. The patented retracting collar springs back and locks in            place as a protective needle guard after the injection, making the device safe for            general disposal. In clinical studies, this device has outperformed other delivery            methods in terms of completeness of injection and user preference, while limiting pain            and bleeding. A summary of the key competitive advantages of the VibexTM system is            provided below.

 

|   |                                                                                                                                            |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | Competitive Advantages of VibexTM Disposable                            Injectors                                                          |   |
|   | **•**      Rapid injection                                                                                   |   |
|   | **•**      Eliminates sharps disposal                                                                        |   |
|   | **•**      Ease of use in emergencies                                                                        |   |
|   | **•**      Reduces psychological barriers since the patient never                            sees the needle |   |
|   | **•**      Reliable subcutaneous injection                                                                   |   |
|   | **•**      Designed around conventional cartridges or pre-filled                            syringes         |   |
|   |                                                                                                                                            |   |

 

The primary goal of the VibexTM disposable pressure assisted auto            injector is to provide a fast, safe, and time-efficient method of self-injection that            addresses the patient’s need for immediate relief. This device is designed around            conventional cartridges or pre-filled syringes, which are primary drug containers,            offering ease of transition for potential pharmaceutical partners.

 

Disposable Pen Injector System

 

Our most recently developed product, the pen injector, complements our            portfolio of pressure assisted auto injector devices. The disposable pen injector            device is designed to deliver drugs by injection through needles from multi-dose            cartridges. The disposable pen is in the prototype stage of development where devices            are being made for engineering bench testing and clinical evaluation. Although            differing from the other pressure assisted injection strategies common to the above            portfolio of injection therapy, this device includes a dosing mechanism design that is            drawn from our variable dose needle-free technology. We have signed a license agreement            with Teva Pharmaceuticals for our pen injector device for two undisclosed            products.

 

Disposable Vaccine Delivery Device

 

Our disposable vaccine delivery device is at an earlier stage and is            derived from our VibexTM injector technology (see above section). The            disposable device is designed to deliver vaccines intradermally and to subdermal layers            of the skin. Effective intradermal injection methods, using variants of conventional            needles, depend extensively on the skill of the person administering the injection. Our            vaccine delivery technology simplifies the process for intradermal delivery, minimizing            the dependence on skilled individuals administering the injection, and providing for a            more comfortable means of vaccine delivery.

 

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**Research and Development**

 

We currently perform pharmaceutical product development work primarily            in our Basel, Switzerland location for both partners and our own portfolio.            Additionally, we perform parenteral product development work primarily at our            Minneapolis, MN facility. We have various products at earlier stages of development as            highlighted in our products schedule on page 3.

 

We currently have a pharmaceutical product candidate in our own clinical            studies listed below. Additionally, pharmaceutical partners are developing compounds            using our technology (see “Collaborative Arrangements and License            Agreements”).

 

***ANTUROLTM.***We are currently            evaluating AnturolTM for the treatment of overactive bladder (OAB). AnturolTM            is the anticholinergic active substance oxybutynin delivered by our proprietary            ATDTM gel that is used to achieve therapeutic blood levels of the active compound            that can be sustained over 24 hours after a single, daily application. It is believed            that AnturolTM may offer equal or increased oxybutynin to the metabolite ratio,            thus resulting in decreased reporting of adverse events when compared to patients            taking comparable oral products. In addition, AnturolTM may also be more            cosmetically appealing than patches and have less irritation and allergic reactions as            well as comparable or decreased reporting of adverse events.

 

Summary of Clinical Data

 

In February 2006, we announced the results of our Phase II dose ranging            study for our ATDTM oxybutynin based gel product called AnturolTM. The study            was an open label, single period, randomized study using 48 healthy subjects and three            different doses of AnturolTM over a 20 day period. Variables tested included            accumulation of the dose, dose proportionality, decay of plasma levels, skin            tolerability and other adverse events.

 

The overall conclusions of the study were positive. Dose proportionality            occurred within the tested dosing range. A steady state was achieved after 3            applications (i.e., 3 days). The incidences of dry mouth were minimal and similar to            other transdermals while significantly improved over comparable oral medications.            Additionally, skin tolerance (i.e. local skin irritation) was excellent.

 

In October 2007, we announced that the first patients were dosed in the            pivotal trial designed to evaluate efficacy of ANTUROLTM when administered            topically once daily for 12 weeks in patients predominantly with urge incontinence            episodes. The randomized, double-blind, parallel, placebo controlled, multi-center            trial is expected to involve 600 patients (200 per arm) using two dose strengths            (selected from the Phase II clinical trial) vs. a placebo. The primary end point of the            trial will be efficacy against the placebo defined as the reduction in the number of            urinary incontinence episodes experienced. Secondary end points include changes from            baseline in urinary urgency, average daily urinary frequency, patient perceptions as            well as safety and tolerability including skin irritation. Enrollment continues in            twelve centers throughout the United States.

 

**Proprietary Rights**

 

When appropriate, we actively seek protection for our products and            proprietary information by means of U.S. and international patents and trademarks. We            currently hold approximately 87 patents and have an additional 80 applications pending            in the U.S. and other countries. Our patents have expiration dates ranging from 2015 to            2022. In addition to issued patents and patent applications, we are also protected by            trade secrets in all of our technology platforms.

 

Some of our technology is developed on our behalf by independent outside            contractors. To protect the rights of our proprietary know-how and technology, Company            policy requires all employees and consultants with access to proprietary information to            execute confidentiality agreements prohibiting the disclosure of confidential            information to anyone outside the Company. These agreements also require disclosure and            assignment to us of discoveries and inventions made by such individuals while devoted            to Company-sponsored activities. Companies with which we have entered into development            agreements have the right to certain technology developed in connection with such            agreements.

 

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**Manufacturing**

 

We do not have the facilities or capabilities to commercially            manufacture any of our product candidates. We have no current plans to establish a            manufacturing facility. We expect that we will be dependent to a significant extent on            contract manufacturers for commercial scale manufacturing of our product candidates in            accordance with regulatory standards.

 

Contract manufacturers may utilize their own technology, technology            developed by us, or technology acquired or licensed from third parties. When contract            manufacturers develop proprietary process technology, our reliance on such contract            manufacturers is increased. Technology transfer from the original contract manufacturer            may be required. Any such technology transfer may also require transfer of requisite            data for regulatory purposes, including information contained in a proprietary DMF held            by a contract manufacturer. FDA approval of the new manufacturer and manufacturing site            would also be required.

 

We have contracted with a commercial supplier of pharmaceutical            chemicals, to supply us with the active pharmaceutical ingredient of oxybutynin for            clinical quantities of AnturolTM in a manner that meets FDA requirements via            reference to their DMF for oxybutynin. We have contracted with Patheon, Inc. (Patheon),            a manufacturing development company, to supply clinical quantities of AnturolTM            gel in a manner that may meet FDA requirements. The FDA has not approved the            manufacturing processes for AnturolTM at Patheon at this time. We have not            completed any commercial scale up activities associated with AnturolTM            manufacturing.

 

The ATDTM Gel formulations for clinical studies have, in the past,            been manufactured by contract under our supervision. Early in 2005, Antares Pharma AG,            our wholly owned subsidiary in Switzerland, received a GMP approval for the production            and wholesaling of medicaments in small scale quantities. Further, we anticipate            contracting with European GMP approved contract manufacturers for supplying            ATDTM gel based products for the European Union.

 

We are responsible for U.S. device manufacturing in compliance with            current Quality System Regulations (“QSR”) established by the Food and Drug            Administration and by the centralized European regulatory authority (Medical Device            Directive). Injector and disposable parts are manufactured by third-party suppliers and            are assembled by a third-party supplier for our VISION® needle-free            device. Packaging is performed by a third-party supplier under our direction. Product            release is performed by us. We have contracted with Nypro Inc. (Nypro), an            international manufacturing development company to supply commercial quantities of our            VibexTM pressure assisted auto injector device in compliance with FDA QSR            regulations.

 

**Sales and Marketing**

 

We expect to currently market most of our products through other more            substantial pharmaceutical and medical device companies while continuing marketing of            our insulin injection devices and related disposable components in the U.S. In the            future as we develop more products in niche therapeutic areas, we plan to develop            commercial capabilities.

 

During 2007, 2006 and 2005, international revenue accounted for            approximately 55%, 63% and 77% of total revenue, respectively. Europe accounted for            91%, 83% and 71% of international revenue in 2007, 2006 and 2005, respectively, with            the remainder coming primarily from Asia. Ferring accounted for 39%, 39% and 48% of our            worldwide revenues in 2007, 2006 and 2005, respectively. BioSante Pharmaceuticals, Inc.            accounted for 36%, 24% and 7% and JCR Pharmaceuticals, Co., Ltd. accounted for 4%, 4%            and 12% of our worldwide revenues in 2007, 2006 and 2005, respectively. Revenue from            Ferring and JCR resulted from sales of injection devices and related disposable            components for their hGH formulations. In 2007 and 2006, the BioSante revenue resulted            primarily from license fees and milestone payments related to Elestrin®,            received under a sublicense arrangement related to an existing license agreement with            BioSante.

 

 

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**Collaborative Arrangements and License Agreements**

 

The following table describes significant existing pharmaceutical and            device relationships, and license agreements.

 
| **Partner**                                                 | **Drug**                                                                                                                                                             | **Market Segment**                                                                                                                                                             | **Platform**                                                                                                       |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| BioSante                                                    | Estradiol                        (Elestrin®)                                                                            Testosterone (Libi-GelTM) | Hormone replacement therapy                        (North America, other countries)                         

Female sexual dysfunction

(North America, other countries) | ATDTM Gel                                                                            ATDTM Gel |
| Jazz Pharmaceuticals                                        | Undisclosed                                                                                                                                                          | Central Nervous System(Worldwide)                                                                                                                                              | ATDTM Gel                                                                                                     |
| Population Council                                          | Nestorone                        ®/Estradiol                                                                                                                     | Contraception                        (Worldwide)                                                                                                                               | ATDTM Gel                                                                                                     |
| Undisclosed                                                 | Undisclosed                                                                                                                                                          | Opioid dependence(Worldwide)                                                                                                                                                   | ODT                                                                                                                |
| Ferring                                                     | hGH                                                                                                                                                                  | GrowthRetardation

(U.S.,Europe& Asia)                                                                                                                                     | Needle Free                        Device                                                                          |
| Teva Pharmaceutical Industries,                        Ltd. | Undisclosed                                                                                                                                                          | Undisclosed                        (United States)                                                                                                                             | Needle Free                        Device                                                                          |
| Eli Lilly and Company                                       | Undisclosed                                                                                                                                                          | Diabetes and Obesity                        (Worldwide)                                                                                                                        | Needle Free                        Device                                                                          |
| JCR Pharmaceuticals Co., Ltd.                               | hGH                                                                                                                                                                  | GrowthRetardation(Japan)                                                                                                                                                       | Needle Free                        Device                                                                          |
| SciGen Pte Ltd.                                             | hGH                                                                                                                                                                  | GrowthRetardation(Asia/Pacific)                                                                                                                                                | Needle Free                        Device                                                                          |
| Teva Pharmaceutical Industries,                        Ltd. | Undisclosed                                                                                                                                                          | Undisclosed                        (U.S. and Canada)                                                                                                                           | Auto InjectorDisposable Device                                                                                     |
| Teva Pharmaceutical Industries,                        Ltd. | Undisclosed                                                                                                                                                          | Undisclosed                        (United States)                                                                                                                             | Auto InjectorDisposable Device                                                                                     |
| Teva Pharmaceutical Industries,                        Ltd. | Undisclosed                                                                                                                                                          | Undisclosed(North America, Europe &                        others)                                                                                                         | Disposable Pen Injector Device                                                                                     |

This table summarizes agreements under which our partners are selling            products, conducting clinical evaluation, and performing development of our products.            For competitive reasons, our partners may not divulge their name, the product name or            the exact stage of clinical development.

 

In June 2000, we granted an exclusive license to BioSante to develop and            commercialize three of our gel technology products and one patch technology product for            use in hormone replacement therapy in North America and other countries. Subsequently,            the license for the patch technology product was returned to us in exchange for a            fourth gel based product. BioSante paid us $1 million upon execution of the agreement            and is also required to make royalty payments once commercial sales of the products            have begun. The royalty payments are based on a percentage of sales of the products and            must be paid for a period of 10 years following the first commercial sale of the            products, or when the last patent for the products expires, whichever is later. The            agreement also provides for milestone payments to us upon the occurrence of certain            events related to regulatory filings and approvals. In November 2006 BioSante entered            into a sublicense and marketing agreement with Bradley Pharmaceuticals, Inc. for            Elestrin® (formerly Bio-E-Gel). BioSante received an upfront payment            from Bradley which triggered a payment to us of $875,000. In December 2006 the FDA            approved for marketing Elestrin® in the United States triggering            payments to us totaling $2.6 million, which were received in 2007. In addition, we will            receive royalties on sales of Elestrin® as well as potential sales-based            milestone payments. Bradley was acquired by Nycomed Inc. in February 2008 and presently            the commercial interest of Elestrin® with Nycomed is unknown.

 

In June 1999, we granted an exclusive license to Solvay for our            transdermal gel technology for delivery of an estradiol/progestin combination for            hormone replacement therapy. The exclusive license applies to all countries and            territories in the world, except for North America, Japan and Korea. The agreement            contains a development plan under which we and Solvay collaborate to bring the product            to market. Solvay must pay us a license fee of $5 million in four separate payments,            all of which are due upon completion of various phases of the development            plan.

 

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To            date, we have received $1.75 million of this fee. Development work performed by Solvay            has been limited due to concerns about certain forms of hormone replacement therapy            that have been debated in scientific literature. When and if commercial sale of the            product begins, Solvay is required to, on a quarterly basis, pay us a royalty based on            a percentage of sales. The royalty payments will be required for a period of 15 years            or when the last patent for the product expires, whichever is later.

 

In August 2001, Solvay entered into an exclusive agreement with BioSante            in which Solvay has sublicensed from BioSante the U.S. and Canadian rights to our            estrogen/progestin combination transdermal hormone replacement gel product, one of the            drug-delivery products we previously licensed to BioSante. Under the terms of this            license agreement between us and BioSante, we received a portion of the upfront payment            made by Solvay to BioSante. We are also entitled to a portion of any milestone payments            or royalties BioSante receives from Solvay under the sublicense agreement. To date,            development work performed by Solvay has been limited and further development and            commercialization is uncertain.

 

In January 2003, we entered into a revised License Agreement with            Ferring, under which we licensed certain of our intellectual property and extended the            territories available to Ferring for use of certain of our reusable needle-free            injection devices to include all countries and territories in the world except            Asia/Pacific. Specifically, we granted to Ferring an exclusive, royalty-bearing            license, within a prescribed manufacturing territory, to utilize certain of our            reusable needle-free injector devices for the field of human growth hormone until the            expiration of the last to expire of the patents in any country in the territory. We            granted to Ferring similar non-exclusive rights outside of the prescribed manufacturing            territory. In addition, we granted to Ferring a non-exclusive right to make and have            made the equipment required to manufacture the licensed products, and an exclusive,            royalty-free license in a prescribed territory to use and sell the licensed products            under certain circumstances. In 2007 we amended this agreement providing for            non-exclusive rights in Asia along with other changes to financial terms of the            agreement.

 

In September 2003, we entered into a Development and License Agreement            (the “License Agreement”) with Eli Lilly and Company. Under the License            Agreement, we granted Lilly an exclusive license to certain of our needle-free            technology in the fields of diabetes and obesity.

 

In March of 2008 we entered into a second amendment to the original            development and license agreement with Lilly dated September 12, 2003. The amendment            narrows the scope of the license grant to Lilly under the agreement whereby (a) certain            devices (as defined in the agreement) owned by us are no longer licensed to Lilly,            including our MJ7 device, (b) the scope of the license for the remaining devices            licensed to Lilly are converted to nonexclusive from exclusive and (c) the scope of            such remaining nonexclusive license is limited to use with a smaller subset of            compounds in a narrower field of use. We are now able to exclusively license and supply            certain devices that were previously licensed to Lilly under the agreement. In            connection with the return of rights with respect to the devices, no device development            plan is required going forward.

 

In 2004, JCR Pharmaceuticals Co., Ltd. initiated a campaign to broaden            its marketing efforts for human growth hormone under a purchase agreement with our            needle free injector, MJ-7. In 1999, SciGen Pte Ltd. began distribution in Asia of our            needle free injector MJ-7 for human growth hormone.

 

In November 2005, we signed an agreement with Sicor Pharmaceuticals            Inc., an affiliate of Teva Pharmaceutical Industries Ltd., under which Sicor is            obligated to purchase all of its injection delivery device requirements from us for an            undisclosed product to be marketed in the United States. Sicor also received an option            for rights in other territories. The license agreement included, among other things, an            upfront cash payment, milestone fees, a negotiated purchase price for each device sold,            and royalties on sales of their product.

 

In July 2006, we entered into an exclusive License Development and            Supply Agreement with Sicor Pharmaceuticals Inc., an affiliate of Teva Pharmaceutical            Industries Ltd. Pursuant to the agreement; the affiliate is obligated to purchase all            of its delivery device requirements from us for an undisclosed product to be marketed            in the United States and Canada. We received an upfront cash payment, and will receive            milestone fees, a negotiated purchase price for each device sold, as well as royalties            on sales of their product.

 

In July 2006, we entered into a joint development agreement with the            Population Council, an international, non-profit research organization, to develop            contraceptive formulation products containing Nestorone®, by using            the

 

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Council’s patented and other proprietary information covering the            compound, and our transdermal delivery gel technology. Under the terms of the joint            development agreement, we are responsible for research and development activities as            they relate to ATD formulation and manufacturing. The Population Council will be            responsible for clinical trial design development and management. Together, we expect            to identify a worldwide or regional commercial development partner as clinical data            becomes available.

 

In September 2006, we entered into a Supply Agreement with Teva            Pharmaceutical Industries Ltd. Pursuant to the agreement, Teva is obligated to purchase            all of its delivery device requirements from us for an undisclosed product to be            marketed in the United States. We received an upfront cash payment, and will receive            milestone fees and a royalty payment on Teva’s net sales, as well as a purchase            price for each device sold.

 

In July 2007, we entered into a worldwide product development and            license agreement with Jazz Pharmaceuticals for a product being developed to treat a            CNS disorder that will utilize our transdermal gel delivery technology ATDTM.            Under the agreement, an upfront payment, development milestones, and royalties on            product sales are to be received by us under certain circumstances.

 

In September 2007, we entered into a worldwide product development and            license agreement with an undisclosed company for a product in the field of opioid            analgesia that will utilize our oral disintegrating tablet delivery technology. Under            the agreement, an upfront payment, development milestones, and royalties on product            sales are to be received by us under certain circumstances.

 

In December 2007, we entered into a license, development and supply            agreement with Teva Pharmaceutical Industries Ltd. under which we will develop and            supply a disposable pen injector for use with two undisclosed patient-administered            pharmaceutical products. Under the agreement, an upfront payment, development            milestones, and royalties on product sales are to be received by us under certain            circumstances.

 

Distribution/supply agreements are arrangements under which our products            are supplied to end-users through the distributor or supplier. We provide the            distributor/supplier with injection devices and related disposable components, and the            distributor/supplier often receives a margin on sales. We currently have a number of            distribution/supply arrangements under which the distributors/suppliers sell our            needle-free injection devices and related disposable components for use with            insulin.

 

**Competition**

 

Competition in the specialty pharmaceutical sector is significant,            mature and dominated by companies like ALZA Corporation, Elan Corporation plc,            SkyePharma plc and Alkermes, Inc. Competition in the transdermal delivery market            includes companies like Watson Pharmaceuticals, Solvay, NexMed, Inc., Auxillium, Inc.,            Bentley Pharmaceuticals, Inc., Novavax, Inc. and many others. Competition in the oral            disintegrating tablet market includes Eurand, Cardinal Health, Yamanouchi            Pharmaceutical Co., Ltd. and many others. Competition in the disposable, single-use            injector market includes, but is not limited to, Ypsomed AG, SHL Group AB, OwenMumford            Ltd. and The Medical House PLC, while competition in the reusable needle-free injector            market includes Bioject Medical Technologies Inc. and The Medical House PLC.

 

Competition in the injectable drug delivery market is intensifying. We            clearly face competition from traditional needles and syringes as well as newer            pen-like and sheathed needle syringes and other injection systems as well as            alternative drug delivery methods including oral, transdermal and pulmonary delivery            systems. Nevertheless, the majority of injections are still currently administered            using needles. Because injections are typically only used when other drug delivery            methods are not feasible, the auto injector systems may be made obsolete by the            development or introduction of drugs or drug delivery methods which do not require            injection for the treatment of conditions we have currently targeted. In addition,            because we intend to, at least in part, enter into collaborative arrangements with            pharmaceutical companies, our competitive position will depend upon the competitive            position of the pharmaceutical company with which we collaborate for each drug            application.

 

 

 

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**Government Regulation**

 

We and our collaborative partners are subject to, and any potential            products discovered, developed and manufactured by us or our collaborative partners            must comply with, comprehensive regulation by the FDA in the United States and by            comparable authorities in other countries. These national agencies and other federal,            state, and local entities regulate, among other things, the pre-clinical and clinical            testing, safety, effectiveness, approval, manufacturing operations, quality, labeling,            distribution, marketing, export, storage, record keeping, event reporting, advertising            and promotion of pharmaceutical products and medical devices. Facilities and certain            company records are also subject to inspections by the FDA and comparable authorities            or their representatives. The FDA has broad discretion in enforcing the FD&C Act            and the regulations thereunder, and noncompliance can result in a variety of regulatory            steps ranging from warning letters, product detentions, device alerts or field            corrections to mandatory recalls, seizures, injunctive actions and civil or criminal            actions or penalties.

 

Transdermal and topical products indicated for the treatment of systemic            or local treatments respectively are regulated by the FDA in the U.S. and other similar            regulatory agencies in other countries as drug products. Transdermal and topical            products are considered to be controlled release dosage forms and may not be marketed            in the U.S. until they have been demonstrated to be safe and effective. The regulatory            approval routes for transdermal and topical products include the filing of an NDA for            new drugs, new indications of approved drugs or new dosage forms of approved drugs.            Alternatively, these dosage forms can obtain marketing approval as a generic product by            the filing of an ANDA, providing the new generic product is bioequivalent to and has            the same labeling as a comparable approved product or as a filing under Section            505(b)(2) where there is an acceptable reference product. Many topical products for            local treatment do not require the filing of either an NDA or ANDA, providing that            these products comply with existing OTC monographs. The combination of the drug, its            dosage form and label claims, and FDA requirement will ultimately determine which            regulatory approval route will be required.

 

The process required by the FDA before a new drug (pharmaceutical            product) or a new route of administration of a pharmaceutical product may be approved            for marketing in the United States generally involves:

 

|   | § | pre-clinical laboratory and animal tests; |
|--------|--------|-------------------------------------------|

|   | § | submission to the FDA of an IND application, which must                            be in effect before clinical trials may begin; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | § | adequate and well controlled human clinical trials to                            establish the safety and efficacy of the drug for its intended                            indication(s); |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | FDA compliance inspection and/or clearance of all                            manufacturers; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | § | submission to the FDA of an NDA; and |
|--------|--------|--------------------------------------|

|   | § | FDA review of the NDA or product license application in                            order to determine, among other things, whether the drug is safe and                            effective for its intended uses. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Pre-clinical tests include laboratory evaluation of product chemistry            and formulation, as well as animal studies, to assess the potential safety and efficacy            of the product. Certain pre-clinical tests must comply with FDA regulations regarding            current good laboratory practices. The results of the pre-clinical tests are submitted            to the FDA as part of an IND, to support human clinical trials and are reviewed by the            FDA, with patient safety as the primary objective, prior to the IND commencement of            human clinical trials.

 

Clinical trials are conducted according to protocols that detail matters            such as a description of the condition to be treated, the objectives of the study, a            description of the patient population eligible for the study and the parameters to be            used to monitor safety and efficacy. Each protocol must be submitted to the FDA as part            of the IND. Protocols must be conducted in accordance with FDA regulations concerning            good clinical practices to ensure the quality and integrity of clinical trial results            and data. Failure to adhere to good clinical practices and the protocols may result in            FDA rejection of clinical trial results and data, and may delay or prevent the FDA from            approving the drug for commercial use.

 

Clinical trials are typically conducted in three sequential Phases,            which may overlap. During Phase I, when the drug is initially given to human subjects,            the product is tested for safety, dosage tolerance, absorption, distribution,            metabolism and excretion. Phase I studies are often conducted with healthy volunteers            depending on the drug being tested; however, in oncology, Phase I trials are more often            conducted in cancer patients. Phase II involves studies in a limited patient            population, typically patients with the conditions needing treatment, to:

 

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|   | § | evaluate preliminarily the efficacy of the product for                            specific, targeted indications; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | § | determine dosage tolerance and optimal dosage;                            and |
|--------|--------|-------------------------------------------------------------------------------|

|   | § | identify possible adverse effects and safety                            risks. |
|--------|--------|--------------------------------------------------------------------------------|

 

Pivotal or Phase III adequate and well-controlled trials are undertaken            in order to evaluate efficacy and safety in a comprehensive fashion within an expanded            patient population for the purpose of registering the new drug. The FDA may suspend or            terminate clinical trials at any point in this process if it concludes that patients            are being exposed to an unacceptable health risk or if they decide it is unethical to            continue the study. Results of pre-clinical and clinical trials must be summarized in            comprehensive reports for the FDA. In addition, the results of Phase III studies are            often subject to rigorous statistical analyses. This data may be presented in            accordance with the guidelines for the International Committee of Harmonization that            can facilitate registration in the United States, the EU and Japan.

 

FDA approval of our own and our collaborators’ products is            required before the products may be commercialized in the United States. FDA approval            of an NDA will be based, among other factors, on the comprehensive reporting of            clinical data, risk/benefit analysis, animal studies and manufacturing processes and            facilities. The process of obtaining NDA approvals from the FDA can be costly and time            consuming and may be affected by unanticipated delays.

 

Among the conditions for NDA approval is the requirement that the            prospective manufacturer’s procedures conform to current good manufacturing            practices, which must be followed at all times. In complying with this requirement,            manufacturers, including a drug sponsor’s third-party contract manufacturer, must            continue to expend time, money and effort in the area of production, quality assurance            and quality control to ensure compliance. Domestic manufacturing establishments are            subject to periodic inspections by the FDA in order to assess, among other things,            compliance with current good manufacturing practices. To supply products for use in the            United States, foreign manufacturing establishments also must comply with current good            manufacturing practices and are subject to periodic inspection by the FDA or by            regulatory authorities in certain countries under reciprocal agreements with the            FDA.

 

A sNDA is a submission to an existing NDA that provides for changes to            the NDA and therefore requires FDA approval. Changes to the NDA that require FDA            approval are the subject of either the active ingredients, the drug product and/or the            labeling. A supplement is required to fully describe the change. There are two types of            sNDAs depending on the content and extent of the change. These two types are (i)            supplements requiring FDA approval before the change is made and (ii) supplements for            changes that may be made before FDA approval. Supplements to the labeling that change            the Indication Section require prior FDA approval before the change can be made to the            labeling, e.g. a new indication.

 

Both before and after market approval is obtained, a product, its            manufacturer and the holder of the NDA for the product are subject to comprehensive            regulatory oversight. Violations of regulatory requirements at any stage, including            after approval, may result in various adverse consequences, including the FDA’s            delay in approving or refusal to approve a product, withdrawal of an approved product            from the market and the imposition of criminal penalties against the manufacturer and            NDA holder. In addition, later discovery of previously unknown problems may result in            restrictions on the product, manufacturer or NDA holder, including withdrawal of the            product from the market. Furthermore, new government requirements may be established            that could delay or prevent regulatory approval of our products under            development.

 

FDA approval is required before a generic equivalent can be marketed. We            seek approval for such products by submitting an ANDA to the FDA. When processing an            ANDA, the FDA waives the requirement of conducting complete clinical studies, although            it normally requires bioavailability and/or bioequivalence studies.            “Bioavailability” indicates the rate and extent of absorption and levels of            concentration of a drug product in the blood stream needed to produce a therapeutic            effect. “Bioequivalence” compares the bioavailability of one drug product            with another, and when established, indicates that the rate of absorption and levels of            concentration of the active drug substance in the body are equivalent for the generic            drug and the previously approved drug. An ANDA may be submitted for a drug on the basis            that it is the equivalent of a previously approved drug or, in the case of a new dosage            form, is suitable for use for the indications specified.

 

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Before approving a product, the FDA also requires that our procedures            and operations or those of our contracted manufacturer conform to Current Good            Manufacturing Practice (“cGMP”) regulations, relating to good manufacturing            practices as defined in the U.S. Code of Federal Regulations. We and our contracted            manufacturer must follow the cGMP regulations at all times during the manufacture of            our products. We will continue to spend significant time, money and effort in the areas            of production and quality testing to help ensure full compliance with cGMP regulations            and continued marketing of our products now or in the future.

 

If the FDA believes a company is not in compliance with cGMP, sanctions            may be imposed upon that company including:

 

|   | § | withholding from the company new drug approvals as well                            as approvals for supplemental changes to existing                            applications; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | preventing the company from receiving the necessary                            export licenses to export its products; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | § | classifying the company as an “unacceptable                            supplier” and thereby disqualifying the company from selling                            products to federal agencies. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The timing of final FDA approval of an ANDA depends on a variety of            factors, including whether the applicant challenges any listed patents for the drug and            whether the brand-name manufacturer is entitled to one or more statutory exclusivity            periods, during which the FDA may be prohibited from accepting applications for, or            approving, generic products. In certain circumstances, a regulatory exclusivity period            can extend beyond the life of a patent, and thus block ANDAs from being approved on the            patent expiration date. For example, in certain circumstances the FDA may extend the            exclusivity of a product by six months past the date of patent expiry if the            manufacturer undertakes studies on the effect of their product in children, a so-called            pediatric extension. The pediatric extension results from a 1997 law designed to reward            branded pharmaceutical companies for conducting research on the effects of            pharmaceutical products in the pediatric population. As a result, under certain            circumstances, a branded company can obtain an additional six months of market            exclusivity by performing pediatric research.

 

In May 1992, Congress enacted the Generic Drug Enforcement Act of            1992, which allows the FDA to impose debarment and other penalties on individuals and            companies that commit certain illegal acts relating to the generic drug approval            process. In some situations, the Generic Drug Enforcement Act requires the FDA to not            accept or review ANDAs for a period of time from a company or an individual that has            committed certain violations. It also provides for temporary denial of approval of            applications during the investigation of certain violations that could lead to            debarment and also, in more limited circumstances, provides for the suspension of the            marketing of approved drugs by the affected company. Lastly, the Generic Drug            Enforcement Act allows for civil penalties and withdrawal of previously approved            applications. Neither we nor any of our employees have ever been subject to            debarment.

 

Products regulated as medical devices can be commercially distributed in            the United States following approval by the FDA, through a finding of substantial            equivalence to a marketed product, or by having been exempted from the FD&C Act and            regulations thereunder. In cases of substantial equivalence, under Section 510(k) of            the FD&C Act, certain products qualify for a pre-market notification            (“PMN”) of the manufacturer’s intention to commence marketing the            product. The manufacturer must, among other things, establish in the PMN that the            product to be marketed is substantially equivalent to another legally marketed product            (that it has the same intended use and that it is as safe and effective as a legally            marketed device and does not raise questions of safety and effectiveness that are            different from those associated with the legally marketed device). Marketing may            commence when the FDA issues a letter finding substantial equivalence to such a legally            marketed device. The FDA may require, in connection with a PMN, that it be provided            with animal and/or human test results. If a medical device does not qualify for PMN,            the manufacturer must file a pre-market approval (“PMA”) application under            Section 515 of the FD&C Act. A PMA must show that the device is safe and effective.            A PMA is generally a much more complex submission than a 510(k) notification, typically            requiring more extensive pre-filing testing and a longer FDA review            process.       

 

Drug delivery systems such as injectors may be legally marketed as a            medical device or may be evaluated as part of the drug approval process such as a NDA            or a Product License Application (“PLA”). Combination drug/device products            raise unique scientific, technical and regulatory issues. The FDA has established an            Office of Combination Products (“OCP”) to address the challenges associated            with the review and regulation of combination products. The OCP assists in determining            strategies for the approval of drug/delivery combinations and assuring

 

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agreement within the FDA on review responsibilities. To the extent            permitted under the FD&C Act and current FDA policy, we intend to seek regulatory            review for drug delivery systems for use in specific drug applications under the            medical device provisions, rather than under the new drug provisions, of the FD&C            Act. We intend to use the OCP to further this goal. Device regulatory filings could            take the form of a PMN, PMA, or the filing of a device master file (“MAF”).            In some cases, the device specific information may need to be filed as part of the drug            approval submission, and in those cases we will seek agreement from the Agency for            review of the device portion of the submission by the Center for Devices and            Radiological Health (“CDRH”) under the medical device provisions of the            law.

 

A MAF filing typically supports a regulatory filing in the approval            pathway. Where common data elements may be part of several submissions for regulatory            approval, as in the case of information supporting an injection platform; a MAF filing            with the FDA may be the preferred route. A delivery device that is considered a product            only when combined with a drug, and where such a device is applicable to a variety of            drugs, represents another opportunity for such a filing. We intend to pursue such            strategies as permitted by the law and as directed by the FDA either through guidance            documents or discussions.

 

In addition to submission when a device is being introduced into the            market for the first time, a PMN is also required when the manufacturer makes a change            or modification to a previously marketed device that could significantly affect safety            or effectiveness, or where there is a major change or modification in the intended use            or in the manufacture of the device. When any change or modification is made in a            device or its intended use, the manufacturer is expected to make the initial            determination as to whether the change or modification is of a kind that would            necessitate the filing of a new 510(k) notification. The*Medi-Jector VISION*®            injection system is a legally marketed device under Section 510(k) of the FD&C Act            for insulin. In the future we or our partners may submit additional 510(k)            notifications with regard to further device design improvements and uses with            additional drug therapies.

 

If the FDA concludes that any or all of our new injectors must be            handled under the new drug provisions of the FD&C Act, substantially greater            regulatory requirements and approval times will be imposed. Use of a modified new            product with a previously unapproved new drug likely will be handled as part of the NDA            for the new drug itself. Under these circumstances, the device component will be            handled as a drug accessory and will be approved, if ever, only when the NDA itself is            approved. Our injectors may be required to be approved as a combination drug/device            product under a supplemental NDA for use with previously approved drugs. Under these            circumstances, our device could be used with the drug only if and when the supplemental            NDA is approved for this purpose. It is possible that, for some or even all drugs, the            FDA may take the position that a drug-specific approval must be obtained through a full            NDA or supplemental NDA before the device may be packaged and sold in combination with            a particular drug.

 

To the extent that our modified injectors are packaged with the drug, as            part of a drug delivery system, the entire package may be subject to the requirements            for drug/device combination products. These include drug manufacturing requirements,            drug adverse reaction reporting requirements, and all of the restrictions that apply to            drug labeling and advertising. In general, the drug requirements under the FD&C Act            are more onerous than medical device requirements. These requirements could have a            substantial adverse impact on our ability to commercialize our products and our            operations.

 

The FD&C Act also regulates quality control and manufacturing            procedures by requiring that we and our contract manufacturers demonstrate compliance            with the current Quality System Regulations (“QSR”). The FDA’s            interpretation and enforcement of these requirements have been increasingly strict in            recent years and seem likely to be even more stringent in the future. The FDA monitors            compliance with these requirements by requiring manufacturers to register with the FDA            and by conducting periodic FDA inspections of manufacturing facilities. If the            inspector observes conditions that might violate the QSR, the manufacturer must correct            those conditions or explain them satisfactorily. Failure to adhere to QSR requirements            would cause the devices produced to be considered in violation of the FDA Act and            subject to FDA enforcement action that might include physical removal of the devices            from the marketplace.

 

The FDA’s Medical Device Reporting Regulation requires companies            to provide information to the FDA on the occurrence of any death or serious injuries            alleged to have been associated with the use of their products, as well as

 

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any            product malfunction that would likely cause or contribute to a death or serious injury            if the malfunction were to recur. In addition, FDA regulations prohibit a device from            being marketed for unapproved or uncleared indications. If the FDA believes that a            company is not in compliance with these regulations, it could institute proceedings to            detain or seize company products, issue a recall, seek injunctive relief or assess            civil and criminal penalties against the company or its executive officers, directors            or employees.

 

In addition to regulations enforced by the FDA, we must also comply with            regulations under the Occupational Safety and Health Act, the Environmental Protection            Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and            other federal, state and local regulations.

 

In addition to regulations in the United States, we are subject to            various foreign regulations governing clinical trials and the commercial sales and            distribution of our products. We must obtain approval of a product by the comparable            regulatory authorities of foreign countries before we can commence clinical trials or            marketing of the product in those countries. The requirements governing the conduct of            clinical trials, product licensing, pricing and reimbursement and the regulatory            approval process all vary greatly from country to country. Additionally, the time it            takes to complete the approval process in foreign countries may be longer or shorter            than that required for FDA approval. Foreign regulatory approvals of our products are            necessary whether or not we obtain FDA approval for such products. Finally, before a            new drug may be exported from the United States, it must either be approved for            marketing in the United States or meet the requirements of exportation of an unapproved            drug under Section 802 of the Export Reform and Enhancement Act or comply with FDA            regulations pertaining to INDs.

 

Under European Union regulatory systems, we are permitted to submit            marketing authorizations under either a centralized or decentralized procedure. The            centralized procedure provides for the grant of a single marketing authorization that            is valid for all member states of the European Union. The decentralized procedure            provides for mutual recognition of national approval decisions by permitting the holder            of a national marketing authorization to submit an application to the remaining member            states. Within 90 days of receiving the applications and assessment report, each member            state must decide whether to recognize approval.

 

Sales of medical devices outside of the U.S. are subject to foreign            legal and regulatory requirements. Certain of our transdermal and injection systems            have been approved for sale only in certain foreign jurisdictions. Legal restrictions            on the sale of imported medical devices and products vary from country to country. The            time required to obtain approval by a foreign country may be longer or shorter than            that required for FDA approval, and the requirements may differ. We rely upon the            companies marketing our injectors in foreign countries to obtain the necessary            regulatory approvals for sales of our products in those countries. Generally, products            having an effective 510(k) clearance or PMA may be exported without further FDA            authorization.

 

We have obtained ISO 13485: 2003 certification, the medical device            industry standard for our quality systems. This certification shows that our            development and manufacturing comply with standards for quality assurance, design            capability and manufacturing process control. Such certification, along with compliance            with the European Medical Device Directive enables us to affix the CE Mark to current            products and supply the device with a Declaration of Conformity. Semi-annual audits by            our notified body, British Standards Institute, are required to demonstrate continued            compliance.

 

We have also received GMP approval from the Swiss Medical Institute for            the production and wholesaling of medicaments, specifically related to its Advanced            Transdermal Delivery (ATDTM) gels. This allows us to produce clinical trial            materials and related packaging as well as production of intermediate products and            end-user medicaments.

 

**Employees**

 

We believe that our success is largely dependent upon our ability to            attract and retain qualified personnel in the research, development, manufacturing,            business development and commercialization fields. As of March 15, 2008, we had 30            full-time and 3 part-time employees worldwide, of whom 18 are in the United States. Of            the 33 employees, 17 are primarily involved in research, development and manufacturing            activities, 2 are primarily involved in business development and commercialization,            with the remainder engaged in executive and

 

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administrative capacities. Although we believe that we are appropriately            sized to focus on our mission, we intend to add personnel with specialized expertise,            as needed.

 

We believe that we have been successful to date in attracting skilled            and experienced scientific and business professionals. We consider our employee            relations to be good, and none of our employees are represented by any labor union or            other collective bargaining unit. However, competition for personnel is intense and we            cannot assure that we will continue to be able to attract and retain personnel of high            caliber.

 

| *Item 1A.* | *RISK FACTORS* |
|------------|----------------|

 

*The following “risk factors” contain important            information about us and our business and should be read in their entirety. Additional            risks and uncertainties not known to us or that we now believe to be not material could            also impair our business. If any of the following risks actually occur, our business,            results of operations and financial condition could suffer significantly. As a result,            the market price of our common stock could decline and you could lose all of your            investment. In this Section, the terms “we,” “our” and            “us” refer to Antares Pharma, Inc.*

 

**Risks Related to Our Operations**

 

*We have incurred significant losses to date, and there is no            guarantee that we will ever become profitable.*

 

We incurred net losses of ($8,578,939) and ($8,099,846) in the fiscal            years ended 2007 and 2006, respectively. In addition, we have accumulated aggregate net            losses from the inception of business through December 31, 2007 of ($107,901,392). The            costs for research and product development of our drug delivery technologies along with            marketing and selling expenses and general and administrative expenses have been the            principal causes of our losses. We may not ever become profitable and if we do not            become profitable your investment would be harmed.

 

*We            may need additional capital in the future in order to continue our            operations.*

 

In July of 2007, we completed a private placement of our common stock            and warrants in which we received aggregate gross proceeds of $16,000,000. In February            of 2007, we received gross proceeds of $5,000,000 upon closing of the first tranche of            a $10,000,000 credit facility, to help fund working capital needs. In December of 2007            we received gross proceeds of $2,500,000, after amending the credit facility agreement            to reduce the amount available to draw down in the second tranche from $5,000,000 to            $2,500,000. We believe that the combination of the debt and equity financings and            projected product sales, product development, license revenues, milestone payments and            royalties will provide us with sufficient funds to support operations beyond 2008.            However, if we need additional financing and are unable to obtain such financing when            needed, or obtain it on favorable terms, we may be required to curtail development of            new drug technologies, limit expansion of operations, accept financing terms that are            not as attractive as we may desire or be forced to liquidate and close            operations.

 

Long-term capital requirements will depend on numerous factors,            including, but not limited to, the status of collaborative arrangements, the progress            of research and development programs and the receipt of revenues from sales of            products. Our ability to achieve and/or sustain profitable operations depends on a            number of factors, many of which are beyond our control. These factors include, but are            not limited to, the following:

 

|   | § | the demand for our technologies from current and future                            biotechnology and pharmaceutical partners; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | § | our ability to manufacture products efficiently, at the                            appropriate commercial scale, and with the required quality; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | our ability to increase and continue to outsource                            manufacturing capacity to allow for new product |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|

introductions;

|   | § | the level of product competition and of price                            competition; |
|--------|--------|---------------------------------------------------------------------------------------|

|   | § | our ability to develop, maintain or acquire patent                            positions; |
|--------|--------|------------------------------------------------------------------------------------------|

|   | § | patient acceptance of our current and future                            products; |
|--------|--------|-----------------------------------------------------------------------------------|

|   | § | our ability to develop additional commercial                            applications for our products; |
|--------|--------|--------------------------------------------------------------------------------------------------------|

|   | § | our limited regulatory and commercialization                            experience; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | § | our reliance on outside consultants; |
|--------|--------|--------------------------------------|

|   | § | our ability to obtain regulatory approvals; |
|--------|--------|---------------------------------------------|

 

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|   | § | our ability to attract the right personnel to execute                            our plans; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | § | our ability to control costs; and |
|--------|--------|-----------------------------------|

|   | § | general economic conditions. |
|--------|--------|------------------------------|

 

*Over time we have changed our business model to be more commercially            oriented by further developing our own products, we may not have sufficient resources            to fully execute our plan.*

 

We must make choices as to the drugs that we will combine with our            transdermal gel, oral disintegrating tablet and disposable pressure assisted auto            injector and reusable needle free technologies to move into the marketplace. We may not            make the correct choice of drug or technologies when combined with a drug, which may            not be accepted by the marketplace as we expected or at all. FDA approval processes for            the drugs and drugs with devices may be longer in time and/or more costly and/or            require more extended clinical evaluation than anticipated. Funds required to bring our            own products to market may be more than anticipated or may not be available at all. We            have limited experience in development of compounds and in regulatory matters and            bringing such products to market; therefore, we may experience difficulties in            execution of development of internal product candidates.

 

*We currently depend on a limited number of customers for the majority            of our revenue, and the loss of any one of these customers could substantially reduce            our revenue and impact our liquidity.*

 

During 2007, we derived approximately 39% and 36% of our revenue from            Ferring and BioSante Pharmaceuticals, respectively, and in 2006 we derived            approximately 39% and 24% of our revenue from Ferring and BioSante Pharmaceuticals,            respectively. The revenue from Ferring was primarily product sales and royalties. The            revenue from BioSante was milestone based and will likely not be recurring in the near            future.

 

The loss of any of these customers or partners or reduction in our            business activities could cause our revenues to decrease significantly, increase our            continuing losses from operations and, ultimately, could require us to cease operating.            If we cannot broaden our customer base, we will continue to depend on a few customers            for the majority of our revenues. Additionally, if we are unable to negotiate favorable            business terms with these customers in the future, our revenues and gross profits may            be insufficient to allow us to achieve and/or sustain profitability or continue            operations.

 

We have entered into four License, Development and/or Supply agreements            for five potential products since November of 2005 with Teva Pharmaceutical Industries            Ltd. or an affiliate of Teva.  Although certain upfront payments have been            received, there have been no commercial sales and there can be no assurance that there            ever will be commercial sales or future milestone payments under these            agreements.

 

In July 2007, we entered into a worldwide product development and            license agreement with Jazz Pharmaceuticals. Under the agreement an upfront payment,            development milestones, and royalties on product sales are due us under certain            circumstances. If the development program conducted by Jazz is not a success we may            never receive any compensation other than the upfront payment earned at agreement            execution.

 

In September 2007, we entered into a worldwide product development and            license agreement with an undisclosed company. Under the agreement an upfront payment,            development milestones, and royalties on product sales are due us under certain            circumstances. If the development program conducted by this company is not a success we            may never receive any compensation other than the upfront payment earned at agreement            execution.

 

*If we or our third-party manufacturer are unable to supply Ferring            with our devices pursuant to our current license agreement with Ferring, Ferring would            own a fully paid up license for certain of our intellectual property.*

 

Pursuant to our license agreement with Ferring, we licensed certain of            our intellectual property related to our needle-free injection devices, including a            license that allows Ferring to manufacture our devices on its own under certain            circumstances for use with its human growth hormone product. In accordance with the            license agreement, we entered into a manufacturing agreement with a third party to            manufacture our devices for Ferring. If we or this third party are unable to meet our            obligations to supply Ferring with our devices, Ferring would own a fully paid up            license to manufacture our devices and to use and exploit our intellectual property in            connection with Ferring’s

 

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human growth hormone product. In such event, we would no longer receive            product sales and manufacturing margins from Ferring, however we would still receive            royalties.

 

*If we do not develop and maintain relationships with manufacturers of            our drug candidates, then we may not successfully manufacture and sell our            pharmaceutical products.*

 

We do not possess the capabilities or facilities to manufacture            commercial quantities of AnturolTM, which is currently in development for            overactive bladder, or any other of our future drug candidates. We must contract with            manufacturers to produce AnturolTM according to government regulations. Our future            development and delivery of our product candidates depends on the timely, profitable            and competitive performance of these manufacturers. A limited number of manufacturers            exist which are capable of manufacturing our product candidates. We may fail to            contract with the necessary manufacturers or we may contract with manufactures on terms            that may not be favorable to us. Our manufacturers must obtain FDA approval for their            manufacturing processes, and we have no control over this approval process.            Additionally, use of contract manufacturers exposes us to risks in the manufacturer's            business such as their potential inability to perform from a technical, operational or            financial standpoint.

 

We have contracted with a commercial supplier of pharmaceutical            chemicals to supply us with the active pharmaceutical ingredient of oxybutynin for            clinical quantities of AnturolTM in a manner that meets FDA requirements via            reference of their DMF for oxybutynin. Additionally, we have contracted with Patheon, a            manufacturing development company, to supply clinical quantities of AnturolTM in a            manner that meets FDA requirements. The FDA has not approved the manufacturing            processes of Patheon for AnturolTM. Any failure by Patheon or our supplier of the            active ingredient oxybutynin to achieve or maintain compliance with FDA standards could            significantly harm our business since we do not currently have approved secondary            manufacturers for AnturolTM gel or oxybutynin

 

*If we do not develop and maintain relationships with manufacturers of            our device products, then we may not successfully manufacture and sell our device            products.*

 

Our device manufacturing for our needle-free device has involved the            assembly of products from machined stainless steel and composite components in limited            quantities. Our planned future device business necessitates significant changes and            additions to our contract manufacturing and assembly process due to the anticipated            larger scale of manufacturing in our business plan. Our devices must be manufactured in            compliance with regulatory requirements, in a timely manner and in sufficient            quantities while maintaining quality and acceptable manufacturing costs. In the course            of these changes and additions to our manufacturing and production methods, we may            encounter difficulties, including problems involving scale-up, yields, quality control            and assurance, product reliability, manufacturing costs, existing and new equipment and            component supplies, any of which could result in significant delays in            production.

 

We entered into a manufacturing agreement under which a third party            manufactures and assembles our MJ7 devices and certain related disposable component            parts. There can be no assurance that this third-party manufacturer will be able to            continue to meet these regulatory requirements or our own quality control standards.            Therefore, there can be no assurance that we will be able to successfully produce and            manufacture our products. Any failure to do so would negatively impact our business,            financial condition and results of operations. We will also continue to outsource            manufacturing of our future disposable injection products to third parties. Such            products will be price sensitive and may be required to be manufactured in large            quantities, and we have no assurance that this can be done. Additionally, use of            contract manufacturers exposes us to risks in the manufacturers’ business such as            their potential inability to perform from a technical, operational or financial            standpoint.

 

We have contracted with Nypro Inc (Nypro), an international            manufacturing development company to supply commercial quantities of our            VibexTM pressure assisted auto injector device in compliance with FDA QSR            regulations. Any failure by Nypro to successfully manufacture the pressure assisted            auto injector device in commercial quantities, and be in compliance with regulatory            regulations, would have a negative impact on our future revenue            expectations.

 

 

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*We rely on third parties to supply components for our products, and            any failure to retain relationships with these third parties could negatively impact            our ability to manufacture our products.*

 

Certain of our technologies contain a number of customized components            manufactured by various third parties. Regulatory requirements applicable to            manufacturing can make substitution of suppliers costly and time-consuming. In the            event that we could not obtain adequate quantities of these customized components from            our suppliers, there can be no assurance that we would be able to access alternative            sources of such components within a reasonable period of time, on acceptable terms or            at all. The unavailability of adequate quantities, the inability to develop alternative            sources, a reduction or interruption in supply or a significant increase in the price            of components could have a material adverse effect on our ability to manufacture and            market our products.

 

*Our products have achieved only limited acceptance by patients and            physicians, which continues to restrict marketing penetration and the resulting sales            of more units.*

 

Our business ultimately depends on patient and physician acceptance of            our reusable needle-free injectors, disposable pressure assisted auto injectors,            transdermal gels, oral disintegrating tablets and our other drug delivery technologies            as an alternative to more traditional forms of drug delivery, including injections            using a needle, orally ingested drugs and more traditional transdermal patch products.            To date, our device technologies have achieved only limited acceptance from such            parties. The degree of acceptance of our drug delivery systems depends on a number of            factors. These factors include, but are not limited to, the following:

 

|   | • | advantages over alternative drug delivery systems or                            similar products from other companies; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|

|   | • | demonstrated clinical efficacy, safety and enhanced                            patient compliance; |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | • | cost-effectiveness; |
|--------|--------|---------------------|

|   | • | convenience and ease of use of injectors and transdermal                            gels; |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | • | marketing and distribution support; and |
|--------|--------|-----------------------------------------|

|   | • | successful launch of our pharmaceutical partners                            products which utilize our devices. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

 

Physicians may refuse to prescribe products incorporating our drug            delivery technologies if they believe that the active ingredient is better administered            to a patient using alternative drug delivery technologies, that the time required to            explain use of the technologies to the patient would not be offset by advantages, or            they believe that the delivery method will result in patient noncompliance. Factors            such as patient perceptions that a gel is inconvenient to apply or that devices do not            deliver the drug at the same rate as conventional drug delivery methods may cause            patients to reject our drug delivery technologies. Because only a limited number of            products incorporating our drug delivery technologies are commercially available, we            cannot yet fully assess the level of market acceptance of our drug delivery            technologies.

 

*A            2002 National Institute of Health (“NIH”) study and the 2003 findings from            the Million Women Study first launched in 1997 in the U.K. questioned the safety of            hormone replacement therapy for menopausal women, and our female hormone replacement            therapy business may suffer as a result.*

 

In July 2002, the NIH halted a long-term study, known as the            Women’s Health Initiative, being conducted on oral female hormone replacement            therapy (“HRT”) using a combination of estradiol and progestin because the            study showed an increased risk of breast cancer, heart disease and blood clots in women            taking the combination therapy. The arm of the study using estrogen alone was stopped            in March 2004 after the NIH concluded that the benefits of estrogen did not outweigh            the stroke risk for women in this trial. The halted study looked at only one brand of            oral combined HRT and of estrogen, and there is no information on whether brands with            different levels of hormones would carry the same risk. In January 2003, the FDA            announced that it would require new warnings on the labels of HRT products, and it            advised patients to consult with their physicians about whether to continue treatment            with continuous combined HRT and to limit the period of use to that required to manage            post-menopausal vasomotor symptoms only. Subsequently, additional analysis from the NIH            study has suggested a slight increase in the risk of cognitive dysfunction developing            in patients on long-term combined HRT. The Million Women Study, conducted in the U.K.,            confirmed that current and recent use of HRT increases a woman’s chance of            developing breast cancer and that the risk increased with duration of use. Other HRT            studies have found potential links between HRT and an increased risk of dementia and            asthma. These results and recommendations impacted the use of HRT, and            product

 

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sales have diminished significantly. We cannot predict whether our            alternative route of transdermal administration of HRT products will carry the same            risk as the oral products used in the study.

 

In 2006 the FDA approved Elestrin®, an estrogen gel            developed by our partner BioSante for the treatment of vasomotor symptoms associated            with menopause. The determination by the FDA of Elestrin’s efficacy and safety            may not impact the acceptance by physicians and patients of this newly approved            product. In 2008 our partner BioSante reached agreement under a Special Protocol            Assessment (SPA) for the Phase III program for LibiGel® for the            treatment of female sexual dysfunction. The receipt of the SPA does not ensure the FDA            will find LibiGel® safe or effective nor does it impact future            acceptance by physicians and patients.

 

*If transdermal gels do not achieve greater market acceptance, we may            be unable to achieve profitability.*

 

Because transdermal gels are a newer, less understood method of drug            delivery, our potential partners and consumers have little experience with such            products. Our assumption of higher value may not be shared by the potential partner and            consumer. To date, transdermal gels have gained successful entry into only a limited            number of markets. There can be no assurance that transdermal gels will ever gain            market acceptance beyond these markets sufficient to allow us to achieve and/or sustain            profitable operations in this product area.

 

Elestrin®, our transdermal estradiol gel, was launched by            BioSante’s marketing partner Bradley Pharmaceuticals in June 2007. To date, the            market penetration of Elestrin® has been low. Additionally, Bradley was            acquired by Nycomed in February 2008 and presently the commercial interest of            Elestrin® with Nycomed is unknown.

 

We are developing Anturol, our oxybutynin gel for overactive bladder. We            may seek a pharmaceutical partner to assist in the development and marketing of this            potential product. However, we may be unsuccessful in partnering AnturolTM            which may delay or affect the timing of the clinical program due to availability of            resources.

 

*We may be unable to successfully expand into new areas of drug            delivery technology, which could negatively impact our business as a            whole.*

 

We intend to continue to enhance our current technologies. Even if            enhanced technologies appear promising during various stages of development, we may not            be able to develop commercial applications for them because:

 

|   | • | the potential technologies may fail clinical                            studies; |
|--------|--------|----------------------------------------------------------------------------------|

|   | • | we may not find a pharmaceutical company to adopt the                            technologies; |
|--------|--------|------------------------------------------------------------------------------------------------|

|   | • | it may be difficult to apply the technologies on a                            commercial scale; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | • | the technologies may not be economical to market;                            or |
|--------|--------|---------------------------------------------------------------------------------|

|   | • | we may not receive necessary regulatory approvals for                            the potential technologies. |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

 

We have not yet completed research and development work or obtained            regulatory approval for any technologies for use with any drugs other than insulin,            human growth hormone and estradiol (Elestrin®). There can be no            assurance that any newly developed technologies will ultimately be successful or that            unforeseen difficulties will not occur in research and development, clinical testing,            regulatory submissions and approval, product manufacturing and commercial scale-up,            marketing, or product distribution related to any such improved technologies or new            uses. Any such occurrence could materially delay the commercialization of such improved            technologies or new uses or prevent their market introduction entirely.

 

*As health insurance companies and other third-party payors            increasingly challenge the products and services for which they will provide coverage,            our individual consumers may not be able to receive adequate reimbursement or may be            unable to afford to use our products, which could substantially reduce our revenues and            negatively impact our business as a whole.*

 

Our injector device products are currently sold in the European            Community (“EC”) and elsewhere for use with human growth hormone and in the            United States for use with insulin. In the case of human growth hormone, our products            are generally provided to users at no cost by the drug supplier. In the United States            the injector products are marketed and available for use with insulin.

 

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Although it is impossible for us to identify the amount of sales of our            products that our customers will submit for payment to third-party insurers, at least            some of these sales may be dependent in part on the availability of adequate            reimbursement from these third-party healthcare payors. Currently, insurance companies            and other third-party payors reimburse the cost of certain technologies on a            case-by-case basis and may refuse reimbursement if they do not perceive benefits to a            technology’s use in a particular case. Third-party payors are increasingly            challenging the pricing of medical products and devices, and there can be no assurance            that such third-party payors will not in the future increasingly reject claims for            coverage of the cost of certain of our technologies. Insurance and third-party payor            practice vary from country to country, and changes in practices could negatively affect            our business if the cost burden for our technologies were shifted more to the patient.            Therefore, there can be no assurance that adequate levels of reimbursement will be            available to enable us to achieve or maintain market acceptance of our products or            technologies or maintain price levels sufficient to realize profitable operations.            There is also a possibility of increased government control or influence over a broad            range of healthcare expenditures in the future. Any such trend could negatively impact            the market for our drug delivery products and technologies.

 

Elestrin®, for which we receive royalties from our            partner based on any commercial sales, was launched in June 2007. We have no way of            knowing at this time if health insurance companies reimbursement has negatively            impacted patient use of Elestrin® as this typically becomes known after            the first year of launch.

 

*The loss of any existing licensing agreements or the failure to enter            into new licensing agreements could substantially affect our revenue.*

 

One of our primary business pathways requires us to enter into license            agreements with pharmaceutical and biotechnology companies covering the development,            manufacture, use and marketing of drug delivery technologies with specific drug            therapies. Under these arrangements, the partner companies typically assist us in the            development of systems for such drug therapies and collect or sponsor the collection of            the appropriate data for submission for regulatory approval of the use of the drug            delivery technology with the licensed drug therapy. Our licensees may also be            responsible for distribution and marketing of the technologies for these drug therapies            either worldwide or in specific territories. We are currently a party to a number of            such agreements, all of which are currently in varying stages of development. We may            not be able to meet future milestones established in our agreements (such milestones            generally being structured around satisfactory completion of certain phases of clinical            development, regulatory approvals and commercialization of our product) and thus, would            not receive the fees expected from such arrangements, related future royalties or            product sales. Moreover, there can be no assurance that we will be successful in            executing additional collaborative agreements or that existing or future agreements            will result in increased sales of our drug delivery technologies. In such event, our            business, results of operations and financial condition could be adversely affected,            and our revenues and gross profits may be insufficient to allow us to achieve and/or            sustain profitability. As a result of our collaborative agreements, we are dependent            upon the development, data collection and marketing efforts of our licensees. The            amount and timing of resources such licensees devote to these efforts are not within            our control, and such licensees could make material decisions regarding these efforts            that could adversely affect our future financial condition and results of operations.            In addition, factors that adversely impact the introduction and level of sales of any            drug or drug device covered by such licensing arrangements, including competition            within the pharmaceutical and medical device industries, the timing of regulatory or            other approvals and intellectual property litigation, may also negatively affect sales            of our drug delivery technology. We are relying on partners such as Teva, Jazz,            BioSante and an undisclosed partner in our device, gel and ODT platforms for future            milestone, sales and royalty revenue. Any or all of these partners may never            commercialize a product with our technologies or significant delays in anticipated            launches of these products may occur. Any potential loss of anticipated future revenue            could have an adverse affect on our business and the value of your            investment.

 

*The failure of any of our third-party licensees to develop, obtain            regulatory approvals for, market, distribute and sell our products as planned may            result in us not meeting revenue and profit targets.*

 

Pharmaceutical company partners help us develop, obtain regulatory            approvals for, manufacture and sell our products. If one or more of these            pharmaceutical company partners fail to pursue the development or marketing of the            products as planned, our revenues and profits may not reach expectations or may            decline. We may not be able to control the timing and other aspects of the development            of products because pharmaceutical company partners may have priorities that differ            from ours. Therefore, commercialization of products under development may be            delayed

 

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unexpectedly. Generally speaking, in the near term, we do not intend to            have a direct marketing channel to consumers for our drug delivery products or            technologies except through current distributor agreements in the United States for our            insulin delivery device. Therefore, the success of the marketing organizations of our            pharmaceutical company partners, as well as the level of priority assigned to the            marketing of the products by these entities, which may differ from our priorities, will            determine the success of the products incorporating our technologies. Competition in            this market could also force us to reduce the prices of our technologies below            currently planned levels, which could adversely affect our revenues and future            profitability.

 

Additionally, there is no assurance that regulatory filings by our            partners in the U.S. will be deemed sufficient by agencies equivalent to the FDA            outside the U.S., potentially delaying non U.S. product launches.

 

*If we cannot develop and market our products as rapidly or            cost-effectively as our competitors, then we may never be able to achieve profitable            operations.*

 

Competitors in the overactive bladder, transdermal gel drug delivery,            injector and other markets, some with greater resources and experience than us, may            enter these markets, as there is an increasing recognition of a need for less invasive            methods of delivering drugs. Additionally, there is an ever increasing list of            competitors in the oral disintegrating tablet business. Our success depends, in part,            upon maintaining a competitive position in the development of products and technologies            in rapidly evolving fields. If we cannot maintain competitive products and            technologies, our current and potential pharmaceutical company partners may choose to            adopt the drug delivery technologies of our competitors. Companies that compete with            our technologies include Watson Pharmaceuticals, Bioject Medical Technologies, Inc.,            Bentley Pharmaceuticals, Inc., Auxillium, BioChemics, Inc., Aradigm, Cellegy            Pharmaceuticals, Inc., Cardinal Health, CIMA Laboratories, Laboratoires            Besins-Iscovesco, MacroChem Corporation, NexMed, Inc., The Medical House and Novavax,            Inc., along with other companies. We also compete generally with other drug delivery,            biotechnology and pharmaceutical companies engaged in the development of alternative            drug delivery technologies or new drug research and testing. Many of these competitors            have substantially greater financial, technological, manufacturing, marketing,            managerial and research and development resources and experience than we do, and,            therefore, represent significant competition.

 

Additionally, new drug delivery technologies are mostly used only with            drugs for which other drug delivery methods are not possible, in particular with            biopharmaceutical proteins (drugs derived from living organisms, such as insulin and            human growth hormone) that cannot currently be delivered orally or transdermally.            Transdermal patches and gels are also used for drugs that cannot be delivered orally or            where oral delivery has other limitations (such as high first pass drug metabolism,            meaning that the drug dissipates quickly in the digestive system and, therefore,            requires frequent administration). Many companies, both large and small, are engaged in            research and development efforts on less invasive methods of delivering drugs that            cannot be taken orally. The successful development and commercial introduction of such            non-injection techniques could have a material adverse effect on our business,            financial condition, results of operations and general prospects.

 

Competitors may succeed in developing competing technologies or            obtaining governmental approval for products before we do. Competitors’ products            may gain market acceptance more rapidly than our products, or may be priced more            favorably than our products. Developments by competitors may render our products, or            potential products, noncompetitive or obsolete.

 

One of our competitors, Watson Pharmaceuticals, completed a Phase III            study of its own oxybutynin gel for OAB in January 2008. While there is no guarantee            their drug will ultimately be approved or launched in the U.S., at this point            Watson’s development of their oxybutynin gel is ahead of AnturolTM            which may limit the success of AnturolTM in the market, if approved.            Additionally, Watson has greater resources than we do, which may impact our ability to            be competitive in the OAB market.

 

*Although we have applied for, and have received, several patents, we            may be unable to protect our intellectual property, which would negatively affect our            ability to compete.*

 

Our success depends, in part, on our ability to obtain and enforce            patents for our products, processes and technologies and to preserve our trade secrets            and other proprietary information. If we cannot do so, our competitors may exploit our            innovations and deprive us of the ability to realize revenues and profits from our            developments.

 

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We currently hold approximately 87 patents and have an additional 80            applications pending in the U.S. and other countries. Our current patents may not be            valid or enforceable and may not protect us against competitors that challenge our            patents, obtain their own patents that may have an adverse effect on our ability to            conduct business, or are able to otherwise circumvent our patents. Additionally, our            technologies are complex and one patent may not be sufficient to protect our products            where a series of patents may be needed. Further, we may not have the necessary            financial resources to enforce or defend our patents or patent applications. In            addition, any patent applications we may have made or may make relating to inventions            for our actual or potential products, processes and technologies may not result in            patents being issued or may result in patents that provide insufficient or incomplete            coverage for our inventions.

 

We have received a notice of rejection from the U.S. patent and            trademark office (USPTO) for a key patent in the AnturolTM patent portfolio            which was posted on the USPTO website (USPTO.gov) in January 2008. As part of the            patent process, after a meeting held with the patent examiner, we filed a response that            amended the claims. While we believe that the claims are patentable, there is no            assurance that the USPTO will issue the patent, and, if the patent is not issued, the            market value of AnturolTM may be adversely            affected.          

 

To protect our trade secrets and proprietary technologies and processes,            we rely, in part, on confidentiality agreements with employees, consultants and            advisors. These agreements may not provide adequate protection for our trade secrets            and other proprietary information in the event of any unauthorized use or disclosure,            or if others lawfully and independently develop the same or similar            information.

 

*Others may bring infringement claims against us, which could be            time-consuming and expensive to defend.*

 

Third parties may claim that the manufacture, use or sale of our drug            delivery technologies infringe their patent rights. If such claims are asserted, we may            have to seek licenses, defend infringement actions or challenge the validity of those            patents in the patent office or the courts. If we cannot avoid infringement or obtain            required licenses on acceptable terms, we may not be able to continue to develop and            commercialize our product candidates. Even if we were able to obtain rights to a third            party’s intellectual property, these rights may be non-exclusive, thereby giving            our competitors potential access to the same intellectual property. If we are found            liable for infringement or are not able to have these patents declared invalid, we may            be liable for significant monetary damages, encounter significant delays in bringing            products to market or be precluded from participating in the manufacture, use or sale            of products or methods of drug delivery covered by patents of others. Even if we were            able to prevail, any litigation could be costly and time-consuming and could divert the            attention of our management and key personnel from our business operations. We may not            have identified, or be able to identify in the future, United States or foreign patents            that pose a risk of potential infringement claims. Furthermore, in the event a patent            infringement suit is brought against us, the development, manufacture or potential sale            of product candidates claimed to infringe on a third party’s intellectual            property may have to stop or be delayed. Ultimately, we may be unable to commercialize            some of our product candidates as a result of patent infringement claims, which could            harm our business.

 

We are aware of two related U.S. Patents issued to Watson            Pharmaceuticals relating to a gel formulation of oxybutynin. We believe that we do not            infringe these patents and that they should not have been issued. We may seek to            invalidate these patents but there can be no assurance that we will prevail. If the            patents are determined to be valid and if AnturolTM is approved, we may be delayed            in our marketing and the potential market value of AnturolTM may be adversely            affected.

             

*If the pharmaceutical companies to which we license our technologies            lose their patent protection or face patent infringement claims for their drugs, we may            not realize our revenue or profit plan.*

 

The drugs to which our drug delivery technologies are applied are            generally the property of the pharmaceutical companies. Those drugs may be the subject            of patents or patent applications and other forms of protection owned by the            pharmaceutical companies or third parties. If those patents or other forms of            protection expire, become ineffective or are subject to the control of third parties,            sales of the drugs by the collaborating pharmaceutical company may be restricted or may            cease. Our expected revenues, in that event, may not materialize or may            decline.

 

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*Our business may suffer if we lose certain key officers or employees            or if we are not able to add additional key officers or employees necessary to reach            our goals.*

 

The success of our business is materially dependent upon the continued            services of certain of our key officers and employees. The loss of such key personnel            could have a material adverse effect on our business, operating results or financial            condition. There can be no assurance that we will be successful in retaining key            personnel. We consider our employee relations to be good; however, competition for            personnel is intense and we cannot assume that we will continue to be able to attract            and retain personnel of high caliber.

 

*We are involved in international markets, and this subjects us to            additional business risks.*

 

We have offices and our pharmaceutical operations in Basel, Switzerland,            and we also license and distribute our products in the European Community, Asia and the            United States. These geographic localities provide economically and politically stable            environments in which to operate. However, in the future, we intend to introduce            products through partnerships in other countries. As we expand our geographic market,            we will face additional ongoing complexity to our business and may encounter the            following additional risks:

 

|   | • | increased complexity and costs of managing international                            operations; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | • | protectionist laws and business practices that favor                            local companies; |
|--------|--------|--------------------------------------------------------------------------------------------------|

|   | • | dependence on local vendors; |
|--------|--------|------------------------------|

|   | • | multiple, conflicting and changing governmental laws and                            regulations; |
|--------|--------|--------------------------------------------------------------------------------------------------|

|   | • | difficulties in enforcing our legal rights; |
|--------|--------|---------------------------------------------|

|   | • | reduced or limited protections of intellectual property                            rights; and |
|--------|--------|------------------------------------------------------------------------------------------------|

|   | • | political and economic instability. |
|--------|--------|-------------------------------------|

 

A significant portion of our international revenues is denominated in            foreign currencies. An increase in the value of the U.S. dollar relative to these            currencies may make our products more expensive and, thus, less competitive in foreign            markets.

 

*If we make any acquisitions, we will incur a variety of costs and            might never successfully integrate the acquired product or business into            ours.*

 

We might attempt to acquire products or businesses that we believe are a            strategic complement to our business model. We might encounter operating difficulties            and expenditures relating to integrating an acquired product or business. These            acquisitions might require significant management attention that would otherwise be            available for ongoing development of our business. In addition, we might never realize            the anticipated benefits of any acquisition. We might also make dilutive issuances of            equity securities, incur debt or experience a decrease in cash available for our            operations, or incur contingent liabilities and/or amortization expenses relating to            goodwill and other intangible assets, in connection with future            acquisitions.

 

*If we do not have adequate insurance for product liability or            clinical trial claims, then we may be subject to significant expenses relating to these            claims.*

 

Our business entails the risk of product liability and clinical trial            claims. Although we have not experienced any material claims to date, any such claims            could have a material adverse impact on our business. Insurance coverage is expensive            and may be difficult to obtain, and may not be available in the future on acceptable            terms, or at all. We maintain product and clinical trial liability insurance with            coverage of $5 million per occurrence and an annual aggregate maximum of $5 million and            evaluate our insurance requirements on an ongoing basis. If the coverage limits of the            product liability insurance are not adequate, a claim brought against us, whether            covered by insurance or not, could have a material adverse effect on our business,            results of operations, financial condition and cash flows.

 

**Risks Related to Regulatory Matters**

 

*We or our licensees may incur significant costs seeking approval for            our products, which could delay the realization of revenue and, ultimately, decrease            our revenues from such products.*

 

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The design, development, testing, manufacturing and marketing of            pharmaceutical compounds, medical nutrition and diagnostic products and medical devices            are subject to regulation by governmental authorities, including the FDA and comparable            regulatory authorities in other countries. The approval process is generally lengthy,            expensive and subject to unanticipated delays. Currently, we, along with our partners,            are actively pursuing marketing approval for a number of products from regulatory            authorities in other countries and anticipate seeking regulatory approval from the FDA            for products developed internally and pursuant to our license agreements. In the future            we, or our partners, may need to seek approval for newly developed products. Our            revenue and profit will depend, in part, on the successful introduction and marketing            of some or all of such products by our partners or us.

 

Applicants for FDA approval often must submit extensive clinical data            and supporting information to the FDA. Varying interpretations of the data obtained            from pre-clinical and clinical testing could delay, limit or prevent regulatory            approval of a drug product. Changes in FDA approval policy during the development            period, or changes in regulatory review for each submitted new drug application also            may cause delays or rejection of an approval. Even if the FDA approves a product, the            approval may limit the uses or “indications” for which a product may be            marketed, or may require further studies. The FDA also can withdraw product clearances            and approvals for failure to comply with regulatory requirements or if unforeseen            problems follow initial marketing.

 

We are currently developing AnturolTM for the treatment of            overactive bladder (OAB). AnturolTM is the anticholinergic oxybutynin delivered by            our proprietary ATDTM gel that is used to achieve therapeutic blood levels of the            active compound that can be sustained over 24 hours after a single, daily            application.

 

In February 2006, we announced the results of our Phase II dose ranging            study for our ATDTM oxybutynin gel product AnturolTM. The study was an open            label, single period, randomized study using 48 healthy subjects and three different            doses of AnturolTM over a 20 day period. Our overall conclusions of the study were            positive.

 

         The FDA however, may            not concur with our analysis of the data.

 

In July 2007, we completed a Special Protocol Assessment (SPA) with the            FDA for a pivotal trial of Anturol. A SPA documents the FDA's agreement that the design            and planned analysis of the trial adequately addresses objectives, in support of a            regulatory submission such as a New Drug Application (NDA). The completion of the SPA            does not ensure success of the trial or that the FDA will ultimately accept the results            of the trial and we may never receive FDA approval for AnturolTM and without FDA            approval, we cannot market or sell AnturolTM.

 

In October 2007, we announced the first patient dosing in a pivotal            safety and efficacy trial of AnturolTM for OAB. The three arm study will enroll            approximately 600 patients for a 12-week clinical trial. The randomized, double-blind,            placebo controlled, multi-center trial will principally evaluate the efficacy of            AnturolTM when administered topically once daily for 12 weeks. The primary end            point of the trial will be efficacy against the placebo defined as the reduction in the            number of urinary incontinence episodes experienced. Secondary end points include            changes from baseline in urinary urgency, average daily urinary frequency, patient            perceptions as well as safety and tolerability. The initiation of the trial does not            ensure success of the trial. We may not have the resources to complete the trial,            AnturolTM may prove to not be efficacious, may not beat placebo or may have            undesired side effects not previously experienced. We may have to modify the trial            which may delay the trial or cause the costs of the trial to increase significantly.            Additionally, the FDA may require further studies for approval. Any of these potential            outcomes could have a negative impact on the value of our stock price.

 

We are also developing, with partners, injection devices for use with            our partner’s drugs. The regulatory path for approval of such combination            products maybe subject to review by several centers within the FDA and although            precedent and guidance exists for the requirements for such combination products, there            is no assurance that the FDA will not change what it requires or how it reviews such            submissions. Additionally, there is no assurance that the FDA will not require human            clinical testing in order to commercialize these devices. Such changes in review            processes or the requirement for clinical studies could delay anticipated launch dates            or be at a cost which makes launching the device cost prohibitive for our partners.            Such delay or failure to launch these devices could adversely affect our revenues and            future profitability.

 

In other jurisdictions, we, and the pharmaceutical companies with whom            we are developing technologies (both drugs and devices), must obtain required            regulatory approvals from regulatory agencies and comply with extensive

 

33

 

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regulations regarding safety and quality. If approvals to market the            products are delayed, if we fail to receive these approvals, or if we lose previously            received approvals, our revenues may not materialize or may decline. We may not be able            to obtain all necessary regulatory approvals. Additionally, clinical data that we            generate or obtain from partners from FDA regulatory filings may not be sufficient for            regulatory filings in other jurisdictions and we may be required to incur significant            costs in obtaining those regulatory approvals.

 

*The            505(b)(2) regulatory pathway for many of our potential pharmaceutical products is            uncertain and could result in unexpected costs and delays of approvals.*

 

Transdermal and topical products indicated for the treatment of systemic            or local treatments respectively are regulated by the FDA in the U.S. and other similar            regulatory agencies in other countries as drug products. Transdermal and topical            products are considered to be controlled release dosage forms and may not be marketed            in the U.S. until they have been demonstrated to be safe and effective. The regulatory            approval routes for transdermal and topical products include the filing of an NDA for            new drugs, new indications of approved drugs or new dosage forms of approved drugs.            Alternatively, these dosage forms can obtain marketing approval as a generic product by            the filing of an ANDA, providing the new generic product is bioequivalent to and has            the same labeling as a comparable approved product or as a filing under Section            505(b)(2) where there is an acceptable reference product. Other topical products for            local treatment do not require the filing of either an NDA or ANDA, providing that            these products comply with existing OTC monographs. The combination of the drug, its            dosage form and label claims and FDA requirement will ultimately determine which            regulatory approval route will be required.

 

Many of our transdermal product candidates may be developed via the            505(b)(2) route. The 505(b)(2) regulatory pathway is continually evolving and advice            provided in the present is based on current standards, which may or may not be            applicable when we potentially submit an NDA. Additionally, we must reference the most            similar predicate products when submitting a 505(b)(2) application. It is therefore            probable that:

 

|   | • | should a more appropriate reference product(s) be                            approved by the FDA at any time before or during the review of our NDA,                            we would be required to submit a new application referencing the more                            appropriate product; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | the FDA cannot disclose whether such predicate                            product(s) is under development or has been submitted at any time                            during another company’s review cycle. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Accordingly, these regulations and the FDA’s interpretation of            them might impair our ability to obtain product approval or effectively market our            products.

 

*Our business could be harmed if we fail to comply with regulatory            requirements and, as a result, are subject to sanctions.*

 

 If we, or pharmaceutical companies with whom we are developing            technologies, fail to comply with applicable regulatory requirements, the            pharmaceutical companies, and we, may be subject to sanctions, including the            following:

 

|   | • | warning letters; |
|--------|--------|------------------|

|   | • | fines; |
|--------|--------|--------|

|   | • | product seizures or recalls; |
|--------|--------|------------------------------|

|   | • | injunctions; |
|--------|--------|--------------|

|   | • | refusals to permit products to be imported into or                            exported out of the applicable regulatory jurisdiction; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | • | total or partial suspension of production; |
|--------|--------|--------------------------------------------|

|   | • | withdrawals of previously approved marketing                            applications; or |
|--------|--------|------------------------------------------------------------------------------------------|

|   | • | criminal prosecutions. |
|--------|--------|------------------------|

 

*Our revenues may be limited if the marketing claims asserted about            our products are not approved.*

 

Once a drug product is approved by the FDA, the Division of Drug            Marketing, Advertising and Communication, the FDA’s marketing surveillance            department within the Center for Drugs, must approve marketing claims asserted by our            pharmaceutical company partners. If we or a pharmaceutical company partner fails to            obtain

 

34

 

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from            the Division of Drug Marketing acceptable marketing claims for a product incorporating            our drug technologies, our revenues from that product may be limited. Marketing claims            are the basis for a product’s labeling, advertising and promotion. The claims the            pharmaceutical company partners are asserting about our drug delivery technologies, or            the drug product itself, may not be approved by the Division of Drug            Marketing.

 

*Product liability claims related to participation in clinical trials            or the use or misuse of our products could prove to be costly to defend and could harm            our business reputation.*

 

The testing, manufacturing and marketing of products utilizing our drug            delivery technologies may expose us to potential product liability and other claims            resulting from their use in practice or in clinical development. If any such claims            against us are successful, we may be required to make significant compensation            payments. Any indemnification that we have obtained, or may obtain, from contract            research organizations or pharmaceutical companies conducting human clinical trials on            our behalf may not protect us from product liability claims or from the costs of            related litigation. Similarly, any indemnification we have obtained, or may obtain,            from pharmaceutical companies with whom we are developing drug delivery technologies            may not protect us from product liability claims from the consumers of those products            or from the costs of related litigation. If we are subject to a product liability            claim, our product liability insurance may not reimburse us, or may not be sufficient            to reimburse us, for any expenses or losses that may have been suffered. A successful            product liability claim against us, if not covered by, or if in excess of our product            liability insurance, may require us to make significant compensation payments, which            would be reflected as expenses on our statement of operations. Adverse claim experience            for our products or licensed technologies or medical device, pharmaceutical or            insurance industry trends may make it difficult for us to obtain product liability            insurance or we may be forced to pay very high premiums, and there can be no assurance            that insurance coverage will continue to be available on commercially reasonable terms            or at all.

 

**Risks Related to our Common Stock**

 

*Together, certain of our stockholders own or have the right to            acquire a significant portion of our stock and could ultimately control decisions            regarding our company and impact stock price.*

 

As a result of our reverse business combination with Permatec in January            2001 and subsequent additional debt and equity financings, Permatec Holding AG and its            controlling stockholder, Dr. Jacques Gonella, own a substantial portion (as of March            14, 2008, approximately 14%) of our outstanding shares of common stock. Dr. Gonella,            who is the Chairman of our Board of Directors, also owns warrants to purchase an            aggregate of 4,198,976 shares of common stock and options to purchase 144,500 shares of            common stock. Additionally, three investors (Perceptive Life Sciences Fund, SCO Capital            Group and SDS Funds) own warrants that are, as of March 14, 2008, exercisable into an            aggregate of 5,286,588 shares of our common stock. Some of these investors also            directly own shares of our common stock. If Dr. Gonella and all of the above investors            exercised all of the warrants and options owned by them, Dr. Gonella would own            approximately 18%, and the four investors as a group would own, at a minimum, over 7%,            of our common stock.

 

Because the parties described above either currently own or could            potentially own a large portion of our stock, they may be able to generally determine            or they may be able to significantly influence the outcome of corporate actions            requiring stockholder approval. As a result, these parties may be in a position to            control matters affecting our company, including decisions as to our corporate            direction and policies; future issuances of certain securities; our incurrence of debt;            amendments to our certificate of incorporation and bylaws; payment of dividends on our            common stock; and acquisitions, sales of our assets, mergers or similar transactions,            including transactions involving a change of control. As a result, some investors may            be unwilling to purchase our common stock. In addition, if the demand for our common            stock is reduced because of these stockholders’ control of the Company, the price            of our common stock could be adversely affected. Additionally, future sales of large            blocks of our common stock by any of the above investors could substantially adversely            affect our stock price.

 

*Future conversions or exercises by holders of warrants or options            could substantially dilute our common stock.*

 

As of March 14, 2008, we have warrants outstanding that are exercisable,            at prices ranging from $0.55 per share to $5.00per share, for an aggregate of            approximately 23,141,000 shares of our common stock. We also have options outstanding            that are exercisable, at exercise prices ranging from $0.70 to $9.40 per share, for an            aggregate of

 

35

 

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approximately 5,582,000 shares of our common stock. Purchasers of common            stock could therefore experience substantial dilution of their investment upon exercise            of the above warrants or options. The majority of the shares of common stock issuable            upon exercise of the warrants or options held by these investors are currently            registered.

 

*Sales of our common stock by our officers and directors may lower the            market price of our common stock.*

 

As of March 14, 2008, our officers and directors beneficially owned an            aggregate of approximately 16,700,000 shares (or approximately 23%) of our common            stock, including stock options exercisable within 60 days. If our officers and            directors, or other stockholders, sell a substantial amount of our common stock, it            could cause the market price of our common stock to decrease and could hamper our            ability to raise capital through the sale of our equity securities.

 

*We do not expect to pay dividends in the foreseeable            future.*

 

We intend to retain any earnings in the foreseeable future for our            continued growth and, thus, do not expect to declare or pay any cash dividends in the            foreseeable future.

 

*Anti-takeover effects of certain certificate of incorporation and            bylaw provisions could discourage, delay or prevent a change in control.*

 

Our certificate of incorporation and bylaws could discourage, delay or            prevent persons from acquiring or attempting to acquire us. Our certificates of            incorporation authorizes our board of directors, without action of our stockholders, to            designate and issue preferred stock in one or more series, with such rights,            preferences and privileges as the board of directors shall determine. In addition, our            bylaws grant our board of directors the authority to adopt, amend or repeal all or any            of our bylaws, subject to the power of the stockholders to change or repeal the bylaws.            In addition, our bylaws limit who may call meetings of our stockholders.

 

| *Item 1B.* | *UNRESOLVED STAFF COMMENTS* |
|------------|-----------------------------|

 

|   | None. |
|--------|-------|

 

| *Item 2.* | *DESCRIPTION OF PROPERTY* |
|-----------|---------------------------|

 

We lease approximately 7,000 square feet of office space in Ewing, New            Jersey for our corporate headquarters facility. The lease will terminate in January            2012. We believe the facility will be sufficient to meet our requirements through the            lease period at this location.

 

We lease approximately 9,300 square feet of office and laboratory space            in Plymouth, a suburb of Minneapolis, Minnesota, and sublease approximately half of            this space to another company. The lease will terminate in April 2011. We believe the            facilities will be sufficient to meet our requirements through the lease period at this            location.

 

We also lease approximately 650 square meters of facilities in Basel,            Switzerland, for office space and formulation and analytical laboratories. The lease            will terminate in September 2013. We believe the facilities will be sufficient to meet            our requirements through the lease period at this location.

 

| *Item 3.* | *LEGAL PROCEEDINGS* |
|-----------|---------------------|

 

|   | None. |
|--------|-------|

 

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

 

|   | None. |
|--------|-------|

 

 

36

 

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**PART II**

 

| *Item 5.* | *MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED                            STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY                            SECURITIES.* |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 Our Common Stock trades on the American Stock Exchange under the            symbol “AIS.” The following table sets forth the per share high and low            closing sales prices of our Common Stock, as reported by the American Stock Exchange,            for each quarterly period during the two most recent fiscal years.

 

|           |   | **High** |   | **Low** |   |   |
|----------------|--------|----------|--------|---------|--------|--------|
| **2007:**      |   |     |   |    |   |   |   |
| First Quarter  |   | $        | 1.34   |    | $      | 1.09   |   |
| Second Quarter |   | $        | 2.15   |    | $      | 1.25   |   |
| Third Quarter  |   | $        | 1.83   |    | $      | 1.25   |   |
| Fourth Quarter |   | $        | 1.44   |    | $      | 0.92   |   |
|           |   |     |   |    |   |   |   |
| **2006:**      |   |     |   |    |   |   |   |
| First Quarter  |   | $        | 1.89   |    | $      | 1.10   |   |
| Second Quarter |   | $        | 1.75   |    | $      | 1.09   |   |
| Third Quarter  |   | $        | 1.35   |    | $      | 0.86   |   |
| Fourth Quarter |   | $        | 1.38   |    | $      | 1.00   |   |

 

**Common Shareholders**

 

|   | As of March 14, 2008, we had 130 shareholders of                            record of our common stock. |
|--------|---------------------------------------------------------------------------------------------------------|

 

**Dividends**

 

We have not paid or declared any cash dividends on our common stock            during the past ten years. We have no intention of paying cash dividends in the            foreseeable future on common stock. We paid semi-annual dividends on Series A            Convertible Preferred Stock (“Series A”) at an annual rate of 10%, payable            on May 10 and November 10 each year until June 2005, when all of the Series A was            converted into common stock. The covenants of our current credit facility, in certain            circumstances, restrict our ability to declare or pay any dividends on any shares of            our capital stock.

 

 

37

 

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*Item 6.**SELECTED FINANCIAL            DATA*

             

The            following table summarizes certain selected financial data. The selected financial data            is derived from, and is qualified by reference to, our financial statements            accompanying this report (amounts expressed in thousands, except per share            amounts). 

 

|                                                                      |   | **At December 31,** |     |
|---------------------------------------------------------------------------|--------|---------------------|----------|
|                                                                      |   | **2007**            |     |   |   | **2006** |   |   |   | **2005** |   |   |   | **2004** |   |   |   | **2003** |   |
| **Balance Sheet Data:**                                                   |   |                |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                 |   | $                   | 9,759    |   |   |   | $ | 2,706 |   |   |   | $ | 2,718 |   |   |   | $ | 1,652 |   |   |   | $ | 1,929 |   |
| Short-term investments                                                    |   |                | 16,301   |   |   |   |   | 4,953 |   |   |   |   | - |   |   |   |   | 7,972 |   |   |   |   | - |   |
| Working capital                                                           |   |                | 21,891   |   |   |   |   | 5,979 |   |   |   |   | 965 |   |   |   |   | 8,489 |   |   |   |   | 615 |   |
| Total assets                                                              |   |                | 30,217   |   |   |   |   | 11,534 |   |   |   |   | 6,166 |   |   |   |   | 13,178 |   |   |   |   | 5,955 |   |
| Long-term liabilities, less current                            maturities |   |                | 7,295    |   |   |   |   | 3,556 |   |   |   |   | 3,062 |   |   |   |   | 3,339 |   |   |   |   | 3,558 |   |
| Accumulated deficit                                                       |   |                | (107,901 | ) |   |   |   | (99,322 | ) |   |   |   | (91,123 | ) |   |   |   | (82,575 | ) |   |   |   | (74,127 | ) |
| Total stockholders’ equity                                          |   |                | 17,499   |   |   |   |   | 5,080 |   |   |   |   | 757 |   |   |   |   | 8,189 |   |   |   |   | 307 |   |

 

 

 

|                                      |   | **Year Ended December 31,** |   |
|-------------------------------------------|--------|-----------------------------|--------|
|                                      |   | **2007**                    |   |   |   | **2006** |   |   |   | **2005** |   |   |   | **2004** |   |   |   | **2003** |   |
| **Statement of Operations Data:**         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                             |   | $                           | 3,211  |   |   |   | $ | 2,195 |   |   |   | $ | 1,512 |   |   |   | $ | 1,834 |   |   |   | $ | 2,647 |   |
| Development revenue                       |   |                        | 956    |   |   |   |   | 594 |   |   |   |   | 184 |   |   |   |   | 197 |   |   |   |   | 310 |   |
| Licensing fees                            |   |                        | 3,231  |   |   |   |   | 1,254 |   |   |   |   | 374 |   |   |   |   | 635 |   |   |   |   | 695 |   |
| Royalties                                 |   |                        | 459    |   |   |   |   | 225 |   |   |   |   | 155 |   |   |   |   | 80 |   |   |   |   | 135 |   |
| Revenues                                  |   |                        | 7,857  |   |   |   |   | 4,268 |   |   |   |   | 2,225 |   |   |   |   | 2,746 |   |   |   |   | 3,787 |   |
| Cost of revenues (1)                      |   |                        | 3,442  |   |   |   |   | 1,556 |   |   |   |   | 1,137 |   |   |   |   | 1,372 |   |   |   |   | 2,008 |   |
|                                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                  |   |                        | 5,362  |   |   |   |   | 3,778 |   |   |   |   | 3,677 |   |   |   |   | 2,870 |   |   |   |   | 2,389 |   |
| Sales, marketing and business development |   |                        | 1,641  |   |   |   |   | 1,350 |   |   |   |   | 1,161 |   |   |   |   | 676 |   |   |   |   | 462 |   |
| General and administrative (2)            |   |                        | 6,058  |   |   |   |   | 5,861 |   |   |   |   | 4,839 |   |   |   |   | 6,203 |   |   |   |   | 7,562 |   |
| Operating expenses                        |   |                        | 13,061 |   |   |   |   | 10,989 |   |   |   |   | 9,677 |   |   |   |   | 9,749 |   |   |   |   | 10,413 |   |
| Operating loss                            |   |                        | (8,646 | ) |   |   |   | (8,277 | ) |   |   |   | (8,589 | ) |   |   |   | (8,375 | ) |   |   |   | (8,634 | ) |
| Net other income (expense)                |   |                        | 67     |   |   |   |   | 177 |   |   |   |   | 91 |   |   |   |   | 26 |   |   |   |   | (24,184 | ) |
| Net loss                                  |   |                        | (8,579 | ) |   |   |   | (8,100 | ) |   |   |   | (8,498 | ) |   |   |   | (8,349 | ) |   |   |   | (32,818 | ) |
| Deemed dividend to warrant holder         |   |                        | -      |   |   |   |   | (99 | ) |   |   |   | - |   |   |   |   | - |   |   |   |   | - |   |
| Preferred stock dividends                 |   |                        | -      |   |   |   |   | - |   |   |   |   | (50 | ) |   |   |   | (100 | ) |   |   |   | (143 | ) |
| Net loss applicable to common shares      |   | $                           | (8,579 | ) |   |   | $ | (8,199 | ) |   |   | $ | (8,548 | ) |   |   | $ | (8,449 | ) |   |   | $ | (32,961 | ) |
|                                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss per common share (3) (4)         |   | $                           | (0.14  | ) |   |   | $ | (0.16 | ) |   |   | $ | (0.21 | ) |   |   | $ | (0.23 | ) |   |   | $ | (2.18 | ) |
|                                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of common shares  |   |                        | 59,605 |   |   |   |   | 51,582 |   |   |   |   | 41,460 |   |   |   |   | 36,348 |   |   |   |   | 15,093 |   |

             

| (1) | In 2007 we recorded non-cash impairment of prepaid                            license discount and related charges of $1,439. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

| (2) | In 2007, 2006, 2004 and 2003 we recorded non-cash patent                            impairment charges of $296, $139, $233 and $974,                            respectively. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Basic and diluted loss per share amounts are identical                            as the effect of potential common shares is anti-dilutive. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | We have not paid any dividends on our Common Stock since                            inception. |
|-----|------------------------------------------------------------------------------------------------|

             

             

 

38

 

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| *Item 7.* | *MANAGEMENT’S DISCUSSION AND ANALYSIS OF                            FINANCIAL CONDITION AND RESULTS OF OPERATIONS* |
|-----------|--------------------------------------------------------------------------------------------------------------------------|

 

*You should read the following discussion in conjunction with Item 1A.            (“Risk Factors”) and our audited financial statements included elsewhere in            this report. Some of the statements in the following discussion are forward-looking            statements. See “Special Note Regarding Forward-Looking            Statements.”*

 

**Overview**

 

We develop, produce and market pharmaceutical delivery products,            including transdermal gels, oral disintegrating tablets and reusable needle-free and            disposable pressure assisted auto injector and pen injector systems. In addition, we            have several products and compound formulations under development. We have operating            facilities in the U.S. and Switzerland. Our U.S. operation manufactures and markets            reusable needle-free injection devices and related disposables, and develops            disposable pressure assisted auto injector and pen injector systems. These operations,            including all development and some U.S. administrative activities, are located in            Minneapolis, Minnesota. We also have operations located in Basel, Switzerland, which            consist of administration and facilities for the development of transdermal gels and            oral disintegrating tablet products. Our Swiss operations focus principally on            research, development and commercialization of pharmaceutical products and include a            number of license agreements with pharmaceutical companies for the application of its            drug delivery systems. Our corporate offices are located in Ewing, New            Jersey.

 

We operate as a specialty pharmaceutical company in the broader            pharmaceutical industry. Companies in this sector generally bring technology and            know-how in the area of drug formulation and/or delivery to pharmaceutical product            marketers through licensing and development agreements while actively pursuing            development of their own products. We currently view pharmaceutical and biotechnology            companies as our primary customers. We have negotiated and executed licensing            relationships in the growth hormone segment (reusable needle-free devices in Europe and            Asia), the transdermal gels segment (several development programs in place worldwide,            including the United States and Europe) and the oral disintegrating tablet segment. In            addition, we continue to market reusable needle-free devices for the home or alternate            site administration of insulin in the U.S. market through distributors and have            licensed both disposable and reusable injection devices to Teva Pharmaceuticals for use            in undisclosed fields and territories.

 

We are reporting a net loss of $8,578,939 for the year ended December            31, 2007 and expect to report a net loss for the year ending December 31, 2008, as            marketing and development costs related to bringing future generations of products to            market continue. Long-term capital requirements will depend on numerous factors,            including the status of collaborative arrangements and payments received under such            arrangements, the progress of research and development programs, the receipt of            revenues from sales of products and royalties and the ability to control            costs.

 

 Included in the current year net loss is a net charge to earnings            of $1,629,060 recorded in the fourth quarter after we determined Eli Lilly was no            longer committed to development of our product on the previously agreed upon timeline            under a development and license agreement, resulting in our conclusion that the            carrying value of the prepaid license discount associated with the agreement was            impaired.

 

 During 2007 we raised net proceeds of $14,742,671 in a private            placement of our common stock and received proceeds of $7,500,000 from debt financings.            We believe that the combination of the recent equity and debt financings and projected            product sales, product development, license revenues, milestone payments and royalties            will provide sufficient funds to support operations beyond 2008. Additionally, we            believe we have the funds required for capital expenditures that may exceed $2.5            million in 2008 in connection with tooling and production equipment related to            commercial device deals, and have the funds necessary for the pivotal safety and            efficacy trial of AnturolTM for overactive bladder which began in            2007.

 

 

39

 

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**Critical Accounting Policies and Use of Estimates**

 

In preparing the financial statements in conformity with U.S. generally            accepted accounting principles (GAAP), management must make decisions that impact            reported amounts and related disclosures. Such decisions include the selection of the            appropriate accounting principles to be applied and the assumptions on which to base            accounting estimates. In reaching such decisions, management applies judgment based on            its understanding and analysis of relevant circumstances. Note 2 to the consolidated            financial statements provides a summary of the significant accounting policies followed            in the preparation of the consolidated financial statements. The following accounting            policies are considered by management to be the most critical to the presentation of            the consolidated financial statements because they require the most difficult,            subjective and complex judgments.

 

|   | *Revenue Recognition* |
|--------|-----------------------|

 

A significant portion of our revenue relates to product sales for which            revenue is recognized upon shipment, with limited judgment required related to product            returns. Product sales are shipped FOB shipping point. We also enter into license            arrangements that are often complex as they may involve a license, development and            manufacturing components. Licensing revenue recognition requires significant management            judgment to evaluate the effective terms of agreements, our performance commitments and            determination of fair value of the various deliverables under the arrangement. In            December 2002, the Emerging Issues Task Force (“EITF”) issued EITF            00-21,*Revenue Arrangements with Multiple            Deliverables,*which addresses certain aspects of revenue            recognition for arrangements that include multiple revenue-generating activities. EITF            00-21 addresses when and, if so, how an arrangement involving multiple deliverables            should be divided into separate units of accounting. In some arrangements, the            different revenue-generating activities (deliverables) are sufficiently separable, and            there exists sufficient evidence of their fair values to separately account for some or            all of the deliverables (that is, there are separate units of accounting). In other            arrangements, some or all of the deliverables are not independently functional, or            there is not sufficient evidence of their fair values to account for them separately.            Our ability to establish objective evidence of fair value for the deliverable portions            of the contracts may significantly impact the time period over which revenues will be            recognized. For instance, if there is no objective fair value of undelivered elements            of a contract, then we may be required to treat a multi-deliverable contract as one            unit of accounting, resulting in all revenue being deferred and recognized over the            entire contract period. EITF 00-21 does not change otherwise applicable revenue            recognition criteria. For major licensing contracts, this results in the deferral of            significant revenue amounts ($3,594,324 at December 31, 2007) where non-refundable cash            payments have been received, but the revenue is not immediately recognized due to the            long-term nature of the respective agreements. Subsequent factors affecting the initial            estimate of the effective terms of agreements could either increase or decrease the            period over which the deferred revenue is recognized.

 

Due to the requirement to defer significant amounts of revenue and the            extended period over which the revenue will be recognized, along with the requirement            to amortize certain deferred development costs over an extended period of time, revenue            recognized and cost of revenue may be materially different from cash flows.

 

In connection with a license agreement entered into with Eli Lilly and            Company in 2003, we issued to Lilly a ten-year warrant to purchase 1,000,000 shares of            our common stock at an exercise price of $3.776 per share. At the time of issue, we            determined that the fair value of the warrant was $2,943,739 using the Black Scholes            option pricing model. EITF 01-9,*Accounting for Consideration            Given by a Vendor to a Customer (Including a Reseller of the Vendor’s            Products)*, requires that the value of the warrants be treated            as a reduction in revenue. The fair value of the warrant was recorded to additional            paid-in capital and to prepaid license discount, a contra equity account. The prepaid            license discount was being reduced on a straight-line basis over the term of the            agreement, offsetting revenue generated under the agreement.

 

As discussed further in Note 10 to the consolidated financial            statements, the agreement with Lilly was amended in March of 2008. Considering the            renegotiations with Lilly and drafts of the then pending amendment, we evaluated the            prepaid license discount related to the original agreement (recorded as contra equity            in the stockholders’ equity section of the balance sheet) for potential            impairment in connection with our preparation and review of the 2007 financial            statements. Given that Lilly was no longer committed to development of our product on            the previously agreed upon timeline under the agreement, we determined it was unlikely            that future cash flows would be received by us that would exceed the unamortized            carrying value, indicating that the recorded prepaid

 

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license discount was impaired. In addition, we determined that            capitalized patent costs associated with the agreement had been impaired. We also            recognized related deferred revenue and deferred costs related to the agreement.            Accordingly, we recorded a net non-cash charge to earnings in the fourth quarter            totaling $1,629,060, consisting principally of the patent impairment charge of $296,338            and the impairment of prepaid license discount and related charges of $1,438,638. The            patent impairment charge was recorded in general and administrative expense, while the            impairment of prepaid license discount and recognition of deferred revenue and deferred            costs was recorded in cost of revenue. The net impact to stockholders’ equity was            an increase of approximately $480,000 as a result of the recognition of deferred            revenue in excess of deferred costs and patent impairment charges.

 

On an overall basis, our reported revenues can differ significantly from            billings and/or accrued billings based on terms in agreements with customers. The table            below is presented to help explain the impact of the deferral of revenue and            amortization of prepaid license discount on reported revenues, and is not meant to be a            substitute for accounting or presentation requirements under U.S. generally accepted            accounting principles.

 

|                                                                           |   | **2007** |       |   |   | **2006** |   |       |   | **2005** |   |
|--------------------------------------------------------------------------------|--------|----------|------------|--------|--------|----------|--------|------------|--------|----------|--------|
| Product sales                                                                  |   | $        | 3,211,397  |   |   |     | $      | 2,195,218  |   |     |   | $ | 1,511,929 |   |
| Development fees                                                               |   |     | 912,172    |   |   |     |   | 785,720    |   |     |   |   | 214,210 |   |
| Licensing fees and milestone payments                                          |   |     | 3,478,642  |   |   |     |   | 2,082,742  |   |     |   |   | 275,524 |   |
| Royalties                                                                      |   |     | 218,042    |   |   |     |   | 140,110    |   |     |   |   | 105,276 |   |
| Billings received and/or accrued per contract                            terms |   |     | 7,820,253  |   |   |     |   | 5,203,790  |   |     |   |   | 2,106,939 |   |
| Deferred billings received and/or accrued                                      |   |     | (1,068,804 | )      |   |     |   | (1,409,268 | )      |     |   |   | (360,949 | ) |
| Deferred revenue recognized                                                    |   |     | 1,195,880  |   |   |     |   | 670,126    |   |     |   |   | 675,005 |   |
| Amortization of prepaid license discount                                       |   |     | (90,333    | )      |   |     |   | (196,249   | )      |     |   |   | (196,249 | ) |
| Total revenue as reported                                                      |   | $        | 7,856,996  |   |   |     | $      | 4,268,399  |   |     |   | $ | 2,224,746 |   |

 

|   | *Valuation of Long-Lived and Intangible Assets and                            Goodwill* |
|--------|-----------------------------------------------------------------------------------------|

 

Long-lived assets, including patent rights, are reviewed for impairment            whenever events or changes in circumstances indicate that the carrying amount of an            asset may not be recoverable. Recoverability of assets to be held and used is measured            by a comparison of the carrying amount of an asset to future net cash flows expected to            be generated by the asset. This analysis can be very subjective as we rely upon signed            distribution or license agreements with variable cash flows to substantiate the            recoverability of long-lived assets. If such assets are considered to be impaired, the            impairment to be recognized is measured by the amount by which the carrying amount of            the assets exceeds the fair value of the assets. Assets to be disposed of are reported            at the lower of the carrying amount or fair value less costs to sell.

 

In the fourth quarter of each year we update our long-range business            plan. We then review patent costs for impairment and identify patents related to            products for which there are no signed distribution or license agreements or for which            no revenues or cash flows were included in the business plan. In 2007 and 2006 we            recognized impairment charges of $296,338 and $138,632, respectively, in general and            administrative expenses, which represented the gross carrying amount, net of            accumulated amortization, for the identified patents. No impairment charges were            recognized in 2005. The 2007 impairment charge relates to the Eli Lilly amendment            discussed further in Note 10 to the consolidated financial statements. After the            impairment charge, the gross carrying amount and accumulated amortization of patents,            which are our only intangible assets subject to amortization, were $1,308,327 and            $736,153, respectively, at December 31, 2007 and were $1,526,714 and $713,122,            respectively, at December 31, 2006. The Company’s estimated aggregate patent            amortization expense for the next five years is $78,000 in each of 2008, 2009 and 2010,            $31,000 in 2011 and $25,000 in 2012.

 

We evaluate the carrying value of goodwill during the fourth quarter of            each year and between annual evaluations if events occur or circumstances change that            would more likely than not reduce the fair value of the reporting unit below its            carrying amount. Such circumstances could include, but are not limited to: (1) a            significant adverse change in legal factors or in business climate, (2) unanticipated            competition, (3) an adverse action or assessment by a regulator, or (4) a sustained            significant drop in our stock price. When evaluating whether goodwill is impaired, we            compare the fair value of the Minnesota operations to the carrying amount, including            goodwill. If

 

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the            carrying amount of the Minnesota operations exceeds its fair value, then the amount of            the impairment loss must be measured. The impairment loss would be calculated by            comparing the implied fair value of goodwill to its carrying amount. In calculating the            implied fair value of goodwill, the fair value of the Minnesota operations would be            allocated to all of its other assets and liabilities based on their fair values. The            excess of the fair value of the Minnesota operations over the amount assigned to its            other assets and liabilities is the implied fair value of goodwill. An impairment loss            would be recognized when the carrying amount of goodwill exceeds its implied fair            value. Our evaluation of goodwill completed during 2007, 2006 and 2005 resulted in no            impairment losses.

 

**Results of Operations**

 

*Years Ended December 31, 2007, 2006 and 2005*

 

*Revenues*

 

Total revenue was $7,856,996, $4,268,399 and $2,224,746 for the years            ended December 31, 2007, 2006 and 2005, respectively. The increases in 2007 and 2006            were primarily due to increases in licensing revenue and product sales. The licensing            revenue increase was mainly due to $2,625,000 and $875,000 received in 2007 and 2006,            respectively, under a sublicense arrangement related to an existing license agreement            with BioSante Pharmaceuticals, Inc. The increase in product sales in each year was            mainly due to an increase in sales to our major customer, Ferring.

 

Product sales include sales of reusable needle-free injector devices,            related parts, disposable components, and repairs. In 2007, 2006 and 2005, revenue from            sales of needle-free injector devices totaled $1,027,986, $804,481 and $549,070,            respectively. Sales of disposable components in 2007, 2006 and 2005 totaled $2,100,253,            $1,326,758 and $896,764, respectively. The increases in device and disposable revenue            in 2007 and 2006 were due mainly to increases in sales to Ferring. The increases were            primarily due to increases in product quantities sold to Ferring in each year. However,            in 2007, a portion of the increase was attributable to a renegotiated contract with            Ferring in which selling prices were increased. In addition, as the selling prices of            certain products sold to Ferring are denominated in Euros, the decreasing value of the            U.S. dollar against the Euro in 2007 resulted in an increase in revenue compared to            2006. The increases in product sales to Ferring in 2007 and 2006 followed two years of            decreasing sales that occurred while Ferring was working down high inventory levels            they had accumulated in prior years.

 

Development revenue was $955,402, $593,797 and $183,760 for the years            ended December 31, 2007, 2006 and 2005, respectively. The revenue in 2007 was            attributable primarily to an agreement related to our oral disintegrating tablet            technology, along with recognized revenue in connection with our proprietary ATDTM            gel technology. The revenue in 2006 was attributable to projects related to injector            systems and transdermal gel technologies, but resulted primarily from one agreement            related to use of our proprietary ATDTM gel technology. In 2006 we also generated            development fees of approximately $217,000 in connection with an agreement related to            our oral disintegrating tablet technology, all of which was deferred and was recognized            as revenue in 2007. In 2005 approximately half of the development revenue was generated            from projects related to injector devices, with most of this coming from one-time            projects. The remainder of the recognized development revenue in 2005 was generated            under licensing and development agreements related to use of our transdermal gel            technology.

 

Licensing revenue was $3,231,305, $1,254,250 and $374,021 for the years            ended December 31, 2007, 2006 and 2005, respectively. The licensing revenue in 2007 and            2006 was primarily due to $2,625,000 and $875,000, respectively, received under a            sublicense arrangement related to an existing license agreement with BioSante            Pharmaceuticals, Inc. In November 2006 BioSante entered into a marketing agreement with            Bradley Pharmaceuticals, Inc. for Elestrin® (formerly Bio-E-Gel).            BioSante received an upfront payment from Bradley which triggered a payment to us of            $875,000. In December 2006 the FDA approved for marketing Elestrin® in            the United States triggering the payments of $2,625,000 received in 2007. In addition,            we have begun to receive royalties on sales of Elestrin® and may receive            potential sales-based milestone payments in the future.

 

Royalty revenue was $458,892, $225,134 and $155,036 for the years ended            December 31, 2007, 2006 and 2005, respectively. Nearly all royalty revenue has been            related to the Vision® reusable needle-free injection device, and has            been generated primarily under the license agreement with Ferring dated January 22,            2003, described in

 

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more            detail in Note 10 to the consolidated financial statements. Royalties from Ferring are            earned on device sales and under a provision in the Ferring agreement in which            royalties are triggered by the achievement of certain quality standards. The increase            in 2007 was primarily related to the increase in the number of injector devices sold to            Ferring, as well as a renegotiated increased royalty rate with Ferring. The increase in            2006 was due to increases both in royalties earned from device sales and in the royalty            earned under the quality standards provision.

 

*Cost of Revenues*

 

The costs of product sales are primarily related to reusable injection            devices and disposable components. Cost of sales as a percentage of product sales were            55%, 59% and 69% for the years ended December 31, 2007, 2006 and 2005, respectively.            The decrease in 2007 was mainly the result of an increase in selling prices to Ferring.            The decrease in 2006 was due to a combination of factors including a change in the mix            of products sold and a higher sales volume absorbing a slightly decreased level of            fixed overhead costs.

 

The cost of development revenue consists of labor costs, direct external            costs and an allocation of certain overhead expenses based on actual costs and time            spent in these revenue-generating activities. Cost of development revenue as a            percentage of development revenue can fluctuate considerably between periods depending            on the development projects in process. In some cases development projects are            substantially labor based, resulting in relatively high margins, while in other cases            development projects include a significant amount of external cost passed through to            the customer at little or no markup, resulting in lower margins. Cost of development            revenue as a percentage of development revenue was 25%, 44% and 51% for the years ended            December 31, 2007, 2006 and 2005, respectively. The 2007 decrease was primarily due to            an increased average hourly billing rate, due primarily to one project which was the            source of the majority of the development revenue for the year. The percentage decrease            in 2006 was primarily due to projects having fewer external costs that were billed to            customers with little or no markup.

 

Impairment of prepaid license discount of $2,215,596, partially offset            by recognizing deferred revenue net of deferred costs, resulted in a net non-cash            impairment charge of $1,438,638 in 2007. As discussed in Note 10 to the consolidated            financial statements, we determined it was unlikely that future cash flows from the            Lilly agreement would exceed the unamortized prepaid license discount (recorded as            contra equity in the stockholders’ equity section of the balance sheet). In            addition, we determined that the carrying value of related capitalized patent costs of            $296,338 was impaired, and is recorded in general and administrative expenses in the            2007 statement of operations.

 

*Research and Development*

 

The majority of research and development expenses consist of external            costs for studies and analysis activities, design work and prototype development. While            we are typically engaged in research and development activities involving each of our            drug delivery platforms, over 75% of the total research and development expenses in            each year were generated in connection with projects related to transdermal gels and            oral disintegrating tablet products. Research and development expenses were $5,362,291,            $3,778,469 and $3,677,015 for the years ended December 31, 2007, 2006 and 2005,            respectively. The increase in 2007 compared to 2006 was primarily due to the initiation            of a Phase III study of AnturolTM (oxybutynin gel) for the treatment of            overactive bladder. The overall increase in 2006 compared to 2005 was primarily due to            an increase in stock based compensation expense of approximately $128,000.

 

*Sales, Marketing and Business Development*

 

Sales, marketing and business development expenses were $1,640,875,            $1,349,678 and $1,160,752 for the years ended December 31, 2007, 2006 and 2005,            respectively. The increase in 2007 was primarily due to increases in payroll and legal            fees. The payroll increases were partially due to the addition of personnel and the            legal fees increases were due to increased activity as a result of new license,            development and/or supply agreements that were completed or in process at year end. The            increase in 2006 compared to 2005 was due mainly to an increase in professional            services in connection with business development projects related to transdermal gels            and oral disintegrating tablets, along with an increase in stock based compensation            expense of approximately $80,000.

 

 

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*General and Administrative*

 

General and administrative expenses were $6,057,396, $5,861,111 and            $4,839,408 for the years ended December 31, 2007, 2006 and 2005, respectively. The            increase in 2007 compared to 2006 was due mainly to the patent impairment charge of            $296,338 related to the Lilly agreement, along with increases in other patent related            expenses. The increase in 2006 compared to 2005 was due primarily to an increase in            stock based compensation expense of approximately $826,000, along with an increase in            patent impairment charges of $138,632. The patent impairment charges were recognized            after we determined it was unlikely that future cash flows would exceed the net            carrying value of the capitalized patent costs. The impairment charges represented the            gross carrying amount net of accumulated amortization for the identified patent            costs.

 

*Other Income (Expense)*

 

Other income (expense), net, was $66,647, $176,983 and $91,218 for the            years ended December 31, 2007, 2006 and 2005, respectively. In 2007, interest income            increased to $872,095 from $353,236 in 2006 due mainly to investment of the net            proceeds from issuance of common stock of $14,742,671, the exercise of warrants and            options of $2,292,692, and the debt financing of $7,500,000. The debt financing            resulted in an increase in interest expense and was the primary reason interest expense            increased by $769,285, which offset the increase in interest income and resulted in an            overall decrease in other income. The increase in 2006 compared to 2005 was primarily            due to an increase in interest income resulting from investment of the proceeds from            the private placement of common stock in the first quarter of 2006, partially offset by            an increase in foreign exchange losses related mainly to the impact of exchange rate            fluctuations on liabilities due in foreign currencies.

 

**Liquidity and Capital Resources**

 

We have not historically generated, and do not currently generate,            enough revenue to provide the cash needed to support our operations, and have continued            to operate primarily by raising capital and incurring debt. In order to better position            ourselves to take advantage of potential growth opportunities and to fund future            operations, during 2007 we raised additional capital and received proceeds from debt            financings.

 

In July of 2007 we received net proceeds of $14,742,671 in a private            placement of our common stock in which a total of 10,000,000 shares of common stock            were sold at a price of $1.60 per share. In connection with the private placement, we            issued five-year warrants to purchase an aggregate of 3,800,000 shares of common stock            with an exercise price of $2.00 per share. In 2007 we also received proceeds of            $2,292,692 in connection with warrant and stock option exercises which resulted in the            issuance of 2,187,317 shares of common stock.

 

In February of 2007, we received gross proceeds of $5,000,000 upon            closing of the first tranche of a $10,000,000 credit facility, to help fund working            capital needs. In December of 2007 we received gross proceeds of $2,500,000, after we            amended the credit facility agreement to reduce the amount available to draw down in            the second tranche from $5,000,000 to $2,500,000. The per annum interest rate is 12.7%            in the case of the first tranche and 11% in the case of the second tranche. The            maturity date (i) with respect to the first tranche is forty-two months from the first            funding date and (ii) with respect to the second tranche is thirty-six months from the            second funding date. The credit agreement is secured by all personal property of the            Company, including all intellectual property. The credit agreement contains certain            covenants and provisions, including, without limitation, covenants and provisions            that:

|   | **•** | restrict our ability to create or incur indebtedness                            (subject to enumerated exceptions); |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict our ability to create or incur certain liens on                            our property (subject to enumerated exceptions); |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, require us to maintain, on a                            consolidated basis, unrestricted cash and cash equivalents of at least                            $2,500,000; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, restrict our ability to                            declare or pay any dividends on any shares of our capital stock,                            purchase or redeem any shares of our capital stock, return any capital                            to any holder of our equity securities or payment of certain                            bonuses; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict our ability to make certain                            investments. |
|--------|------------|------------------------------------------------------------------------------|

 

In connection with the credit facility, we issued warrants to purchase a            total of 640,000 shares of common stock at an exercise price of $1.25.

 

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We believe that the combination of the recent debt and equity financings            and projected product sales, product development, license revenues, milestone payments            and royalties will provide sufficient funds to support operations beyond 2008. We            anticipate that capital expenditures may increase to over $2.5 million in 2008,            primarily in connection with tooling and production equipment related to commercial            device deals. We do not currently have any bank credit lines. If we do need additional            financing and are unable to obtain such financing when needed, or obtain it on            favorable terms, we may be required to curtail development of new drug technologies,            limit expansion of operations or accept financing terms that are not as attractive as            we may desire.

 

*Net Cash Used in Operating Activities*

 

Operating cash inflows are generated primarily from product sales,            license and development fees and royalties. Operating cash outflows consist principally            of expenditures for manufacturing costs, general and administrative costs, research and            development projects and sales, marketing and business development activities. Net cash            used in operating activities was $5,394,276, $6,118,050 and $7,218,529 for the years            ended December 31, 2007, 2006 and 2005, respectively. This was primarily the result of            net losses of $8,578,939, $8,099,846 and $8,497,956 in 2007, 2006 and 2005,            respectively, adjusted by noncash expenses and changes in operating assets and            liabilities.

 

Noncash expenses totaled $4,276,731, $1,798,524 and $695,967 in 2007,            2006 and 2005, respectively. The increase in 2007 compared to 2006 was mainly due to            the impairment charges related to the Lilly agreement, including the prepaid license            discount impairment and amortization charge of $2,305,929 and the patent rights            impairment charge of $296,338. In addition, noncash expenses increased in 2007 due to            amortization of debt discount and issuance costs of $220,034, which began in 2007 as a            result of the debt financing during the year. The increase in 2006 compared to 2005 was            primarily the result of an increase in noncash stock-based compensation expense of            nearly $1.0 million, which was principally due to the adoption of SFAS No. 123R in            2006.

 

In 2007, the change in operating assets and liabilities resulted in a            use of cash of $1,092,068. This was due primarily to a decrease in deferred revenue of            $1,061,916, which was mainly the result of eliminating the deferred revenue related to            the Lilly agreement. Other changes included increases in prepaid expenses of $312,075            and other assets of $340,439, which were partially offset by a decrease in accounts            receivable of $379,129 and an increase in accrued expenses and other current            liabilities of $441,698. The increases in prepaid expenses and other assets were the            result of costs incurred in connection with development projects related mainly to            injector devices and AnturolTM. The increase in accrued expenses was            primarily due to compensation related accruals such as vacation and bonuses, along with            accruals for project costs and certain professional fees.

 

In 2006, the change in operating assets and liabilities generated cash            of $183,272. This was primarily the net result of increases in accounts receivable of            $616,327 and deferred revenue of $818,234. Both increases reflect the increase in            revenue generating activity in 2006 compared to 2005. The accounts receivable increase            was due to an increase in product sales activity, royalties and development revenue            near the end of 2006 as compared to 2005. In 2006 the amount received from license            fees, development fees and milestone payments increased compared to 2005, as did the            portion of these payments that was deferred and is being recognized as revenue over            various periods.

 

The change in operating assets and liabilities in 2005 generated cash of            $583,460. This resulted mainly from the increases in accounts payable and accrued            expenses of $501,614 and $194,782, respectively. These increases were primarily due to            increased research and development activities near the end of the year, particularly in            connection with development projects related to transdermal gels, and increased            accruals related to executive bonuses. Partially offsetting these increases was an            increase in prepaid expenses and other assets, which utilized cash of $210,753, and a            decrease in deferred revenue of $63,098. The increase in prepaid expenses and other            assets was almost entirely due to payments made in connection with development projects            related to transdermal gels. The reduction in deferred revenue was the result of            recognizing as revenue amounts that had previously been deferred, which exceeded            amounts deferred during the year totaling approximately $610,000.

 

 

 

 

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| *Net Cash Provided by (Used in) Investing                            Activities* |
|----------------------------------------------------------------------------------|

 

Investing activities are comprised primarily of short-term investment            purchases and maturities. All short-term investments are commercial paper or U.S.            government agency discount notes that mature within six to twelve months of purchase            and are classified as held-to-maturity because we have the positive intent and ability            to hold the securities to maturity. In 2007 and 2006 the use of cash to purchase            securities exceeded cash generated from maturities by $11,163,507 and $4,851,551,            respectively, due primarily to the investment of excess funds from the private            placements in each of those years and in 2007 the debt financing provided additional            funds for investment. In 2005, maturities exceeded purchases by $7,941,688, as cash was            required to fund operations and was not available for reinvestment. Investing            activities in 2007, 2006 and 2005 also included additions to patent rights of $145,590,            $142,751 and $154,193, respectively, and purchases of equipment, furniture and fixtures            of $96,575, $35,703, and $89,651, respectively.

 

*Net Cash Provided by Financing Activities*

 

Net cash provided by financing activities totaled $23,851,897,            $11,117,141 and $619,700 for the years ended December 31, 2007, 2006 and 2005,            respectively. In 2007 we received net proceeds of $14,742,671 from the private            placement of common stock in which a total of 10,000,000 shares of common stock were            sold at a price of $1.60 per share. In addition, in 2007 we received proceeds of            $2,292,692 from the exercise of warrants and stock options and received proceeds of            $7,500,000 from debt financings. In 2007 cash was used for debt principal payments and            debt issuance costs, which totaled $492,745 and $190,721, respectively. In 2006, we            received $1,335,086 from the exercise of warrants and stock options and received net            proceeds of $9,782,055 from the private placement of common stock in which a total of            8,770,000 shares of common stock were sold at a price of $1.25 per share. In 2005, we            received $476,000 from the sale of common stock and $193,700 from the exercise of            warrants, which was partially offset by the payment of preferred stock dividends of            $50,000.

 

Our contractual cash obligations at December 31, 2007 are associated            with long-term debt, capital and operating leases and are summarized in the following            table:      

 

|                               |   | **Payment Due by Period** |       |
|------------------------------------|--------|---------------------------|------------|
|                               |   | **Total**                 |       |   |   | **Less than****1 year** |   |   |   | **1-3****years** |   |   |   | **4-5****years** |   |   |   | **After 5 years** |   |
| Long-term debt, including interest |   | $                         | 8,314,427  |   |   |   | $ | 2,995,140 |   |   |   | $ | 5,319,287 |   |   |   | $ | - |   |   |   | $ | - |   |
| Capital leases, including interest |   |                      | 99,056     |   |   |   |   | 43,471 |   |   |   |   | 55,585 |   |   |   |   | - |   |   |   |   | - |   |
| Operating leases                   |   |                      | 2,047,245  |   |   |   |   | 390,550 |   |   |   |   | 874,778 |   |   |   |   | 607,415 |   |   |   |   | 174,502 |   |
| Total contractual cash obligations |   | $                         | 10,460,728 |   |   |   | $ | 3,429,161 |   |   |   | $ | 6,249,650 |   |   |   | $ | 607,415 |   |   |   | $ | 174,502 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*Off Balance Sheet Arrangements*

 

We do not have any off-balance sheet arrangements, including any            arrangements with any structured finance, special purpose or variable interest            entities.

 

**New Accounting Pronouncements**

 

In December 2007, the FASB issued Statement of Financial Accounting            Standards No. 141R (revised 2007), “Business Combinations” (“SFAS            141R”).  SFAS 141R establishes principles and requirements for how an            acquirer recognizes and measures in its financial statements the identifiable assets            acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the            goodwill acquired in the business combination.  SFAS 141R also establishes            disclosure requirements to enable the evaluation of the nature and financial effects of            the business combination. The provisions of SFAS 141R are effective beginning January            1, 2009.  We are currently evaluating the impact of adopting this pronouncement on            our consolidated financial statements and related disclosures. 

 

In June 2007, EITF Issue No. 07-3, “Accounting for            Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and            Development Activities” (“EITF 07-3”) was issued. EITF 07-3            addresses the diversity that exists with respect to the accounting for the            non-refundable portion of a payment made by a research

 

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and            development entity for future research and development activities. Under            EITF 07-3, an entity would defer and capitalize non-refundable advance payments            made for research and development activities until the related goods are delivered or            the related services are performed. EITF 07-3 will be effective beginning on            January 1, 2008. We are currently evaluating the effect of EITF 07-3 on our            consolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting            Standards No. 159, “The Fair Value Option for Financial Assets and Financial            Liabilities, Including an Amendment of FASB Statement No. 115”            (“SFAS 159”). SFAS 159 provides companies with an option to            report selected financial assets and liabilities at fair value. Furthermore,            SFAS 159 establishes presentation and disclosure requirements designed to            facilitate comparisons between companies that choose different measurement attributes            for similar types of assets and liabilities. SFAS 159 will be effective beginning            on January 1, 2008. We are currently evaluating the impact of adopting this            pronouncement on our consolidated financial statements and related            disclosures.

 

 

In September 2006, the FASB issued Statement of Financial Accounting            Standards No. 157, “Fair Value Measurements” which is effective for            fiscal years beginning after November 15, 2007 and for interim periods within            those years. This statement defines fair value, establishes a framework for measuring            fair value and expands the related disclosure requirements. We are currently evaluating            the potential impact of this statement on the consolidated financial            statements.

 

| *Item 7(A).* | *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET                            RISK* |
|--------------|-----------------------------------------------------------------------------------------|

 

Our primary market risk exposure is foreign exchange rate fluctuations            of the Swiss Franc to the U.S. dollar as the financial position and operating results            of our subsidiaries in Switzerland are translated into U.S. dollars for consolidation.            Our exposure to foreign exchange rate fluctuations also arises from transferring funds            to our Swiss subsidiaries in Swiss Francs. In addition, we have exposure to exchange            rate fluctuations between the Euro and the U.S. dollar in connection with the licensing            agreement entered into in January 2003 with Ferring, which established pricing in Euros            for products sold under the supply agreement and for all royalties. In March 2007 we            amended the 2003 agreement with Ferring, establishing prices in U.S. dollars rather            than Euros for certain products, reducing the exchange rate risk. Most of our sales and            licensing fees are denominated in U.S. dollars, thereby significantly mitigating the            risk of exchange rate fluctuations on trade receivables. We do not currently use            derivative financial instruments to hedge against exchange rate risk. Because exposure            increases as intercompany balances grow, we will continue to evaluate the need to            initiate hedging programs to mitigate the impact of foreign exchange rate fluctuations            on intercompany balances. The effect of foreign exchange rate fluctuations on our            financial results for the years ended December 31, 2007, 2006 and 2005 was not            material.

 

Typically, our short-term investments are commercial paper or U.S.            government agency discount notes that mature within six to twelve months of purchase.            The market value of such investments fluctuates with current market interest rates. In            general, as rates increase, the market value of a debt instrument is expected to            decrease. The opposite is also true. To minimize such market risk, we have in the past            and to the extent possible, will continue in the future, to hold such debt instruments            to maturity at which time the debt instrument will be redeemed at its stated or face            value. Due to the short duration and nature of these instruments, we do not believe            that we have a material exposure to interest rate risk related to our investment            portfolio.

             

             

             

             

             

             

             

 

47

 

----

 

| *Item 8.* | *FINANCIAL STATEMENTS AND SUPPLEMENTARY                            DATA.* |
|-----------|---------------------------------------------------------------------------|

 

             

**ANTARES PHARMA, INC.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

             

 

|                                                                                                                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Management’s                            Report on Internal Control Over Financial                            Reporting                                                                                        | 49     |
|                                                                                                                                                                                                                |   |
| Report of                            Independent Registered Public Accounting Firm                                                                                                                                  | 50     |
|                                                                                                                                                                                                                |   |
| Consolidated                            Balance Sheets as of December 31, 2007 and 2006                                                                                                                             | 51     |
|                                                                                                                                                                                                                |   |
| Consolidated                            Statements of Operations for the Years Ended December 31, 2007, 2006                            and 2005                                                                    | 52     |
|                                                                                                                                                                                                                |   |
| Consolidated Statements                            of Stockholders’ Equity and Comprehensive Loss for                            the

Years Ended December                            31, 2007, 2006 and 2005 | 53     |
|                                                                                                                                                                                                                |   |
| Consolidated                            Statements of Cash Flows for the Years Ended December 31, 2007, 2006                            and 2005                                                                    | 54     |
|                                                                                                                                                                                                                |   |
| Notes to Consolidated                            Financial Statements                                                                                                                                               | 55     |

 

48

 

----

Index

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL            REPORTING**

 

The            management of Antares Pharma, Inc. (the “Company”) is responsible for            establishing and maintaining adequate internal control over financial reporting, as            defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The            Company’s internal control over financial reporting is designed to provide            reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external purposes in accordance with accounting            principles generally accepted in the United States and include those policies and            procedures that:

 

|   | **•** | Pertain to the maintenance of records that, in                            reasonable detail, accurately and fairly reflect the transactions and                            dispositions of the assets of the Company; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Provide reasonable assurance that transactions are                            recorded as necessary to permit preparation of financial statements in                            accordance with accounting principles generally accepted in the United                            States; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Provide reasonable assurance that receipts and                            expenditures of the Company are being made only in accordance with                            authorization of management and directors of the Company;                            and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Provide reasonable assurance regarding prevention or                            timely detection of unauthorized acquisition, use, or disposition of                            the Company’s assets that could have a material effect on the                            financial statements. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements. Therefore, even those systems            determined to be effective can provide only reasonable assurance with respect to            financial statement preparation and presentation.

 

Company management assessed the effectiveness of its internal control            over financial reporting as of December 31, 2007. In making this assessment, management            used the criteria established in*Internal Control-Integrated            Framework*issued by the Committee of Sponsoring Organizations            of the Treadway Commission (COSO). Based on its assessment, management has concluded            that the Company’s internal control over financial reporting was effective as of            December 31, 2007.

 

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.

 

 

| /s/    | Jack E. Stover                        |   | /s/    | Robert F. Apple                                                              |
|--------|---------------------------------------|--------|--------|------------------------------------------------------------------------------|
|   | Jack E. Stover                        |   |   | Robert F. Apple                                                              |
|   | President and Chief Executive Officer |   |   | Senior Vice President and Chief Financial                            Officer |
|   | (Principal Executive Officer)         |   |   | (Principal Financial Officer)                                                |
|   |                                  |   |   |                                                                         |
|   | March 25, 2008                        |   |   | March 25, 2008                                                               |

 

 

 

 

 

 

 

 

 

49

 

----

 

 

Index

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

 

The            Board of Directors and Shareholders

Antares            Pharma, Inc.:

 

We            have audited the accompanying consolidated balance sheets of Antares Pharma, Inc. and            subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the            related consolidated statements of operations, stockholders’ equity and            comprehensive loss, and cash flows for each of the years in the three-year period ended            December 31, 2007. These consolidated financial statements are the responsibility of            the Company’s management. Our responsibility is to express an opinion on these            consolidated 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. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes 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 consolidated financial statements referred to above present fairly, in            all material respects, the financial position of Antares Pharma, Inc. and subsidiaries            as of December 31, 2007 and 2006, and the results of their operations and their cash            flows for each of the years in the three-year period ended December 31, 2007, in            conformity with U.S. generally accepted accounting principles.

 

As            discussed in Note 2 to the consolidated financial statements, the Company adopted            Statement of Financial Accounting Standards No. 123R, “Share-Based            Payment,” on January 1, 2006.

 

|   | /s/ KPMG LLP |
|--------|--------------|

 

 

Minneapolis, Minnesota

March            25, 2008

50

 

----

 

Index

 

**ANTARES            PHARMA, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

|                                                                                                      |   | **December 31,** |         |   |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|------------------|--------------|--------|--------|------------------|--------|
|                                                                                                      |   | **2007**         |         |   |   | **2006**         |   |
| **Assets**                                                                                                |   |             |         |   |   |             |   |   |   |
| Current Assets:                                                                                           |   |             |         |   |   |             |   |   |   |
| Cash and cash equivalents                                                                                 |   | $                | 9,758,924    |   |   |             | $      | 2,706,047 |   |
| Short-term investments                                                                                    |   |             | 16,300,844   |   |   |             |   | 4,953,421 |   |
| Accounts receivable, less allowance for doubtful                            accounts of $10,000           |   |             | 486,887      |   |   |             |   | 855,866 |   |
| Other receivables                                                                                         |   |             | 20,181       |   |   |             |   | 55,794 |   |
| Inventories                                                                                               |   |             | 125,409      |   |   |             |   | 84,779 |   |
| Prepaid expenses and other current assets                                                                 |   |             | 620,933      |   |   |             |   | 221,669 |   |
| Total current assets                                                                                      |   |             | 27,313,178   |   |   |             |   | 8,877,576 |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
| Equipment, furniture and fixtures, net                                                                    |   |             | 467,676      |   |   |             |   | 382,096 |   |
| Patent rights, net                                                                                        |   |             | 572,174      |   |   |             |   | 813,592 |   |
| Goodwill                                                                                                  |   |             | 1,095,355    |   |   |             |   | 1,095,355 |   |
| Other assets                                                                                              |   |             | 768,333      |   |   |             |   | 365,864 |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
| Total Assets                                                                                              |   | $                | 30,216,716   |   |   |             | $      | 11,534,483 |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
| **Liabilities and Stockholders’                            Equity**                                 |   |             |         |   |   |             |   |   |   |
| Current Liabilities:                                                                                      |   |             |         |   |   |             |   |   |   |
| Accounts payable                                                                                          |   | $                | 804,848      |   |   |             | $      | 813,014 |   |
| Accrued expenses and other liabilities                                                                    |   |             | 1,543,401    |   |   |             |   | 1,071,086 |   |
| Notes payable and capital lease – current, net of                            discount of $199,060   |   |             | 2,109,385    |   |   |             |   | - |   |
| Deferred revenue                                                                                          |   |             | 964,673      |   |   |             |   | 1,014,337 |   |
| Total current liabilities                                                                                 |   |             | 5,422,307    |   |   |             |   | 2,898,437 |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
| Notes payable and capital lease – long term, net                            of discount of $154,189 |   |             | 4,665,467    |   |   |             |   | - |   |
| Deferred revenue – long term                                                                        |   |             | 2,629,651    |   |   |             |   | 3,555,601 |   |
| Total liabilities                                                                                         |   |             | 12,717,425   |   |   |             |   | 6,454,038 |   |
|                                                                                                      |   |             |         |   |   |             |   |   |   |
| Stockholders’ Equity:                                                                               |   |             |         |   |   |             |   |   |   |
| Common Stock: $0.01 par; authorized 100,000,000                            shares;                        |   |             |         |   |   |             |   |   |   |
| 65,529,666 and 53,319,622 issued and outstanding                            at                            |   |             |         |   |   |             |   |   |   |
| December 31, 2007 and 2006, respectively                                                                  |   |             | 655,296      |   |   |             |   | 533,196 |   |
| Additional paid-in capital                                                                                |   |             | 125,430,653  |   |   |             |   | 106,792,974 |   |
| Prepaid license discount                                                                                  |   |             | -            |   |   |             |   | (2,305,929 | ) |
| Accumulated deficit                                                                                       |   |             | (107,901,392 | )      |   |             |   | (99,322,453 | ) |
| Accumulated other comprehensive loss                                                                      |   |             | (685,266     | )      |   |             |   | (617,343 | ) |
|                                                                                                      |   |             | 17,499,291   |   |   |             |   | 5,080,445 |   |
| Total Liabilities and Stockholders’                            Equity                               |   | $                | 30,216,716   |   |   |             | $      | 11,534,483 |   |

 

 

 

|   | See accompanying notes to consolidated financial                            statements. |
|--------|-----------------------------------------------------------------------------------------|

 

51

 

----

Index

 

**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

|                                                            | Years Ended December 31, |     |
|-----------------------------------------------------------------|--------------------------|----------|
|                                                            |                     | **2007** |   |   |   | **2006** |   |   |   | **2005** |   |
| Revenue:                                                        |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                   |                     | $        | 3,211,397 |   |   |   | $ | 2,195,218 |   |   |   | $ | 1,511,929 |   |
| Development revenue                                             |                     |     | 955,402 |   |   |   |   | 593,797 |   |   |   |   | 183,760 |   |
| Licensing revenue                                               |                     |     | 3,231,305 |   |   |   |   | 1,254,250 |   |   |   |   | 374,021 |   |
| Royalties                                                       |                     |     | 458,892 |   |   |   |   | 225,134 |   |   |   |   | 155,036 |   |
| Total revenue                                                   |                     |     | 7,856,996 |   |   |   |   | 4,268,399 |   |   |   |   | 2,224,746 |   |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                                                |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                           |                     |     | 1,768,799 |   |   |   |   | 1,293,192 |   |   |   |   | 1,042,504 |   |
| Cost of development revenue                                     |                     |     | 234,583 |   |   |   |   | 262,778 |   |   |   |   | 94,241 |   |
| Impairment of prepaid license discount and related charges |                     |     | 1,438,638 |   |   |   |   | - |   |   |   |   | - |   |
| Total cost of revenue                                           |                     |     | 3,442,020 |   |   |   |   | 1,555,970 |   |   |   |   | 1,136,745 |   |
| Gross profit                                                    |                     |     | 4,414,976 |   |   |   |   | 2,712,429 |   |   |   |   | 1,088,001 |   |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                             |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                        |                     |     | 5,362,291 |   |   |   |   | 3,778,469 |   |   |   |   | 3,677,015 |   |
| Sales, marketing and business development                       |                     |     | 1,640,875 |   |   |   |   | 1,349,678 |   |   |   |   | 1,160,752 |   |
| General and administrative                                      |                     |     | 6,057,396 |   |   |   |   | 5,861,111 |   |   |   |   | 4,839,408 |   |
|                                                            |                     |     | 13,060,562 |   |   |   |   | 10,989,258 |   |   |   |   | 9,677,175 |   |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                  |                     |     | (8,645,586 | ) |   |   |   | (8,276,829 | ) |   |   |   | (8,589,174 | ) |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                         |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                 |                     |     | 872,095 |   |   |   |   | 353,236 |   |   |   |   | 128,832 |   |
| Interest expense                                                |                     |     | (772,417 | ) |   |   |   | (3,132 | ) |   |   |   | (576 | ) |
| Foreign exchange losses                                         |                     |     | (46,268 | ) |   |   |   | (128,268 | ) |   |   |   | (36,718 | ) |
| Other, net                                                      |                     |     | 13,237 |   |   |   |   | (44,853 | ) |   |   |   | (320 | ) |
|                                                            |                     |     |      66,647 |   |   |   |   | 176,983 |   |   |   |   | 91,218 |   |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                        |                     |     | (8,578,939 | ) |   |   |   | (8,099,846 | ) |   |   |   | (8,497,956 | ) |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Deemed dividend to warrant holders                              |                     |     | - |   |   |   |   | (99,500 | ) |   |   |   | - |   |
| Preferred stock dividends                                       |                     |     | - |   |   |   |   | - |   |   |   |   | (50,000 | ) |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss applicable to common shares                            |                     | $        | (8,578,939 | ) |   |   | $ | (8,199,346 | ) |   |   | $ | (8,547,956 | ) |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per common share                     |                     | $        | (0.14 | ) |   |   | $ | (0.16 | ) |   |   | $ | (0.21 | ) |
|                                                            |                     |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted weighted average common shares outstanding    |                     |     | 59,604,646 |   |   |   |   | 51,582,111 |   |   |   |   | 41,459,533 |   |

             

             

|   | See accompanying notes to consolidated financial                            statements. |
|--------|-----------------------------------------------------------------------------------------|

             

52

             

             

----

                Index

|   | **ANTARES PHARMA, INC.** |
|--------|--------------------------|

|   | **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’                            EQUITY AND COMPREHENSIVE LOSS** |
|--------|-------------------------------------------------------------------------------------------------------------|

|   | **Years Ended December 31, 2005, 2006 and                            2007** |
|--------|-----------------------------------------------------------------------------|

|                                                                               |   | **Convertible Preferred Stock** |   |         |   |                    |       | **Accumulated** |   |                       |   |
|------------------------------------------------------------------------------------|--------|---------------------------------|--------|--------------|--------|-------------------------|------------|-----------------|--------|----------------------------|--------|
|                                                                               |   | **Series A**                    |   | **Series D** |   | **Common Stock**        |       |            |   | **Other**                  |   |   |   |   |
|                                                                               |   | **Number of****Shares**         |   | **Amount**   |   | **Number of****Shares** |       | **Amount**      |   | **Number****of****Shares** |   | **Amount** |   | **Additional****Paid-In****Capital** |   | **Prepaid****License****Discount** |   | **Accumulated****Deficit** |   | **Comprehen-****sive****Loss** |   | **Total****Stockholders’****Equity** |   |
| **December 31, 2004**                                                              |   | **1,500**                       |   |         | **15** |                    | **63,588** |            |   | **636**                    |   | **40,418,406** |   |   | **404,184** |   |   | **93,720,060** |   |   | **(2,698,427** | **)** |   | **(82,575,151** | **)** |   | **(662,478** | **)** |   | **8,188,839** |   |
| Preferred stock conversions                                                        |   | (1,500                          | )      |         | (15    | )                       | (63,588    | )               |   | (636                       | )      | 1,835,880 |   |   | 18,359 |   |   | (17,708 | ) |   | - |   |   | - |   |   | - |   |   | - |   |
| Issuance of common stock                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 400,000 |   |   | 4,000 |   |   | 472,000 |   |   | - |   |   | - |   |   | - |   |   | 476,000 |   |
| Exercise of warrants                                                               |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 315,200 |   |   | 3,152 |   |   | 190,548 |   |   | - |   |   | - |   |   | - |   |   | 193,700 |   |
| Stock-based compensation                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 50,000 |   |   | 500 |   |   | 182,205 |   |   | - |   |   | - |   |   | - |   |   | 182,705 |   |
| Amortization of prepaidlicense discount                                            |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | 196,249 |   |   | - |   |   | - |   |   | 196,249 |   |
| Preferred stock dividends                                                          |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | (50,000 | ) |   | - |   |   | (50,000 | ) |
| Net loss                                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,497,956 | ) |   | - |   |   | (8,497,956 | ) |
| Translation adjustments                                                            |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 67,112 |   |   | 67,112 |   |
| Comprehensive loss                                                                 |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,430,844 | ) |
| **December 31, 2005**                                                              |   | **-**                           |   |         | **-**  |                    | **-**      |            |   | **-**                      |   | **43,019,486** |   |   | **430,195** |   |   | **94,547,105** |   |   | **(2,502,178** | **)** |   | **(91,123,107** | **)** |   | **(595,366** | **)** |   | **756,649** |   |
| Issuance of common stock inprivate placement                                       |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 8,770,000 |   |   | 87,700 |   |   | 9,694,355 |   |   | - |   |   | - |   |   | - |   |   | 9,782,055 |   |
| Exercise of warrants and options                                                   |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 1,443,470 |   |   | 14,435 |   |   | 1,320,651 |   |   | - |   |   | - |   |   | - |   |   | 1,335,086 |   |
| Stock-based compensation                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 86,666 |   |   | 866 |   |   | 1,131,363 |   |   | - |   |   | - |   |   | - |   |   | 1,132,229 |   |
| Amortization of prepaidlicense discount                                            |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | 196,249 |   |   | - |   |   | - |   |   | 196,249 |   |
| Deemed dividend to warrant holder                                                  |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | 99,500 |   |   | - |   |   | (99,500 | ) |   | - |   |   | - |   |
| Net loss                                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,099,846 | ) |   | - |   |   | (8,099,846 | ) |
| Translation adjustments                                                            |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (21,977 | ) |   | (21,977 | ) |
| Comprehensive loss                                                                 |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,121,823 | ) |
| **December 31, 2006**                                                              |   | **-**                           |   |         | **-**  |                    | **-**      |            |   | **-**                      |   | **53,319,622** |   |   | **533,196** |   |   | **106,792,974** |   |   | **(2,305,929** | **)** |   | **(99,322,453** | **)** |   | **(617,343** | **)** |   | **5,080,445** |   |
| Issuance of common stock inprivate placement                                       |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 10,000,000 |   |   | 100,000 |   |   | 14,642,671 |   |   | - |   |   | - |   |   | - |   |   | 14,742,671 |   |
| Issuance of warrants in debt financing                                             |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | 505,379 |   |   | - |   |   | - |   |   | - |   |   | 505,379 |   |
| Exercise of warrants and options                                                   |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 2,187,317 |   |   | 21,873 |   |   | 2,270,819 |   |   | - |   |   | - |   |   | - |   |   | 2,292,692 |   |
| Stock-based compensation                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | 22,727 |   |   | 227 |   |   | 1,218,810 |   |   | - |   |   | - |   |   | - |   |   | 1,219,037 |   |
| Impairment and amortization of prepaid license                            discount |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | 2,305,929 |   |   | - |   |   | - |   |   | 2,305,929 |   |
| Net loss                                                                           |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,578,939 | ) |   | - |   |   | (8,578,939 | ) |
| Translation adjustments                                                            |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (67,923 | ) |   | (67,923 | ) |
| Comprehensive loss                                                                 |   | -                               |   |         | -      |                    | -          |            |   | -                          |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | (8,646,862 | ) |
| **December 31, 2007**                                                              |   | **-**                           |   | **$**        | **-**  |                    | **-**      |            | **$**  | **-**                      |   | **65,529,666** |   | **$** | **655,296** |   | **$** | **125,430,653** |   | **$** | **-** |   | **$** | **(107,901,392** | **)** | **$** | **(685,266** | **)** | **$** | **17,499,291** |   |
|                                                                                    |        |                                 |        |              |        |                         |            |                 |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

             

|   | See accompanying notes to consolidated financial                            statements. |
|--------|-----------------------------------------------------------------------------------------|

             

                                                                                                                      53

             

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            Index

 

**ANTARES PHARMA, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

             

             

|                                                                                    | **Years Ended December 31,** |     |
|-----------------------------------------------------------------------------------------|------------------------------|----------|
|                                                                                    |                         | **2007** |   |   |   | **2006** |   |   |   | **2005** |   |
| Cash flows from operating activities:                                                   |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                |                         | $        | (8,578,939 | ) |   |   | $ | (8,099,846 | ) |   |   | $ | (8,497,956 | ) |
| Adjustments to reconcile net loss to netcash used in operating activities:              |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Patent rights impairment charge                                                         |                         |     | 296,338 |   |   |   |   | 138,632 |   |   |   |   | - |   |
| Depreciation and amortization                                                           |                         |     | 251,827 |   |   |   |   | 297,375 |   |   |   |   | 317,013 |   |
| Stock-based compensation expense                                                        |                         |     | 1,202,603 |   |   |   |   | 1,166,268 |   |   |   |   | 182,705 |   |
| Amortization of debt discount and issuance                            costs             |                         |     | 220,034 |   |   |   |   | - |   |   |   |   | - |   |
| Impairment and amortization of prepaid license                            discount      |                         |     | 2,305,929 |   |   |   |   | 196,249 |   |   |   |   | 196,249 |   |
| Changes in operating assets and liabilities:                                            |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                     |                         |     | 379,129 |   |   |   |   | (616,327 | ) |   |   |   | 48,710 |   |
| Other receivables                                                                       |                         |     | (140,149 | ) |   |   |   | (101,684 | ) |   |   |   | 35,881 |   |
| Inventories                                                                             |                         |     | (40,630 | ) |   |   |   | (48,757 | ) |   |   |   | 56,322 |   |
| Prepaid expenses and other current assets                                               |                         |     | (312,075 | ) |   |   |   | 114,446 |   |   |   |   | (210,753 | ) |
| Other assets                                                                            |                         |     | (340,439 | ) |   |   |   | (13,038 | ) |   |   |   | 20,002 |   |
| Accounts payable                                                                        |                         |     | (17,686 | ) |   |   |   | (155,391 | ) |   |   |   | 501,614 |   |
| Accrued expenses and other current                            liabilities               |                         |     | 441,698 |   |   |   |   | 185,789 |   |   |   |   | 194,782 |   |
| Deferred revenue                                                                        |                         |     | (1,061,916 | ) |   |   |   | 818,234 |   |   |   |   | (63,098 | ) |
| Net cash used in operating activities                                                   |                         |     | (5,394,276 | ) |   |   |   | (6,118,050 | ) |   |   |   | (7,218,529 | ) |
|                                                                                    |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                   |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchase of short-term investments                                                      |                         |     | (24,326,544 | ) |   |   |   | (10,694,799 | ) |   |   |   | (5,955,789 | ) |
| Proceeds from maturity of short-term                            investments             |                         |     | 13,163,037 |   |   |   |   | 5,843,248 |   |   |   |   | 13,897,477 |   |
| Additions to patent rights                                                              |                         |     | (145,590 | ) |   |   |   | (142,751 | ) |   |   |   | (154,193 | ) |
| Purchases of equipment, furniture and                            fixtures               |                         |     | (96,575 | ) |   |   |   | (35,703 | ) |   |   |   | (89,651 | ) |
| Net cash provided by (used in) investing                            activities          |                         |     | (11,405,672 | ) |   |   |   | (5,030,005 | ) |   |   |   | 7,697,844 |   |
|                                                                                    |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                   |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of common stock, net                                             |                         |     | 14,742,671 |   |   |   |   | 9,782,055 |   |   |   |   | 476,000 |   |
| Proceeds from exercise of warrants and stock                            options         |                         |     | 2,292,692 |   |   |   |   | 1,335,086 |   |   |   |   | 193,700 |   |
| Proceeds from notes payable, net of debt issuance                            costs      |                         |     | 7,309,279 |   |   |   |   | - |   |   |   |   | - |   |
| Principal payments on long term debt                                                    |                         |     | (492,745 | ) |   |   |   | - |   |   |   |   | - |   |
| Payment of preferred stock dividends                                                    |                         |     | - |   |   |   |   | - |   |   |   |   | (50,000 | ) |
| Net cash provided by financing activities                                               |                         |     | 23,851,897 |   |   |   |   | 11,117,141 |   |   |   |   | 619,700 |   |
|                                                                                    |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash                            equivalents |                         |     | 928 |   |   |   |   | 18,489 |   |   |   |   | (32,951 | ) |
|                                                                                    |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and cash                            equivalents         |                         |     | 7,052,877 |   |   |   |   | (12,425 | ) |   |   |   | 1,066,064 |   |
| Cash and cash equivalents:                                                              |                         |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                                                                       |                         |     | 2,706,047 |   |   |   |   | 2,718,472 |   |   |   |   | 1,652,408 |   |
| End of year                                                                             |                         | $        | 9,758,924 |   |   |   | $ | 2,706,047 |   |   |   | $ | 2,718,472 |   |

             

             

|   | See accompanying notes to consolidated financial                            statements. |
|--------|-----------------------------------------------------------------------------------------|

             

54

             

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Index

 

**ANTARES PHARMA, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

             

             

| **1.** | **Description of Business** |
|--------|-----------------------------|

             

Antares Pharma, Inc. (“Antares”) is a specialty drug            delivery/pharmaceutical company utilizing its experience and expertise in drug delivery            systems to enhance the performance of established and developing pharmaceuticals. The            Company currently has three primary delivery platforms (1) transdermal gels, (2) oral            disintegrating tablets, and (3) injection devices. The corporate headquarters are            located in Ewing, New Jersey, with research and production facilities for the injection            devices in Minneapolis, Minnesota, and research, development and commercialization            facilities for the transdermal gels and oral disintegrating tablets in Basel,            Switzerland.

             

| **2.** | **Summary of Significant Accounting                            Policies** |
|--------|---------------------------------------------------------------------------|

             

*Basis of Presentation*

             

The accompanying consolidated financial statements include the accounts            of Antares Pharma, Inc. and its three wholly-owned subsidiaries. All significant            intercompany accounts and transactions have been eliminated in            consolidation.

             

*Foreign Currency Translation*

             

The majority of the foreign subsidiaries revenues are denominated in            U.S. dollars, and any required funding of the subsidiaries is provided by the U.S.            parent. Nearly all operating expenses of the foreign subsidiaries, including labor,            materials, leasing arrangements and other operating costs, are denominated in Swiss            Francs. Additionally, bank accounts held by foreign subsidiaries are denominated in            Swiss Francs, there is a low volume of intercompany transactions and there is not an            extensive interrelationship between the operations of the subsidiaries and the parent            company. As such, under Financial Accounting Standards Board Statement No. 52,            “*Foreign Currency            Translation,*” the Company has determined that the Swiss            Franc is the functional currency for its three foreign subsidiaries. The reporting            currency for the Company is the United States Dollar (“USD”). The financial            statements of the Company’s three foreign subsidiaries are translated into USD            for consolidation purposes. All assets and liabilities are translated using period-end            exchange rates and statements of operations items are translated using average exchange            rates for the period. The resulting translation adjustments are recorded as a separate            component of stockholders’ equity. Sales to certain customers by the U.S. parent            are in currencies other than the U.S. dollar and are subject to foreign currency            exchange rate fluctuations. Foreign currency transaction gains and losses are included            in the statements of operations.

             

*Cash Equivalents*

             

The Company considers highly liquid debt instruments with original            maturities of 90 days or less to be cash equivalents.

             

*Short-Term Investments*

             

All short-term investments are commercial paper or U.S. government            agency discount notes that mature within one year of purchase and are classified as            held-to-maturity because the Company has the positive intent and ability to hold the            securities to maturity. The securities are carried at their amortized cost. At December            31, 2007 and 2006 the securities had a fair value of $16,332,927 and $4,951,654,            respectively, and a carrying value of $16,300,844 and $4,953,421,            respectively.

             

*Inventories*

             

Inventories are stated at the lower of cost or market. Cost is            determined on a first-in, first-out basis. Certain components of the Company’s            products are provided by a limited number of vendors, and the Company’s            production and assembly operations are outsourced to a third-party supplier. Disruption            of supply from key vendors or the third-party supplier may have a material adverse            impact on the Company’s operations.

             

55

             

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*Equipment, Furniture, and Fixtures*

             

Equipment, furniture, and fixtures are stated at cost and are            depreciated using the straight-line method over their estimated useful lives ranging            from three to ten years. Certain equipment and furniture held under capital leases is            classified in equipment, furniture and fixtures and is amortized using the            straight-line method over the lease term or estimated useful life, and the related            obligations are recorded as liabilities. Lease amortization is included in depreciation            expense. Depreciation expense was $137,085, $144,225 and $192,869 for the years ended            December 31, 2007, 2006 and 2005, respectively.

             

*Goodwill*

             

The Company evaluates the carrying value of goodwill during the fourth            quarter of each year and between annual evaluations if events occur or circumstances            change that would more likely than not reduce the fair value of the Minnesota reporting            unit below its carrying amount. Such circumstances could include, but are not limited            to: (1) a significant adverse change in legal factors or in business climate, (2)            unanticipated competition, (3) an adverse action or assessment by a regulator, or (4) a            sustained significant drop in the Company’s stock price. When evaluating whether            goodwill is impaired, the Company compares the fair value of the Minnesota operations            to the carrying amount, including goodwill. If the carrying amount of the Minnesota            operations exceeds its fair value, then the amount of the impairment loss must be            measured. The impairment loss would be calculated by comparing the implied fair value            of goodwill to its carrying amount. In calculating the implied fair value of goodwill,            the fair value of the Minnesota operations would be allocated to all of its other            assets and liabilities based on their fair values. The excess of the fair value of the            Minnesota operations over the amount assigned to its other assets and liabilities is            the implied fair value of goodwill. An impairment loss would be recognized when the            carrying amount of goodwill exceeds its implied fair value. The Company’s            evaluation of goodwill completed during 2007, 2006 and 2005 resulted in no impairment            losses.

             

*Patent Rights*

             

The Company capitalizes the cost of obtaining patent rights. These            capitalized costs are being amortized on a straight-line basis over periods ranging            from six to fifteen years beginning on the earlier of the date the patent is issued or            the first commercial sale of product utilizing such patent rights. Amortization expense            for the years ended December 31, 2007, 2006 and 2005 was $112,383, $153,150 and            $129,349, respectively.

             

*Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed            Of*

             

Long-lived assets, including patent rights, are reviewed for impairment            whenever events or changes in circumstances indicate that the carrying amount of an            asset may not be recoverable. Recoverability of assets to be held and used is measured            by a comparison of the carrying amount of an asset to future net cash flows expected to            be generated by the asset. This analysis can be very subjective as the Company relies            upon signed distribution or license agreements with variable cash flows to substantiate            the recoverability of long-lived assets. If such assets are considered to be impaired,            the impairment to be recognized is measured by the amount by which the carrying amount            of the assets exceeds the fair value of the assets. Assets to be disposed of are            reported at the lower of the carrying amount or fair value less costs to            sell.

             

In the fourth quarter of each year the Company updates its long-range            business plan. The Company then reviews patent costs for impairment and identifies            patents related to products for which there are no signed distribution or license            agreements or for which no revenues or cash flows are included in the business plan. In            2007 and 2006 the Company recognized impairment charges of $296,338 and $138,632,            respectively, in general and administrative expenses, which represented the gross            carrying amount net of accumulated amortization for the identified patents. No            impairment charges were recognized in 2005. The 2007 impairment charge relates to the            Eli Lilly amendment discussed further in Note 10. After the impairment charges, the            gross carrying amount and accumulated amortization of patents, which are the only            intangible assets of the Company subject to amortization, were $1,308,327 and $736,153,            respectively, at December 31, 2007 and were $1,526,714 and $713,122, respectively, at            December 31, 2006. The Company’s estimated aggregate patent amortization expense            for the next five years is $78,000 in each of 2008, 2009 and 2010, $31,000 in 2011 and            $25,000 in 2012.

             

56

             

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*Fair Value of Financial Instruments*

             

|   | All financial instruments are carried at amounts that                            approximate estimated fair value. |
|--------|--------------------------------------------------------------------------------------------------------------------|

             

*Revenue Recognition*

             

The Company sells its proprietary reusable needle-free injectors and            related disposable products through pharmaceutical and medical product distributors.            The Company’s reusable injectors and related disposable products are not            interchangeable with any competitive products and must be used together. The Company            recognizes revenue upon shipment when title transfers. The Company offers no price            protection or return rights other than for customary warranty claims. Sales terms and            pricing are governed by sales and distribution agreements.

             

The Company also records revenue from license fees, milestone payments            and royalties. License fees and milestone payments received under contracts originating            prior to June 15, 2003 are accounted for under the cumulative deferral method. This            method defers milestone payments with amortization to income over the contract term on            a straight-line basis commencing with the achievement of a contractual milestone. If            the Company is required to refund any portion of a milestone payment, the milestone            will not be amortized into revenue until the repayment obligation no longer            exists.

             

 In December 2002, the Emerging Issues Task Force            (“EITF”) issued EITF 00-21,*Revenue Arrangements            with Multiple Deliverables*. This Issue addresses certain            aspects of the accounting by a vendor for arrangements under which it will perform            multiple revenue-generating activities. In some arrangements, the different            revenue-generating activities (deliverables) are sufficiently separable, and there            exists sufficient evidence of their fair values to separately account for some or all            of the deliverables (that is, there are separate units of accounting). In other            arrangements, some or all of the deliverables are not independently functional, or            there is not sufficient evidence of their fair values to account for them separately.            This Issue addresses when and, if so, how an arrangement involving multiple            deliverables should be divided into separate units of accounting. This Issue does not            change otherwise applicable revenue recognition criteria.

             

 Under EITF 00-21, an up-front license payment is evaluated to            determine whether or not it meets the requirements to be considered a separate unit of            accounting. If it meets the separation criteria it is recognized as revenue when            received or over the development period if the license and development are a combined            unit of accounting. If it does not meet the separation criteria, then an up-front            payment is deferred and would be recognized consistent with the remaining            deliverables.

             

 If the Company earns development fees for time and material costs            incurred in connection with a development agreement, the development fees will be            recognized as revenue when earned if that portion of the agreement meets the separation            criteria of EITF 00-21. If the separation criteria are not met, the development fees            received would be recognized consistent with the remaining deliverables. Likewise, the            labor and material costs related to the development fees are recognized as a cost of            sales when incurred if the separation criteria are met, and are capitalized and            amortized on a straight-line basis over the same period as the development fees if the            criteria are not met.

             

 In connection with a license agreement entered into with Eli Lilly            and Company, the Company issued to Lilly a ten-year warrant to purchase 1,000,000            shares of the Company’s common stock at an exercise price of $3.776 per share. At            the time of issue the Company determined that the fair value of the warrant was            $2,943,739 using the Black-Scholes option pricing model. EITF 01-9,*Accounting for Consideration Given by a Vendor to a Customer            (Including a Reseller of the Vendor’s Products)*,            requires that the value of the warrants be treated as a reduction in revenue. The fair            value of the warrant was recorded to additional paid-in capital and to prepaid license            discount, a contra equity account. The prepaid license discount was being reduced on a            straight-line basis over the term of the agreement, offsetting revenue generated under            the agreement. As discussed further in Note 10, the remaining prepaid license discount            was written off in the fourth quarter of 2007 after the Company determined that it was            unlikely the future cash flows from the agreement would exceed the carrying            value.

             

             

57

             

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*Stock-Based Compensation*

             

As of January 1, 2006, the Company adopted the fair value method of            accounting for employee stock compensation cost pursuant to SFAS No. 123R, which            requires a public entity to measure the cost of employee services received in exchange            for the award of equity instruments based on the fair value of the award at the date of            grant. The cost will be recognized over the period during which an employee is required            to provide services in exchange for the award. Prior to January 1, 2006, the Company            used the intrinsic value method under APB Opinion No. 25. Accordingly, compensation            expense was recognized for restricted stock granted to employees, but was not            recognized for employee stock options other than the intrinsic value of options when            the exercise price of the options was below their fair value on the date of grant. The            Company is using the modified prospective transition method in implementing SFAS No.            123R. Under that transition method, for the portion of awards that vested in 2007 and            2006, compensation cost recognized during the year includes: (1) compensation cost for            all stock-based payments granted prior to, but not yet vested as of December 31, 2005,            based on the grant date fair value calculated in accordance with the original            provisions of SFAS No. 123, and (2) compensation cost for all stock-based payments            granted subsequent to December 31, 2005, based on the grant-date fair value calculated            in accordance with the provisions of SFAS No. 123R. In accordance with the modified            prospective transition method, results for prior periods have not been restated and do            not include the impact of SFAS No. 123R.

             

 Under SFAS No. 123R, the Company uses the Black-Scholes            option valuation model to determine the fair value of stock options. The fair value            model includes various assumptions, including the expected volatility and expected life            of the awards. These assumptions reflect the Company’s best estimates, but they            involve inherent uncertainties based on market conditions generally outside of the            Company’s control. As a result, if other assumptions had been used, stock-based            compensation expense, as calculated and recorded under SFAS No. 123R, could have            been materially impacted. Furthermore, if the Company uses different assumptions in            future periods, stock-based compensation expense could be materially impacted in future            periods.

             

 Had compensation cost been determined based on the fair value at            the grant date for stock options under SFAS No. 123R for the year ended December 31,            2005, the net loss applicable to common shares and loss per common share would have            increased to the pro-forma amounts shown below:

             

|                                                                            |   | **2005** |       |   |
|---------------------------------------------------------------------------------|--------|----------|------------|--------|
| Net loss applicable to common stockholders:                                     |   |     |       |   |   |
| As reported                                                                     |   | $        | (8,547,956 | )      |   |
| Stock based employee compensation expense                            recognized |   |     | 176,298    |   |   |
| Fair-value method compensation expense                                          |   |     | (1,069,103 | )      |   |
| Pro Forma net loss                                                              |   | $        | (9,440,761 | )      |   |
| Basic and diluted net loss per common share:                                    |   |     |       |   |   |
| As reported                                                                     |   | $        | (0.21      | )      |   |
| Stock based employee compensation expense                            recognized |   |     | -          |   |   |
| Fair-value method compensation expense                                          |   |     | (0.02      | )      |   |
| Pro Forma net loss per common share                                             |   | $        | (0.23      | )      |   |

        

The Company accounts for stock-based instruments granted to nonemployees            under the fair value method of SFAS 123R and Emerging Issues Task Force            (“EITF”) 96-18,*“Accounting for Equity            Instruments That Are issued to Other Than Employees for Acquiring, or in Conjunction            with Selling Goods or Services.”*Under SFAS 123R,            options granted to nonemployees are recorded at their fair value on the measurement            date, which is typically the vesting date.

             

*Product Warranty*

             

The Company provides a warranty on its reusable needle-free injector            devices. Warranty terms for devices sold to end-users by dealers and distributors are            included in the device instruction manual included with each device sold.Warranty terms for devices sold to corporate customers who provide their            own warranty terms to end-users are

             

58

             

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included in the contracts with the corporate customers. The Company is            obligated to repair or replace, at the Company’s option, a device found to be            defective due to use of defective materials or faulty workmanship. The warranty does            not apply to any product that has been used in violation of instructions as to the use            of the product or to any product that has been neglected, altered, abused or used for a            purpose other than the one for which it was manufactured. The warranty also does not            apply to any damage or defect caused by unauthorized repair or the use of unauthorized            parts. Warranty periods on devices range from 24 to 30 months from either the date of            retail sale of the device by a dealer or distributor or the date of shipment to a            customer if specified by contract. The Company recognizes the estimated cost of            warranty obligations at the time the products are shipped based on historical claims            incurred by the Company. Actual warranty claim costs could differ from these estimates.            Warranty liability activity is as follows:

             

|   | **Balance at**

**Beginning of**

**Year** |   | **Provisions** |   | **Claims** |   | **Balance at**

**End of**

**Year** |   |   |
|--------|--------------------------------------------|--------|----------------|--------|------------|--------|--------------------------------------|--------|--------|
| 2007   |                                       | $      | 20,000         |   | $          | 6,075  |                                 | $      | (6,075 | ) |   | $ | 20,000 |   |
| 2006   |                                       | $      | 25,000         |   | $          | 4,066  |                                 | $      | (9,066 | ) |   | $ | 20,000 |   |

             

*Research and Development*

             

|   | Research and development costs are expensed as                            incurred. |
|--------|-------------------------------------------------------------------------------------|

             

*Use of Estimates*

             

The preparation of financial statements in conformity with U.S.            generally accepted accounting principles requires management to make estimates and            assumptions that affect the reported amounts of assets and liabilities and disclosure            of contingent assets and liabilities at the date of the financial statements and the            reported amounts of revenues and expenses during the reporting period. The            Company’s significant accounting estimates relate to the revenue recognition            periods for license revenues, product warranty accruals and determination of the fair            value and recoverability of goodwill and patent rights. Actual results could differ            from these estimates.

             

*Income Taxes*

             

Deferred tax assets and liabilities are recognized for the future tax            consequences attributable to differences between the financial statement carrying            amounts of existing assets and liabilities and their respective tax bases. Deferred tax            assets and liabilities are measured using enacted tax rates expected to apply to            taxable income in the

years in which those temporary differences are expected to be recovered            or settled. The effect on deferred tax assets and liabilities of a change in tax rates            is recognized in income in the period that includes the enactment date. Due to            historical net losses of the Company, a valuation allowance is established to offset            the deferred tax asset.

             

*Net Loss Per Share*

             

Basic EPS is computed by dividing net income or loss available to common            stockholders by the weighted-average number of common shares outstanding for the            period. Diluted EPS is computed similar to basic earnings per share except that the            weighted average shares outstanding are increased to include additional shares from the            assumed exercise of stock options, warrants, convertible debt or convertible preferred            stock, if dilutive. The number of additional shares is calculated by assuming that            outstanding stock options or warrants were exercised and that the proceeds from such            exercise were used to acquire shares of common stock at the average market price during            the reporting period. If the convertible preferred stock were dilutive, any applicable            dividends would be removed and the shares issued would be assumed to be outstanding for            the dilutive period. All potentially dilutive common shares were excluded from the            calculation because they were anti-dilutive for all periods presented.

             

Potentially dilutive securities at December 31, 2007, 2006 and 2005,            excluded from dilutive loss per share as their effect is anti-dilutive, are as            follows: 

|                       |   | **2007**   |   |   |   | **2006**   |   |   |   | **2005**   |   |
|----------------------------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|
| Stock options and warrants |   | 28,723,412 |   |   |   | 25,699,542 |   |   |   | 19,840,298 |   |

             

             

59

             

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*New Accounting Pronouncements*

             

In December 2007, the FASB issued Statement of Financial Accounting            Standards No. 141R (revised 2007), “Business Combinations” (“SFAS            141R”).  SFAS 141R establishes principles and requirements for how an            acquirer recognizes and measures in its financial statements the identifiable assets            acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the            goodwill acquired in the business combination.  SFAS 141R also establishes            disclosure requirements to enable the evaluation of the nature and financial effects of            the business combination. The provisions of SFAS 141R are effective for the Company            beginning January 1, 2009.  The Company is currently evaluating the potential            impact of adopting this pronouncement on its consolidated financial statements and            related disclosures.

             

In June 2007, EITF Issue No. 07-3, “Accounting for            Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and            Development Activities” (“EITF 07-3”) was issued. EITF 07-3            addresses the diversity that exists with respect to the accounting for the            non-refundable portion of a payment made by a research and development entity for            future research and development activities. Under EITF 07-3, an entity would defer            and capitalize non-refundable advance payments made for research and development            activities until the related goods are delivered or the related services are performed.            EITF 07-3 will be effective for the Company beginning on January 1, 2008. The            Company is currently evaluating the effect of EITF 07-3 on its consolidated            financial statements.

             

In February 2007, the FASB issued Statement of Financial Accounting            Standards No. 159, “The Fair Value Option for Financial Assets and Financial            Liabilities, Including an Amendment of FASB Statement No. 115”            (“SFAS 159”). SFAS 159 provides companies with an option to            report selected financial assets and liabilities at fair value. Furthermore,            SFAS 159 establishes presentation and disclosure requirements designed to            facilitate comparisons between companies that choose different measurement attributes            for similar types of assets and liabilities. SFAS 159 will be effective for the            Company beginning on January 1, 2008. The Company is currently evaluating the            potential impact of adopting this pronouncement on its consolidated financial            statements and related disclosures.

             

In September 2006, the FASB issued Statement of Financial Accounting            Standards No. 157, “Fair Value Measurements” which is effective for            fiscal years beginning after November 15, 2007 and for interim periods within            those years. This statement defines fair value, establishes a framework for measuring            fair value and expands the related disclosure requirements. The Company is currently            evaluating the potential impact of this statement on the consolidated financial            statements.

             

| **3.** | **Composition of Certain Financial Statement                            Captions** |
|--------|------------------------------------------------------------------------------------|

             

|                                      |   | **December 31,** |       |   |   | **December 31,** |   |
|-------------------------------------------|--------|------------------|------------|--------|--------|------------------|--------|
|                                      |   | **2007**         |       |   |   | **2006**         |   |
| Inventories:                              |   |             |       |   |   |             |   |   |   |
| Raw material                              |   | $                | 65,985     |   |   |             | $      | 16,828 |   |
| Finished goods                            |   |             | 59,424     |   |   |             |   | 67,951 |   |
|                                      |   | $                | 125,409    |   |   |             | $      | 84,779 |   |
| Equipment, furniture and fixtures:        |   |             |       |   |   |             |   |   |   |
| Furniture, fixtures and office equipment  |   | $                | 1,297,635  |   |   |             | $      | 1,233,538 |   |
| Production equipment                      |   |             | 2,379,189  |   |   |             |   | 2,130,992 |   |
| Less accumulated depreciation             |   |             | (3,209,148 | )      |   |             |   | (2,982,434 | ) |
|                                      |   | $                | 467,676    |   |   |             | $      | 382,096 |   |
| Patent                            rights: |   |             |       |   |   |             |   |   |   |
| Patent rights                             |   | $                | 1,308,327  |   |   |             | $      | 1,526,714 |   |
| Less accumulated amortization             |   |             | (736,153   | )      |   |             |   | (713,122 | ) |
|                                      |   | $                | 572,174    |   |   |             | $      | 813,592 |   |

             

             

60

             

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|                                       |   | **December 31,** |      |   |   | **December 31,** |   |
|--------------------------------------------|--------|------------------|-----------|--------|--------|------------------|--------|
|                                       |   | **2007**         |      |   |   | **2006**         |   |
| Accrued expenses and other liabilities:    |   |             |      |   |   |             |   |   |   |
| Accrued employee compensation and benefits |   | $                | 877,844   |   |   |             | $      | 660,248 |   |
| Other liabilities                          |   |             | 665,557   |   |   |             |   | 410,838 |   |
|                                       |   | $                | 1,543,401 |   |   |             | $      | 1,071,086 |   |

             

| **4.** | **Notes Payable** |
|--------|-------------------|

             

In February of 2007, the Company received gross proceeds of $5,000,000            upon closing of the first tranche of a $10,000,000 credit facility. In December of 2007            the Company received gross proceeds of $2,500,000, after amending the credit facility            agreement to reduce the amount available to draw down in the second tranche from            $5,000,000 to $2,500,000. The per annum interest rate is 12.7% in the case of the first            tranche and 11% in the case of the second tranche. The maturity date (i) with respect            to the first tranche is forty-two months from the first funding date and (ii) with            respect to the second tranche is thirty-six months from the second funding date. The            credit agreement is secured by all personal property of the Company, including all            intellectual property. The credit agreement contains certain covenants and provisions,            including, without limitation, covenants and provisions that:

             

|   | **•** | restrict the Company’s ability to create or incur                            indebtedness (subject to enumerated exceptions); |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict the Company’s ability to create or incur                            certain liens on its property (subject to enumerated                            exceptions); |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, require the Company to                            maintain, on a consolidated basis, unrestricted cash and cash                            equivalents of at least $2,500,000; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | in certain circumstances, restrict the Company’s                            ability to declare or pay any dividends on any shares of its capital                            stock, purchase or redeem any shares of its capital stock, return any                            capital to any holder of its equity securities or payment of certain                            bonuses; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | restrict the Company’s ability to make certain                            investments. |
|--------|------------|----------------------------------------------------------------------------------------------|

             

Total interest expense related to the credit facility in 2007 was            $756,262, of which $534,487 was interest paid in cash. The remaining interest expense            of $221,775 consisted of amortization of debt discount and debt issuance costs. In            connection with the credit facility, the Company issued warrants to purchase a total of            640,000 shares of common stock at an exercise price of $1.25. The fair value of the            warrants was approximately $505,000, calculated using the Black-Scholes valuation            model, and was recorded as debt discount and is being amortized and recorded as            interest expense using the interest method over the term of the credit agreement. The            Company capitalized debt issuance costs totaling $190,721, which are being amortized            and recorded as interest expense using the interest method over the term of the            agreement.

             

 Principal payments of $2,267,854, $2,559,152 and $2,206,325 are            due in each of the twelve month periods ended December 31, 2008, 2009 and 2010,            respectively.

             

| **5.** | **Leases** |
|--------|------------|

             

The Company has non-cancelable operating leases for its corporate            headquarters facility in Ewing, New Jersey, its office, research and development            facility in Minneapolis, MN and for its office and research facility in Basel,            Switzerland. The leases require payment of all executory costs such as maintenance and            property taxes. The Company also leases certain equipment and furniture under various            operating and capital leases. The cost of equipment and furniture under capital leases            at December 31, 2007 was $116,923 and accumulated amortization was $15,507.

             

 Rent expense, net, incurred for the years ended December 31, 2007,            2006 and 2005 was $353,966, $352,473 and $375,090, respectively.

             

61

             

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Future minimum lease payments are as follows as of December 31,            2007:

             

|                                                                                                | ****Capital****

**Leases** |    | ****Operating****

**Leases** |
|-----------------------------------------------------------------------------------------------------|-----------------------------|---------|-------------------------------|
|      2008                                                                  | $                           | 43,471  |                          | $ | 390,550 |
|      2009                                                                  |                        | 43,471  |                          |   | 443,305 |
|      2010                                                                  |                        | 12,114  |                          |   | 431,473 |
|      2011                                                                  |                        | -       |                          |   | 366,250 |
|      2012                                                                  |                        | -       |                          |   | 241,165 |
|      Thereafter                                                            |                        | -       |                          |   | 174,502 |
|      Total                            future minimum lease payments        |                        | 99,056  |                          | $ | 2,047,245 |
|      Amount                            representing interest at 3.8%       |                        | (4,285  | )                             |   |   |
|      Obligations                            under capital leases           |                        | 94,771  |                          |   |   |
|      Obligations                            due within one year            |                        | (40,591 | )                             |   |   |
|      Long-term                            obligations under capital leases | $                           | 54,180  |                          |   |   |
|                                                                            |                        |    |                          |   |   |

             

| **6.** | **Income Taxes** |
|--------|------------------|

             

The Company incurred losses for both book and tax purposes in each of            the years in the three-year period ended December 31, 2007, and, accordingly, no income            taxes were provided. The Company was subject to taxes in both the U.S. and Switzerland            in each of the years in the three-year period ended December 31, 2007. Effective tax            rates differ from statutory income tax rates in the years ended December 31, 2007, 2006            and 2005 as follows:

             

|                                                                               |   | **2007** |   |   |   | **2006** |   |   |   | **2005** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|--------|--------|----------|--------|--------|--------|----------|--------|
|    Statutory income tax rate                                             |   | (34.0    | )%     |   |   | (34.0    | )%     |   |   | (34.0    | )%     |
|    State income taxes, net of federal                            benefit |   | (0.6     | )      |   |   | (0.7     | )      |   |   | (0.0     | )      |
|    Research and experimentation                            credit        |   | (1.0     | )      |   |   | (0.3     | )      |   |   | (0.8     | )      |
|    Valuation allowance increase                                          |   | 11.5     |   |   |   | 21.9     |   |   |   | 21.0     |   |
|    Effect of foreign operations                                          |   | 11.9     |   |   |   | 13.1     |   |   |   | 12.8     |   |
|    Expiration of net operating                            losses         |   | 3.8      |   |   |   | 0.8      |   |   |   | 0.2      |   |
|    Nondeductible items                                                   |   | 5.6      |   |   |   | 0.1      |   |   |   | 0.1      |   |
|    Other                                                                 |   | 2.8      |   |   |   | (0.9     | )      |   |   | 0.7      |   |
|                                                                               |   | 0.0      | %      |   |   | 0.0      | %      |   |   | 0.0      | %      |

             

Deferred tax assets as of December 31, 2007 and 2006 consist of the            following:

             

|                                                                                        |   | **2007** |        |   |   | **2006** |   |
|---------------------------------------------------------------------------------------------|--------|----------|-------------|--------|--------|----------|--------|
|    Net operating loss carryforward –                            U.S.        |   | $        | 15,326,000  |   |   |     | $      | 15,251,000 |   |
|    Net operating loss carryforward –                            Switzerland |   |     | 4,701,000   |   |   |     |   | 3,862,000 |   |
|    Research and development tax credit                            carryforward    |   |     | 973,000     |   |   |     |   | 891,000 |   |
|    Deferred revenue                                                               |   |     | 687,000     |   |   |     |   | 1,048,000 |   |
|    Depreciation and amortization                                                  |   |     | 325,000     |   |   |     |   | 280,000 |   |
|    Stock-based compensation                                                       |   |     | 975,000     |   |   |     |   | 1,061,000 |   |
|    Other                                                                          |   |     | 971,000     |   |   |     |   | 195,000 |   |
|                                                                                        |   |     | 23,958,000  |   |   |     |   | 22,588,000 |   |
|    Less valuation allowance                                                       |   |     | (23,958,000 | )      |   |     |   | (22,588,000 | ) |
|                                                                                        |   | $        | —     |   |   |     | $      | — |   |

        

             

The valuation allowance for deferred tax assets as of December 31, 2007            and 2006 was $23,958,000 and $22,588,000, respectively. The net change in the total            valuation allowance for the years ended December 31, 2007

             

62

             

----

and 2006            was an increase of $1,370,000 and $2,057,000, respectively. In assessing the            realizability of deferred tax assets, management considers whether it is more likely            than not that some portion or all of the deferred tax assets will not be realized. The            ultimate realization of deferred tax assets is dependent upon the generation of future            taxable income during the periods in which those temporary differences become            deductible. Management considers the scheduled reversal of deferred tax liabilities,            projected future taxable income and tax planning strategies in making this assessment.            Due to the uncertainty of realizing the deferred tax asset, management has recorded a            valuation allowance against the entire deferred tax asset.

             

The Company has a U.S. federal net operating loss carryforward at            December 31, 2007, of approximately $42,300,000, which, subject to limitations of            Internal Revenue Code Section 382, is available to reduce income taxes payable in            future years. If not used, this carryforward will expire in years 2008 through 2027,            with approximately $3,387,000 expiring over the next three years. Additionally, the            Company has a research credit carryforward of approximately $973,000. These credits            expire in years 2008 through 2027.

             

The Company also has a Swiss net operating loss carryforward at December            31, 2007, of approximately $34,800,000, which is available to reduce income taxes            payable in future years. If not used, this carryforward will expire in years 2008            through 2014, with approximately $10,200,000 expiring over the next three            years.

             

 Utilization of U.S. net operating losses and tax credits of            Antares Pharma, Inc. are subject to annual limitations under Internal Revenue Code            Sections 382 and 383, respectively, as a result of significant changes in ownership,            including the business combination with Permatec, private placements, warrant exercises            and conversion of Series D Convertible Preferred Stock. Subsequent significant equity            changes, including exercise of outstanding warrants, could further limit the            utilization of the net operating losses and credits. The annual limitations have not            yet been determined; however, when the annual limitations are determined, the gross            deferred tax assets for the net operating losses and tax credits will be reduced with a            reduction in the valuation allowance of a like amount.

             

The Company adopted the provisions of FASB Interpretation No. 48 (FIN            48),*Accounting for Uncertainty in Income            Taxes*, on January 1, 2007. Implementation of FIN 48 resulted            in no adjustment to the Company's liability for unrecognized tax benefits. As of both            the date of adoption, and as of December 31, 2007, the total amount of unrecognized tax            benefits was none. Accordingly, a tabular reconciliation from beginning to ending            periods is not provided. In accordance with FIN 48, paragraph 19, the Company has            decided to classify any future interest and penalties as a component of income tax            expense if incurred. To date, there have been no interest or penalties charged or            accrued in relation to unrecognized tax benefits.

             

| **7.** | **Stockholders’ Equity** |
|--------|--------------------------------|

             

*Common Stock*

             

 In July of 2007, the Company received proceeds of $14,742,671, net            of offering costs of $1,257,329, in a private placement of its common stock in which a            total of 10,000,000 shares of common stock were sold at a price of $1.60 per share. In            connection with the private placement, the Company issued five-year warrants to            purchase an aggregate of 3,800,000 shares of common stock with an exercise price of            $2.00 per share.

             

 In March of 2006, the Company received proceeds of $9,782,055,            which was net of offering costs of $1,180,445, in a private placement of its common            stock in which a total of 8,770,000 shares of common stock were sold at a price of            $1.25 per share. In connection with the private placement, the Company issued five-year            warrants to purchase an aggregate of 7,454,500 shares of common stock with an exercise            price of $1.50 per share.

             

 In November 2005, in connection with a License Development and            Supply Agreement discussed further in Note 10, the Company sold 400,000 shares of its            common stock at $1.25 per share.

             

Warrant and stock option exercises during 2007, 2006 and 2005 resulted            in proceeds of $2,292,692, $1,335,086 and $193,700, respectively, and in the issuance            of 2,187,317, 1,443,470 and 315,200 shares of common stock, respectively.

             

63

             

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 In 2005 a total of 50,000 shares of common stock were issued to            consultants or professional services organizations as compensation for services            rendered. The total value of the shares issued was $44,000. Common stock values were            based on the market price of the stock on the dates the shares were issued.

             

*Series A Convertible Preferred Stock*

             

 In June 2005, all 1,500 outstanding shares of Series A Convertible            Preferred Stock (“Series A”) were converted into 1,200,000 shares of common            stock.

             

*Series D Convertible Preferred Stock*

             

 In June and September of 2005, the remaining 30,000 and 33,588            shares of Series D Preferred Stock, respectively, were converted into 300,000 and            335,880 shares of common stock.

             

*Stock Options and Warrants*

             

The Company’s stock option and equity incentive plans allow for            the grants of options, restricted stock and/or performance awards to officers,            directors, consultants and employees. Under the Company’s 2006 Equity Incentive            Plan, the maximum number of shares of stock that may be granted to any one participant            during a calendar year is 500,000 shares, and no more than 500,000 shares may be issued            as restricted stock grants, restricted stock units and performance awards. Options to            purchase shares of Common Stock are granted at exercise prices not less than 100% of            fair market value on the dates of grant. The term of the options range from three to            eleven years and they vest in varying periods. As of December 31, 2007, these plans had            2,412,610 shares available for grant. Stock option exercises are satisfied through the            issuance of new shares.

             

 A summary of stock option activity under the plans as of December            31, 2007 and the changes during the year then ended is as follows:

             

|                             |   | **Number of**

**Shares** |   |   |   | **Weighted****Average****Exercise****Price ($)** |   |   |   | **Weighted**

**Average****Remaining****Contractual****Term (Years)** |   |   |   | **Aggregate****Intrinsic****Value ($)** |   |
|----------------------------------|--------|---------------------------|--------|--------|--------|--------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------|--------|--------|--------|-----------------------------------------|--------|
| Outstanding at December 31, 2006 |   | 4,426,759                 |   |   |   | 1.65                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Granted/Issued                   |   | 1,307,632                 |   |   |   | 1.42                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Exercised                        |   | (35,000                   | )      |   |   | 1.54                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Cancelled                        |   | (117,000                  | )      |   |   | 2.31                                             |   |   |   |                                                                  |   |   |   |                                    |   |
| Outstanding at December 31, 2007 |   | 5,582,391                 |   |   |   | 1.58                                             |   |   |   | 7.0                                                                   |   |   |   | 146,160                                 |   |
| Exercisable at December 31, 2007 |   | 4,170,920                 |   |   |   | 1.65                                             |   |   |   | 6.4                                                                   |   |   |   | 125,681                                 |   |

             

The intrinsic value of stock options exercised in the year ended            December 31, 2007 was $16,100. As of December 31, 2007, there was approximately            $1,440,000 of total unrecognized compensation cost related to nonvested outstanding            stock options that is expected to be recognized over a weighted average period of            approximately 1.7 years.

             

The per share weighted average fair value of options granted during            2007, 2006 and 2005 was estimated as $1.14, $1.35 and $1.25, respectively, on the date            of grant using the Black-Scholes option pricing model based on the assumptions noted in            the table below. Expected volatilities are based on the historical volatility of the            Company’s stock. The weighted average expected life is based on both historical            and anticipated employee behavior.

             

             

             

64

             

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|                                     | **December 31,** |     |
|------------------------------------------|------------------|----------|
|                                     |             | **2007** |   |   | **2006** |   |   | **2005** |   |
| Risk-free interest rate                  |             | 4.7      | % |   | 4.5 | % |   | 3.9 | % |
| Annualized volatility                    |             | 109.0    | % |   | 126.0 | % |   | 131.0 | % |
| Weighted average expected life, in years |             | 5.0      |   |   | 7.0 |   |   | 7.0 |   |
| Expected dividend yield                  |             | 0.0      | % |   | 0.0 | % |   | 0.0 | % |

             

The employment agreements with the Chief Executive Officer, Chief            Financial Officer and other members of executive management include stock-based            incentives under which the executives could be awarded up to approximately 1,500,000            shares of common stock upon the occurrence of various triggering events. At December            31, 2007, the total shares available for grant under the equity incentive plan            applicable to these potential awards were limited to 500,000. Consequently, expense            recognition for awards considered probable of achievement was limited to the awards            covered by the 500,000 shares available. Of these 500,000 shares, 22,727 and 86,666            were awarded in 2007 and 2006, respectively. A total of approximately $91,000 and            $23,000 in compensation expense was recorded in 2007 and 2006, respectively, in            connection with the shares awarded and others considered probable of            achievement.

             

 In 2005 the Company recognized $20,417 of compensation expense in            connection with 50,000 shares granted to the Chief Executive Officer that became fully            vested in that year.

             

As compensation to non-employees for professional services, in 2006 the            Company issued options and warrants to purchase a total of 277,500 shares of the            Company’s common stock. The Company recorded these options and warrants at their            fair values of $116,909, using the Black-Scholes option pricing model. The options and            warrants have exercise prices ranging from $1.25 to $1.55 per share and expire three            years after issuance.

             

 Certain warrants to acquire 5,792,545 shares of common stock at            exercise prices ranging from $1.00 to $1.25 have full antidilution protection which            reduces the exercise price of the warrants to the effective price paid or payable under            new stock or stock equivalent issuances.

             

|   | Stock option and warrant activity is summarized as                            follows: |
|--------|----------------------------------------------------------------------------------------|

             

|                             |   | **Options**   |   |   |   | **Warrants**      |    |
|----------------------------------|--------|---------------|--------|--------|--------|-------------------|---------|
|                             |   | **Number of** |   |   |   | **Weighted**      |    |   |   | **Number of** |   |   |   | **Weighted** |   |
|                             |   | **Shares**    |   |   |   | **Average Price** |    |   |   | **Shares** |   |   |   | **Average Price** |   |
| Outstanding at December 31, 2004 |   | 3,274,494     |   |   |   |              | 1.79    |   |   |   | 16,982,097 |   |   |   |   | 1.43 |   |
| Granted/Issued                   |   | 225,000       |   |   |   |              | 1.34    |   |   |   | — |   |   |   |   | — |   |
| Exercised                        |   | —       |   |   |   |              | — |   |   |   | (315,200 | ) |   |   |   | 0.61 |   |
| Cancelled                        |   | (243,593      | )      |   |   |              | 1.80    |   |   |   | (82,500 | ) |   |   |   | 2.37 |   |
| Outstanding at December 31, 2005 |   | 3,255,901     |   |   |   |              | 1.76    |   |   |   | 16,584,397 |   |   |   |   | 1.44 |   |
| Granted/Issued                   |   | 1,535,000     |   |   |   |              | 1.48    |   |   |   | 7,659,500 |   |   |   |   | 1.49 |   |
| Exercised                        |   | (3,333        | )      |   |   |              | 1.32    |   |   |   | (1,513,687 | ) |   |   |   | 0.97 |   |
| Cancelled                        |   | (360,809      | )      |   |   |              | 2.00    |   |   |   | (1,457,427 | ) |   |   |   | 3.48 |   |
| Outstanding at December 31, 2006 |   | 4,426,759     |   |   |   |              | 1.65    |   |   |   | 21,272,783 |   |   |   |   | 1.35 |   |
| Granted/Issued                   |   | 1,307,632     |   |   |   |              | 1.42    |   |   |   | 4,440,000 |   |   |   |   | 1.89 |   |
| Exercised                        |   | (35,000       | )      |   |   |              | 1.54    |   |   |   | (2,430,095 | ) |   |   |   | 1.09 |   |
| Cancelled                        |   | (117,000      | )      |   |   |              | 2.31    |   |   |   | (141,667 | ) |   |   |   | 1.10 |   |
| Outstanding at December 31, 2007 |   | 5,582,391     |   |   |   |              | 1.58    |   |   |   | 23,141,021 |   |   |   |   | 1.49 |   |
|                                  |        |               |        |        |        |                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

             

             

             

65

             

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The following table summarizes information concerning currently            outstanding and exercisable options and warrants by price range at December 31,            2007:

             

|                                                                                                                                                                                                | **Outstanding**                                                                                                                                     | **Exercisable**                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|  

                             

**Price Range**                                                                                                                                         |  

**Number of Shares Outstanding**                                                                                                            | **Weighted Average Remaining Life**

**In Years**                                                            |  

**Weighted Average Exercise Price** |  

**Number Exercisable** |  

**Weighted Average Exercise Price** |
| **Pursuant to Option Plans:**                                                                                                                                                                       |                                                                                                                                                |                                                                                                         |   |   |   |
| $      0.70 to                            0.96

1.01 to 1.50

1.51 to 1.77

4.56 to 9.40                                                                              | 533,000

2,137,150

2,616,032

296,209

5,582,391                                                                                                   | 6.5

7.6

7.1

3.2

7.0                                                                                      | $    0.71

1.30

1.64

4.64

1.58 | 459,859

1,410,278

2,004,574

296,209

4,170,920 | $   0.71

1.32

1.66

4.64

1.65 |
| **Warrants:**

$      0.55 to                            1.00

1.25 to 1.50

2.00

3.00 to 5.00

                             

**Total Options & Warrants** |  

4,407,550

13,783,471

3,800,000

1,150,000

23,141,021

                             

28,723,412

                              |  

0.7

2.3

4.5

5.0

2.5

                             

3.4

                              |  

0.75

1.38

2.00

3.81

1.49

                             

1.51 |  

4,407,550

13,783,471

3,800,000

1,150,000

23,141,021

                             

27,311,941

                              |  

0.75

1.38

2.00

3.81

1.49

                             

1.51 |

             

             

| **8.** | **Employee 401(k) Savings Plan** |
|--------|----------------------------------|

             

The Company sponsors a 401(k) defined contribution retirement savings            plan that covers all U.S. employees who have met minimum age and service requirements.            Under the plan, eligible employees may contribute up to 50% of their compensation into            the plan. At the discretion of the Board of Directors, the Company may contribute            elective amounts to the plan, allocated in proportion to employee contributions to the            plan, employee’s salary, or both. For the years ended December 31, 2007, 2006 and            2005, the Company elected to make contributions to the plan totaling $75,553, $68,369            and $73,955, respectively.

             

| **9.** | **Supplemental Disclosures of Cash Flow                            Information** |
|--------|----------------------------------------------------------------------------------|

             

 Cash paid for interest during the years ended December 31, 2007,            2006 and 2005 was $550,642, $3,132 and $576, respectively.

             

| **10.** | **License Agreements** |
|---------|------------------------|

             

*Teva License Development and Supply Agreements*

             

 In December 2007, we entered into a license, development and            supply agreement with Teva Pharmaceutical Industries Ltd. under which we will develop            and supply a disposable pen injector for use with two undisclosed patient-administered            pharmaceutical products. Under the agreement, an upfront payment, development            milestones, and royalties on Teva’s product sales, as well as a purchase price            for each device sold are to be received by us under certain circumstances. Based on an            analysis under EITF 00-21, the entire arrangement is considered a single unit of            accounting. Therefore, payments received and development costs incurred will be            deferred and will be recognized from the start of manufacturing through the end of the            initial contract period.

             

 In September 2006, the Company entered into a Supply Agreement            with Teva Pharmaceutical Industries Ltd. Pursuant to the agreement, Teva is obligated            to purchase all of its delivery device requirements from Antares for an undisclosed            product to be marketed in the United States. Antares received an upfront cash payment,            and will receive milestone fees and a royalty payment on Teva’s net sales, as            well as a purchase price for each device sold. The upfront payment is being recognized            as revenue over the development period. The milestone fees and royalties will be            recognized as revenue when earned.

             

 In July 2006, the Company entered into an exclusive License            Development and Supply Agreement with an affiliate of Teva, Sicor Pharmaceuticals Inc.            Pursuant to the agreement, the affiliate is obligated to purchase all of

             

66

             

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its delivery device requirements from Antares for an undisclosed product            to be marketed in the United States and Canada. Antares received an upfront cash            payment, and will receive milestone fees, a negotiated purchase price for each device            sold, as well as royalties on sales of their product. Based on an analysis under EITF            00-21, the entire arrangement is considered a single unit of accounting. Therefore,            payments received and development costs incurred will be deferred and will be            recognized from the start of manufacturing through the end of the initial contract            period.

             

 In November 2005, the Company signed an agreement with an            affiliate of Teva, Sicor Pharmaceuticals Inc., under which Sicor is obligated to            purchase all of its injection delivery device requirements from Antares for an            undisclosed product to be marketed in the United States. Sicor also received an option            for rights in other territories. The license agreement included, among other things, an            upfront cash payment, milestone fees, a negotiated purchase price for each device sold,            and royalties on sales of their product. In addition, pursuant to a Stock Purchase            Agreement, Sicor purchased 400,000 shares of Antares common stock at a per share price            of $1.25. Antares granted Sicor certain registration rights with respect to the            purchased shares of common stock. Based on an analysis under EITF 00-21, the entire            arrangement is considered a single unit of accounting. Therefore, payments received and            development costs incurred will be deferred and will be recognized from the start of            manufacturing through the end of the initial contract period.

             

*Eli Lilly Development and License Agreement*

             

 On September 12, 2003, the Company entered into a Development and            License Agreement (the “License Agreement”) with Eli Lilly and Company.            Under the License Agreement, the Company granted Lilly an exclusive license to certain            of the Company’s reusable needle-free technology in the fields of diabetes and            obesity. The Company also granted an option to Lilly to apply the technology in one            additional therapeutic area. Additionally, the Company issued to Lilly a ten-year            warrant to purchase shares of the Company’s common stock. The Company granted            Lilly certain registration rights with respect to the shares of common stock issuable            upon exercise of the warrant. At the time of the grant, the Company determined that the            fair value of the warrant was $2,943,739 using the Black-Scholes option pricing model.            The fair value of the warrant was recorded to additional paid in capital and to prepaid            license discount, a contra equity account.

             

The Company analyzed this contract to determine the proper accounting            treatment under EITF 00-21, discussed in Note 2. The Company reached the conclusion            that although there are multiple deliverables in the contract, the entire contract must            be accounted for as one unit of accounting. Therefore, all revenue was being deferred            when billed under the contract terms and was being recognized into revenue on a            straight-line basis over the remaining life of the contract. All related costs were            also being deferred and recognized as expense over the remaining life of the contract            on a straight-line basis. The prepaid license discount was being amortized against            revenue on a straight-line basis over the life of the contract.

             

 In March of 2008 the Company entered into a second amendment to            the original development and license agreement with Lilly dated September 12, 2003. The            amendment narrows the scope of the license grant to Lilly under the agreement whereby            (a) certain devices (as defined in the agreement) owned by the Company are no longer            licensed to Lilly, including the Company’s MJ7 device, (b) the scope of the            license for the remaining devices licensed to Lilly are converted to nonexclusive from            exclusive and (c) the scope of such remaining nonexclusive license is limited to use            with a smaller subset of compounds in a narrower field of use. The Company is now able            to exclusively license and supply certain devices that were previously licensed to            Lilly under the agreement. In connection with the return of rights with respect to the            devices, no device development plan is required going forward.

             

 Considering the renegotiations with Lilly and drafts of the then            pending amendment, the Company evaluated the prepaid license discount related to the            original agreement (recorded as contra equity in the stockholders’ equity section            of the balance sheet) for potential impairment in connection with the preparation and            review of the 2007 financial statements. Given that Lilly was no longer committed to            development of the Company’s product on the previously agreed upon timeline under            the agreement, the Company determined it was unlikely that future cash flows would be            received that would exceed the unamortized carrying value, indicating that the recorded            prepaid license discount was impaired. In addition, the Company determined that            capitalized patent costs associated with the agreement had been impaired. The Company            also recognized related deferred revenue and deferred costs related

             

67

             

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to the agreement. Accordingly, the Company recorded a net non-cash            charge to earnings in the fourth quarter totaling $1,629,060, consisting principally of            the patent impairment charge of $296,338 and the impairment of prepaid license discount            and related charges of $1,438,638. The patent impairment charge was recorded in general            and administrative expense, while the impairment of prepaid license discount and            recognition of deferred revenue and deferred costs was recorded in cost of revenue. The            net impact to stockholders’ equity was an increase of approximately $480,000 as a            result of the recognition of deferred revenue in excess of deferred costs and patent            impairment charges.

             

*Ferring License Agreement*

             

The Company entered into a License Agreement, dated January 22, 2003,            with Ferring, under which the Company licensed certain of its intellectual property and            extended the territories available to Ferring for use of certain of the Company’s            reusable needle-free injector devices. Specifically, the Company granted to Ferring an            exclusive, perpetual, irrevocable, royalty-bearing license, within a prescribed            manufacturing territory, to manufacture certain of the Company’s reusable            needle-free injector devices for the field of human growth hormone. The Company granted            to Ferring similar non-exclusive rights outside of the prescribed manufacturing            territory. In addition, the Company granted to Ferring a non-exclusive right to make            and have made the equipment required to manufacture the licensed products, and an            exclusive, perpetual, royalty-free license in a prescribed territory to use and sell            the licensed products.

             

As consideration for the license grants, Ferring paid the Company an            upfront payment upon execution of the License Agreement, and paid an additional            milestone in 2003. Ferring will also pay the Company royalties for each device            manufactured by or on behalf of Ferring, including devices manufactured by the Company.            Beginning in 2004, a portion of the license fee received in 2003 was credited against            future royalties owed by Ferring, until such amount is exhausted. These royalty            obligations expire, on a country-by-country basis, when the respective patents for the            products expire, despite the fact that the License Agreement does not itself expire            until the last of such patents expires. The license fees have been deferred and are            being recognized in income over the period from 2003 through expiration of the patents            in 2016.

             

In March 2007 the Company amended the agreement increasing the royalty            rate and device pricing, included a next generation device and provided for payment            principally in U.S. dollars rather than Euros.

             

*BioSante License Agreement*

             

In June 2000, the Company entered into an exclusive agreement to license            four applications of its drug-delivery technology to BioSante Pharmaceuticals, Inc. in            the United States, Canada, China, Australia, New Zealand, South Africa, Israel, Mexico,            Malaysia and Indonesia (collectively, “the BioSante Territories”). The            Company is required to transfer technology know-how to BioSante until each            country’s regulatory authorities approve the licensed product. BioSante will use            the licensed technology for the development of hormone replacement therapy products. At            the signing of the contract, BioSante made an upfront payment to the Company, a portion            of which, per the terms of the contract, was used to partially offset a later payment            made to the Company as a result of an upfront payment received by BioSante under a            sublicense agreement. The initial upfront payment received by the Company was for the            delivery of intellectual property to BioSante.

             

The Company will receive payments upon the achievement of certain            milestones and will receive from BioSante a royalty from the sale of licensed products.            The Company will also receive a portion of any sublicense fees received by            BioSante.

             

 Under the cumulative deferral method, the Company ratably            recognizes revenue related to milestone payments from the date of achievement of the            milestone through the estimated date of receipt of final regulatory approval in the            BioSante Territory. The Company is recognizing the initial milestone payment in revenue            over a 129-month period. All other milestone payments will be recognized ratably on a            product-by-product basis from the date the milestone payment is earned and all            repayment obligations have been satisfied until the receipt of final regulatory            approval in the BioSante Territoryfor each respective product. It is expected that            these milestones will be earned at various dates from January 2008 to March 2011 and            will be recognized as revenue over periods of up to 39 months.

             

68

             

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 In November 2006 BioSante entered into a sublicense and marketing            agreement with Bradley Pharmaceuticals, Inc. for Elestrin® (formerly            Bio-E-Gel). BioSante received an upfront payment from Bradley which triggered a payment            to the Company of $875,000. In December 2006 the FDA approved for marketing            Elestrin® in the United States triggering payments to the Company            totaling $2,625,000, which was received in 2007. In addition, the Company will receive            royalties on sales of Elestrin® as well as potential sales-based            milestone payments. Because final regulatory approval for this product was obtained by            BioSante and Antares has no further obligations in connection with this product, the            sublicense payments of $2,625,000 and $875,000 received in 2007 and 2006, respectively,            were recognized as revenue in those years. Further sublicense payments and royalties            will be recognized as revenue when due and payable.

             

 In August 2001, BioSante entered into an exclusive agreement with            Solvay in which Solvay has sublicensed from BioSante the U.S. and Canadian rights to an            estrogen/progestogen combination transdermal hormone replacement gel product, one of            the four drug-delivery products the Company has licensed to BioSante. Under the terms            of the license agreement between the Company and BioSante, the Company received a            portion of the up front payment made by Solvay to BioSante, net of the portion of the            initial up front payment the Company received from BioSante intended to offset            sublicense up front payments. The Company is also entitled to a portion of any            milestone payments or royalties BioSante receives from Solvay under the sublicense            agreement. The Company is recognizing the payment received from BioSante in revenue            over an 108-month period. The Company received a milestone payment in 2003 and is            recognizing revenue over a period of 91 months. All other milestone payments will be            recognized ratably from the date the milestone payment is earned until the receipt of            final regulatory approval in the U.S. and Canada.

             

*Jazz License Agreement*

             

 In July 2007, we entered into a worldwide product development and            license agreement with Jazz Pharmaceuticals for a product being developed to treat a            CNS disorder that will utilize our transdermal gel delivery technology. Under the            agreement, an upfront payment, development milestones, and royalties on product sales            are to be received by us under certain circumstances. The upfront payment is being            recognized as revenue over the development period. The milestone fees and royalties            will be recognized as revenue when earned.

             

*Solvay License Agreement*

             

 In June 1999, the Company entered into an exclusive agreement to            license one application of its gel based drug-delivery technology to Solvay            Pharmaceuticals in all countries except the United States, Canada, Japan and Korea            (collectively, ‘‘the Solvay Territories’’). The Company is            required to transfer technology know-how and to provide developmental assistance to            Solvay until each country’s applicable regulatory authorities approve the            licensed product. Solvay will reimburse the Company for all technical assistance            provided during Solvay’s development. Solvay will use the licensed technology for            the development of a hormone replacement therapy gel. The license agreement required            Solvay to pay the Company a milestone payment upon signing of the license, milestones            upon the start of Phase IIb/III clinical trials, additional milestones upon the first            submission by Solvay to regulatory authorities in the Solvay Territories and upon the            first completed registration in Germany, France or the United Kingdom. The Company will            receive from Solvay a royalty from the sale of licensed products. In 2002 the agreement            was amended to change the terms associated with certain milestone payments. Development            work performed by Solvay has been limited due to concerns about certain forms of            hormone replacement therapy that have been debated in scientific literature.

             

 Under the cumulative deferral method, the Company ratably            recognizes revenue related to milestone payments from the date of achievement of the            milestone through the estimated date of completion.

             

*Other License Agreements*

             

 In September 2007, we entered into a worldwide product development            and license agreement with an undisclosed company for a product in the field of opioid            analgesia that will utilize our oral disintegrating tablet delivery technology. Under            the agreement, an upfront payment, development milestones, and royalties on product            sales are to be received by us under certain circumstances. The upfront payment is            being recognized as revenue over the development period. The milestone fees and            royalties will be recognized as revenue when earned.

             

69

             

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| **11.** | **Segment Information and Significant                            Customers** |
|---------|------------------------------------------------------------------------------|

             

The Company has one operating segment, drug delivery, which includes the            development of drug delivery transdermal and transmucosal pharmaceutical products and            drug delivery injection devices and supplies.

             

The geographic distributions of the Company’s identifiable assets            and revenues are summarized in the following tables:

             

|   | The Company has operating assets located in two                            countries as follows: |
|--------|--------------------------------------------------------------------------------------------------|

             

|                     |   | **December 31,** |       |
|--------------------------|--------|------------------|------------|
|                     |   | **2007**         |       | **2006** |   |
| Switzerland              |   | $                | 1,784,230  |   | $ | 1,655,869 |   |
| United States of America |   |             | 28,432,486 |   |   | 9,878,614 |   |
|                     |   | $                | 30,216,716 |   | $ | 11,534,483 |   |

             

|   | Revenues by customer location are summarized as                            follows: |
|--------|-------------------------------------------------------------------------------------|

             

|                     |   | **For the Years Ended December 31,** |      |
|--------------------------|--------|--------------------------------------|-----------|
|                     |   | **2007**                             |      | **2006** |   | **2005** |   |
| United States of America |   | $                                    | 3,576,310 |   | $ | 1,939,802 |   | $ | 511,567 |   |
| Europe                   |   |                                 | 3,915,031 |   |   | 1,856,847 |   |   | 1,215,814 |   |
| Other                    |   |                                 | 365,655   |   |   | 471,750 |   |   | 497,365 |   |
|                     |   | $                                    | 7,856,996 |   | $ | 4,268,399 |   | $ | 2,224,746 |   |

             

The following summarizes significant customers comprising 10% or more of            total revenue for the years ended December 31:

             

|     |   | **2007** |      | **2006** |   | **2005**  |   |
|----------|--------|----------|-----------|----------|--------|-----------|--------|
| Ferring  |   | $        | 3,080,545 |     | $      | 1,660,016 |   | $ | 1,065,835 |   |
| BioSante |   |     | 2,836,016 |     |   | 1,038,339 |   |   | 161,021 |   |
| JCR      |   |     | 304,671   |     |   | 163,193   |   |   | 258,949 |   |

             

The following summarizes significant customers comprising 10% or more of            outstanding accounts receivable as of December 31:

             

|        |   | **2007** |    | **2006** |   |
|-------------|--------|----------|---------|----------|--------|
| Ferring     |   | $        | 274,582 |     | $      | 273,381 |   |
| Teva        |   |     | 137,500 |     |   | 155,083 |   |
| Undisclosed |   |     | -       |     |   | 214,967 |   |

             

             

             

             

             

             

             

70

             

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| **12.** | **Quarterly Financial Data (unaudited)** |
|---------|------------------------------------------|

             

|                                     |   | **First** |       | **Second** |   | **Third**  |   | **Fourth** |       |
|------------------------------------------|--------|-----------|------------|------------|--------|------------|--------|------------|------------|
| **200****7****:**                        |   |      |       |       |   |       |   |       |       |   |   |   |   |
| Total revenues                           |   | $         | 2,843,738  |       | $      | 1,806,275  |   | $          | 1,230,674  |   | $ | 1,976,309 |   |
| Gross profit                             |   |      | 2,376,186  |       |   | 1,238,544  |   |       | 679,034    |   |   | 121,212 |   |
| Net loss applicable to common shares     |   |      | (429,581   | )          |   | (2,297,038 | )      |       | (2,610,732 | ) |   | (3,241,588 | ) |
| Net loss per common share                |   |      | (0.01      | )          |   | (0.04      | )      |       | (0.04      | ) |   | (0.05 | ) |
| Weighted average shares (1)              |   |      | 53,413,326 |       |   | 54,626,788 |   |       | 64,660,101 |   |   | 65,529,666 |   |
|                                     |   |      |       |       |   |       |   |       |       |   |   |   |   |
| **200****6****:**                        |   |      |       |       |   |       |   |       |       |   |   |   |   |
| Total revenues                           |   | $         | 636,660    |       | $      | 859,095    |   | $          | 756,624    |   | $ | 2,016,020 |   |
| Gross profit                             |   |      | 315,172    |       |   | 427,871    |   |       | 436,926    |   |   | 1,532,460 |   |
| Net loss applicable to common shares (2) |   |      | (2,404,014 | )          |   | (2,456,744 | )      |       | (1,924,867 | ) |   | (1,413,721 | ) |
| Net loss per common share (2)            |   |      | (0.05      | )          |   | (0.05      | )      |       | (0.04      | ) |   | (0.03 | ) |
| Weighted average shares (1)              |   |      | 46,972,487 |       |   | 52,961,664 |   |       | 53,094,622 |   |   | 53,214,459 |   |

             

| (1) | Loss per Common Share is computed based upon the                            weighted average number of shares outstanding during each period. Basic                            and diluted loss per share amounts are identical as the effect of                            potential Common Shares is anti-dilutive. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The net loss applicable to common shares and net loss                            per common share include a deemed dividend to warrant holders of                            $99,500 in the first quarter of 2006. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

             

71

             

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| *Item 9.* | *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                            ACCOUNTING AND FINANCIAL* |
|-----------|--------------------------------------------------------------------------------------------------------|

|   | *DISCLOSURE* |
|--------|--------------|

             

|   | None. |
|--------|-------|

             

| *Item 9A.* | *CONTROLS AND PROCEDURES* |
|------------|---------------------------|

Disclosure Controls and Procedures.

             

The Company’s management, with the participation of the            Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the            effectiveness of the Company’s disclosure controls and procedures (as such term            is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,            as amended) as of the end of the period covered by this report. Based on such            evaluation, the Company’s Chief Executive Officer and Chief Financial Officer            have concluded that the Company’s disclosure controls and procedures as of the            end of the period covered by this report have been designed and are functioning            effectively to provide reasonable assurance that the information required to be            disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as            amended, is recorded, processed, summarized and reported within the time periods            specified in the SEC’s rules and is accumulated and communicated to management,            including the Company’s principal executive and principal financial officers, or            person performing similar functions, as appropriate to allow timely decisions regarding            required disclosure.

             

Internal Control over Financial Reporting.

             

There have not been any changes in the Company’s internal control            over financial reporting during the fiscal quarter to which this report relates that            have materially affected, or are reasonably likely to materially affect, the            Company’s internal control over financial reporting.

             

A control system, no matter how well conceived and operated, can provide            only reasonable, not absolute, assurance that the objectives of the control system are            met. Because of the inherent limitations in all control systems, no evaluation of            controls can provide absolute assurance that all control issues and instances of fraud,            if any, within the Company have been detected. The design of any system of controls            also is based in part upon certain assumptions about the likelihood of future events,            and there can be no assurance that any design will succeed in achieving its stated            goals under all potential future conditions; over time, control may become inadequate            because of changes in conditions, or the degree of compliance with the policies or            procedures may deteriorate. Because of the inherent limitations in a cost-effective            control system, misstatements due to error or fraud may occur and not be            detected.

             

Management’s report on internal control over financial reporting            is included in Item 8,*Financial Statements and Supplementary            Data*, of this Annual Report on Form 10-K.

             

| *Item 9B.* | *OTHER INFORMATION* |
|------------|---------------------|

|   | None. |
|--------|-------|

             

             

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**PART III**

             

| *Item 10.* | *DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE                            GOVERNANCE* |
|------------|-------------------------------------------------------------------------------------|

             

Information required by this item concerning directors will be set forth            under the caption “Election of Directors” in our definitive proxy statement            for our 2008 annual meeting, and is incorporated herein by reference.

             

Information required by this item concerning executive officers will be            set forth under the caption “Executive Officers of the Company” in our            definitive proxy statement for our 2008 annual meeting, and is incorporated herein by            reference.

             

Information required by this item concerning compliance with Section            16(a) of the United States Securities Exchange Act of 1934, as amended, will be set            forth under the caption “Section 16(a) Beneficial Ownership Reporting            Compliance” in our definitive proxy statement for our 2008 annual meeting, and is            incorporated herein by reference.

             

Information required by this item concerning the audit committee of the            Company, the audit committee financial expert of the Company and any material changes            to the way in which security holders may recommend nominees to the Company’s            Board of Directors will be set forth under the caption “Corporate            Governance” in our definitive proxy statement for our 2008 annual meeting, and is            incorporated herein by reference.

             

The Board of Directors adopted a Code of Business Conduct and Ethics,            which is posted on our website at www.antarespharma.com that is applicable to all            employees and directors. We will provide copies of our Code of Business Conduct and            Ethics without charge upon request. To obtain a copy, please visit our website or send            your written request to Antares Pharma, Inc., 250 Phillips Boulevard, Suite 290, Ewing,            NJ 08618, Attn: Corporate Secretary. With respect to any amendments or waivers of this            Code of Business Conduct and Ethics (to the extent applicable to the Company’s            chief executive officer, principal accounting officer or controller, or persons            performing similar functions) the Company intends to either post such amendments or            waivers on its website or disclose such amendments or waivers pursuant to a Current            Report on Form 8-K.

             

| *Item 11.* | *EXECUTIVE COMPENSATION* |
|------------|--------------------------|

             

Information required by this item will be set forth under the caption            “Executive Compensation” in our definitive proxy statement for our 2008            annual meeting, and is incorporated herein by reference.

             

| *Item 12.* | *SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                            MANAGEMENT AND RELATED STOCKHOLDER MATTERS* |
|------------|-----------------------------------------------------------------------------------------------------------------------------|

             

Information required by this item concerning ownership will be set forth            under the caption “Security Ownership of Certain Beneficial Owners and            Management” in our definitive proxy statement for our 2008 annual meeting, and is            incorporated herein by reference.

             

             

             

             

             

             

             

             

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|   | The following table provides information for our                            equity compensation plans as of December 31, 2007: |
|--------|--------------------------------------------------------------------------------------------------------------------------------|

    

| **Plan Category**                                                                         |         | **Number** **of** **securities****to** **be** **issued** **upon**

**exercise of**

**outstanding options,****warrants andrights** |         |   | **Weighted-average****exercise price of****outstanding**

**options,****warrants and rights** |         | **Number** **of** **securities****remaining available****for future issuance under equity compensation                            plans**

**(excluding shares reflected in the first                            column)** |
|-------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------|-----------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security                            holders         |    | 5,582,391                                                                                                                                                   |    | $      |  

1.58                                                                                  |    | 2,412,610                                                                                                                                                                                                                            |
| Equity compensation plans not approved by security                            holders (1) |    | 455,000                                                                                                                                                     |    |   | 2.12                                                                                          |    | —                                                                                                                                                                                                                    |
| Total                                                                                     |    | 6,037,391                                                                                                                                                   |    | $      | 1.62                                                                                          |    | 2,412,610                                                                                                                                                                                                                            |

             

(1) Includes shares underlying warrants granted to various consultants            as compensation for professional services.

             

| *Item 13.* | *CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND                            DIRECTOR INDEPENDENCE* |
|------------|--------------------------------------------------------------------------------------------------------|

             

Information required by this item will be set forth under the captions            “Certain Relationships and Related Transactions” and “Corporate            Governance” in our definitive proxy statement for our 2008 annual meeting, and is            incorporated herein by reference.

             

| *Item 14.* | *PRINCIPAL ACCOUNTANT FEES AND SERVICES* |
|------------|------------------------------------------|

             

Information required by this item will be set forth under the caption            “Ratification of Selection of Independent Registered Public Accountants” in            our definitive proxy statement for our 2008 annual meeting, and is incorporated herein            by reference.

             

74

             

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**PART IV**

             

| *Item 15.* | *EXHIBITS AND FINANCIAL STATEMENT                            SCHEDULES* |
|------------|-------------------------------------------------------------------------|

             

| (a) | The following documents are filed as part of this                            report: |
|-----|--------------------------------------------------------------------------------------|

             

|   | (1) | Financial Statements - see Part II |
|--------|-----|------------------------------------|

             

(2)  Financial Statement Schedules

             

Report of Independent Registered Public Accounting Firm on Financial            Statement Schedule.

Schedule II – Valuation and Qualifying Accounts.

             

All other schedules have been omitted because they are not applicable,            are immaterial or are not required because the information is included in the financial            statements or the notes thereto.

             

|   | (3) | Item 601 Exhibits - see list of Exhibits                            below |
|--------|-----|---------------------------------------------------------------------------|

             

| (b) | Exhibits |   |
|-----|----------|--------|

             

|   | The following is a list of exhibits filed as part of                            this annual report on Form 10-K. |
|--------|------------------------------------------------------------------------------------------------------------------|

             

| Exhibit No. |   | Description                                                                                                                                                                                                                                                                         |   |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1         |   | Certificate of Incorporation (Filed as an exhibit to                            Schedule 14A on March 18, 2005 and incorporated herein by                            reference.)                                                                                                    |   |
| 3.2         |   | Bylaws (Filed as an exhibit to Schedule 14A on March 18,                            2005 and incorporated herein by reference.)                                                                                                                                                     |   |
| 3.3         |   | Amended and Restated Bylaws of Antares Pharma, Inc.                            adopted as of May 11, 2007 (Filed as exhibit 3.1 to Form 8-K on May 15,                            2007 and incorporated herein by reference.)                                                       |   |
| 4.1         |   | Form of Certificate for Common Stock (Filed as an                            exhibit to Form S-1 on October 1, 1996 and incorporated herein by                            reference.)                                                                                               |   |
| 4.2         |   | Registration Rights Agreement with Permatec Holding AG                            dated January 31, 2001 (Filed as Exhibit 10.2 to Form 10-K for the year                            ended December 31, 2000 and incorporated herein by                            reference.)      |   |
| 4.3         |   | Securities Purchase Agreement dated July 7, 2003 (Filed                            as exhibit 10.48 to Form 8-K on July 9, 2003 and incorporated by                            reference.)                                                                                          |   |
| 4.4         |   | Form of Registration Rights Agreement dated July 7, 2003                            (Filed as exhibit 10.49 to Form 8-K on July 9, 2003 and incorporated by                            reference.)                                                                                  |   |
| 4.5         |   | Voting Agreement, dated July 7, 2003, by and among                            Antares Pharma, Inc., XMark Fund, L.P. and XMark Fund, Ltd. (Filed as                            exhibit 10.50 to Form 8-K on July 9, 2003 and incorporated by                            reference.) |   |
| 4.6         |   | Form of Warrant, dated July 7, 2003 (Filed as exhibit                            10.51 to Form 8-K on July 9, 2003 and incorporated by                            reference.)                                                                                                       |   |
| 4.7         |   | Form of Securities Purchase Agreement dated July 17,                            2003 (Filed as exhibit 10.52 to Form 8-K on July 22, 2003 and                            incorporated herein by reference.)                                                                         |   |
| 4.8         |   | Form of Registration Rights Agreement dated July 17,                            2003 (Filed as exhibit 10.53 to Form 8-K on July 22, 2003 and                            incorporated herein by reference.)                                                                         |   |
| 4.9         |   | Form of Warrant, dated July 17, 2003 (Filed as exhibit                            10.54 to Form 8-K on July 22, 2003 and incorporated herein by                            reference.)                                                                                              |   |
| 4.10        |   | Warrant Agreement with Eli Lilly and Company dated                            September 12, 2003 (Filed as exhibit 10.60 to Form 8-K on September 18,                            2003 and incorporated herein by reference.)                                                        |   |
| 4.11        |   | Registration Rights Agreement with Eli Lilly and Company                            dated September 12, 2003 (Filed as exhibit 10.61 to Form 8-K on                            September 18, 2003 and incorporated herein by reference.)                                            |   |
| 4.12        |   | Form of Securities Purchase Agreement dated February 10,                            2004 (Filed as exhibit 10.62 to Form 8-K on February 10, 2004 and                            incorporated herein by reference.)                                                                 |   |

             

             

75

             

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| 4.13  |   | Form of Registration Rights Agreement, dated February                            10, 2004 (Filed as exhibit 10.63 to Form 8-K on February 10, 2004 and                            incorporated herein by reference.)                                                                                                                                   |   |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.14  |   | Form of Warrant Agreement, dated February 10, 2004                            (Filed as exhibit 10.64 to Form 8-K on February 10, 2004 and                            incorporated herein by reference.)                                                                                                                                               |   |
| 4.15  |   | Stock Purchase Agreement with Sicor Pharmaceuticals,                            Inc., dated November 23, 2005 (Filed as exhibit 10.55 to Form 10-K for                            the year ended December 31, 2005 and incorporated herein by                            reference.)                                                                   |   |
| 4.16  |   | Form of Common Stock and Warrant Purchase Agreement,                            dated February 27, 2006 (Filed as exhibit 10.57 to Form 10-K for the                            year ended December 31, 2005 and incorporated herein by                            reference.)                                                                         |   |
| 4.17  |   | Form of Investors Rights Agreement, dated March 2, 2006                            (Filed as exhibit 10.58 to Form 10-K for the year ended December 31,                            2005 and incorporated herein by reference.)                                                                                                                         |   |
| 4.18  |   | Form of Common Stock Purchase Warrant, dated March 2,                            2006 (Filed as exhibit 10.59 to Form 10-K for the year ended December                            31, 2005 and incorporated herein by reference.)                                                                                                                      |   |
| 4.19  |   | Form of Common Stock Purchase Warrant and Related                            Schedule of Holders and Other Terms (Filed as exhibit 4.7 to Form S-3/A                            Registration Statement on May 16, 2006 and incorporated herein by                            reference.)                                                               |   |
| 4.20  |   | Registration Rights Agreement by and among Antares                            Pharma, Inc., MMV Financial Inc. and HSBC Capital (Canada) Inc., dated                            February 26, 2007 (Filed as exhibit 4.1 to Form 8-K on March 2, 2007                            and incorporated herein by reference.)                                 |   |
| 4.21  |   | Warrant for the Purchase of Shares of Common Stock                            issued by Antares Pharma, Inc. to MMV Financial Inc., dated February                            26, 2007 (Filed as exhibit 4.2 to Form 8-K on March 2, 2007 and                            incorporated herein by reference.)                                            |   |
| 4.22  |   | Warrant for the Purchase of Shares of Common Stock                            issued by Antares Pharma, Inc. to HSBC Capital (Canada) Inc., dated                            February 26, 2007 (Filed as exhibit 4.3 to Form 8-K on March 2, 2007                            and incorporated herein by reference.)                                    |   |
| 4.23  |   | Credit Agreement by and among Antares Pharma, Inc., MMV                            Financial Inc. and HSBC Capital (Canada) Inc., dated February 26, 2007                            (Filed as exhibit 10.1 to Form 8-K on March 2, 2007 and incorporated                            herein by reference.)                                             |   |
| 4.24  |   | First Amending Agreement Between Antares Pharma, Inc.,                            MMV Financial Inc. and HSBC Capital (Canada) Inc., dated December 17,                            2007 (Filed as exhibit 10.1 to Form 8-K on December 19, 2007 and                            incorporated herein by reference.)                                      |   |
| 4.25  |   | Common Stock and Warrant Purchase Agreement, dated June                            29, 2007, by and between Antares Pharma, Inc. and the Purchasers party                            thereto (Filed as exhibit 4.1 to Form 8-K on July 2, 2007 and                            incorporated herein by reference.)                                       |   |
| 4.26  |   | Form of Investor Rights Agreement (Filed as exhibit 4.2                            to Form 8-K on July 2, 2007 and incorporated herein by                            reference.)                                                                                                                                                                       |   |
| 4.27  |   | Form of Warrant (Filed as exhibit 4.3 to Form 8-K on                            July 2, 2007 and incorporated herein by reference.)                                                                                                                                                                                                                    |   |
| 10.0  |   | Stock Purchase Agreement with Permatec Holding AG,                            Permatec Pharma AG, Permatec Technologie AG and Permatec NV with First                            and Second Amendments

dated July 14, 2000 (Filed as an exhibit to Schedule 14A                            on December 28, 2000 and incorporated herein by reference.) |   |
| 10.1  |   | Third Amendment to Stock Purchase Agreement, dated                            January 31, 2001 (Filed as exhibit 10.1 to Form 10-K for the year ended                            December 31, 2000 and incorporated herein by reference.)                                                                                                              |   |
| 10.2* |   | Agreement with Becton Dickinson dated January 1, 1999                            (Filed as exhibit 10.24 to Form 10-K for the year ended December 31,                            1998 and incorporated herein by reference.)                                                                                                                           |   |
| 10.3+ |   | 1993 Stock Option Plan (Filed as an exhibit to Form S-1                            on October 1, 1996 and incorporated herein by reference.)                                                                                                                                                                                                           |   |
| 10.4+ |   | Form of incentive stock option agreement for use with                            1993 Stock Option Plan (Filed as an exhibit to Form S-1 on October 1,                            1996 and incorporated herein by reference.)                                                                                                                          |   |
| 10.5+ |   | Form of non-qualified stock option agreement for use                            with 1993 Stock Option Plan (Filed as an exhibit to Form S-1 on October                            1, 1996 and incorporated herein by reference.)                                                                                                                      |   |

             

             

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| 10.6+  |   | 1996 Stock Option Plan, with form of stock option                            agreement (Filed as an exhibit to Form S-1 on October 1, 1996 and                            incorporated herein by reference.)                                                                                                              |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.7   |   | Amended and Restated 2001 Stock Option Plan for                            Non-Employee Directors and Consultants (Filed as exhibit 10.24 to Form                            S-8 Registration Statement on December 15, 2003.)                                                                                            |   |
| 10.8   |   | Amended and Restated 2001 Incentive Stock Option Plan                            for Employees (Filed as exhibit 10.25 to Form S-8 Registration                            Statement on December 15, 2003.)                                                                                                               |   |
| 10.9*  |   | License Agreement with Solvay Pharmaceuticals BV, dated                            June 9, 1999 (Filed as exhibit 10.33 to Form 10-K/A for the year ended                            December 31, 2001 and incorporated herein by reference.)                                                                             |   |
| 10.10* |   | License Agreement with BioSante Pharmaceuticals, Inc.,                            dated June 13, 2000 (Filed as exhibit 10.34 to Form 10-K/A for the year                            ended December 31, 2001 and incorporated herein by                            reference.)                                            |   |
| 10.11* |   | Amendment No. 1 to License Agreement with BioSante                            Pharmaceuticals, Inc., dated May 20, 2001 (Filed as exhibit 10.35 to                            Form 10-K/A for the year ended December 31, 2001 and incorporated                            herein by reference.)                          |   |
| 10.12* |   | Amendment No. 2 to License Agreement with BioSante                            Pharmaceuticals, Inc., dated July 5, 2001 (Filed as exhibit 10.36 to                            Form 10-K/A for the year ended December 31, 2001 and incorporated                            herein by reference.)                          |   |
| 10.13* |   | Amendment No. 3 to License Agreement with BioSante                            Pharmaceuticals, Inc., dated August 28, 2001 (Filed as exhibit 10.37 to                            Form 10-K/A for the year ended December 31, 2001 and incorporated                            herein by reference.)                       |   |
| 10.14* |   | Amendment No. 4 to License Agreement with BioSante                            Pharmaceuticals, Inc., dated August 8, 2002 (Filed as exhibit 10.38 to                            Form 10-K/A for the year ended December 31, 2001 and incorporated                            herein by reference.)                        |   |
| 10.15* |   | License Agreement between Antares Pharma, Inc. and                            Ferring, dated January 21, 2003 (Filed as exhibit 10.47 to Form 8-K on                            February 20, 2003 and incorporated herein by reference.)                                                                                  |   |
| 10.16  |   | Securities and Exchange Agreement, dated September 12,                            2003 (Filed as exhibit 10.57 to Form 8-K on September 15, 2003 and                            incorporated herein by reference.)                                                                                                        |   |
| 10.17* |   | Development and License Agreement, dated September 12,                            2003, with Eli Lilly and Company (Filed as exhibit 10.59 to Form 8-K on                            September 18, 2003 and incorporated herein by reference.)                                                                            |   |
| 10.18  |   | Office lease with The Trustees Under the Will and of the                            Estate of James Campbell, Deceased, dated February 19, 2004 (Filed as                            exhibit 10.65 to Form 10-K for the year ended December 31, 2003 and                            incorporated herein by reference.)    |   |
| 10.19  |   | Form of Indemnification Agreement, dated February 11,                            2008, between Antares Pharma, Inc. and each of its directors and                            executive officers (Filed as exhibit 10.1 to Form 8-K on February 13,                            2008 and incorporated herein by reference.) |   |
| 10.20+ |   | Amended and Restated Employment Agreement, dated March                            11, 2008, with Jack E. Stover (Filed as exhibit 10.1 to Form 8-K on                            March 12, 2008 and incorporated herein by reference.)                                                                                    |   |
| 10.21* |   | Development Supply Agreement, dated June 22, 2005 (Filed                            as exhibit 10.0 to Form 10-Q for the quarter ended June 30, 2005 and                            incorporated herein by reference.)                                                                                                    |   |
| 10.22* |   | License Development and Supply Agreement with Sicor                            Pharmaceuticals, Inc., dated November 23, 2005 (Filed as exhibit 10.54                            to Form 10-K for the year ended December 31, 2005 and incorporated                            herein by reference.)                      |   |
| 10.23+ |   | Senior Management Agreement by and between Antares                            Pharma, Inc. and Robert F. Apple, dated February 9, 2006 (Filed as                            exhibit 10.1 to Form 8-K on February 14, 2006 and incorporated herein                            by reference.)                               |   |
| 10.24+ |   | 2006 Equity Incentive Plan (Filed as exhibit 10.1 to                            Form 8-K on May 9, 2006 and incorporated herein by                            reference.)                                                                                                                                                 |   |
| 10.25  |   | Lease Agreement, dated as of May 15, 2006, between the                            Company and 250 Phillips Associates LLC (Filed as exhibit 10.2 to Form                            10-Q for the quarter ended June 30, 2006 and incorporated herein by                            reference.)                            |   |

             

             

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| 10.26+ |   | Employment agreement with Peter Sadowski, Ph.D., dated                            October 13, 2006 (Filed as exhibit 10.1 to Form 8-K on October 16, 2006                            and incorporated herein by reference.) |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.27+ |   | Employment agreement with Dario Carrara, dated October                            13, 2006 (Filed as exhibit 10.2 to Form 8-K on October 16, 2006 and                            incorporated herein by reference.)         |   |
| 21.1   |   | Subsidiaries of the Registrant                                                                                                                                                                                              |   |
| 23.1   |   | Consent of Independent Registered Public Accounting Firm                            (KPMG LLP)                                                                                                                              |   |
| 31.1   |   | Section 302 CEO Certification                                                                                                                                                                                               |   |
| 31.2   |   | Section 302 CFO Certification                                                                                                                                                                                               |   |
| 32.1   |   | Section 906 CEO Certification                                                                                                                                                                                               |   |
| 32.2   |   | Section 906 CFO Certification                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                                                                        |   |
| *      |   | Confidential portions of this document have been                            redacted and have been separately filed with the Securities and                            Exchange Commission.                                 |   |
| +      |   | Indicates management contract or compensatory plan or                            arrangement.                                                                                                                               |   |

             

78

             

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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, in the City of Ewing, State of New            Jersey, on March 25, 2008.

             

**ANTARES PHARMA, INC.**

             

|   |   | /s/Jack E. Stover |
|--------|--------|-------------------|

Jack E. Stover

President and Chief Executive Officer

             

Pursuant to the requirements of Section 13 or 15(d) of the Securities            Exchange Act of 1934, this report has been signed by the following persons on behalf of            the registrant in the capacities indicated on March 25, 2008.

             

| **Signature**                        | **Title**                                                                            |
|--------------------------------------|--------------------------------------------------------------------------------------|
|  

/s/Jack E. Stover            |  

President, Chief Executive Officer and                            Director   |
| Jack E. Stover                       | (principal executive officer)                                                        |
|                                 |                                                                                 |
|  

/s/Robert F. Apple           |  

Senior Vice President and Chief Financial                            Officer |
| Robert F. Apple                      | (principal financial and accounting officer)                                         |
|                                 |                                                                                 |
|  

/s/Dr. Jacques Gonella  |  

Director, Chairman of the Board                                              |
| Dr. Jacques Gonella             |                                                                                 |
|                                 |                                                                                 |
|  

/s/Thomas J. Garrity         |  

Director                                                                     |
| Thomas J. Garrity                    |                                                                                 |
|                                 |                                                                                 |
|  

/s/Anton Gueth               |  

Director                                                                     |
| Anton Gueth                          |                                                                                 |
|                                 |                                                                                 |
|  

/s/Dr. Rajesh Shrotriya |  

Director                                                                     |
| Dr. Rajesh Shrotriya            |                                                                                 |
|                                 |                                                                                 |
|  

/s/Dr. Paul Wotton      |  

Director                                                                     |
| Dr. Paul Wotton                 |                                                                                 |
|                                 |                                                                                 |
|  

/s/Dr. Leonard Jacob    |  

Director                                                                     |
| Dr. Leonard Jacob               |                                                                                 |
|                                 |                                                                                 |

             

             

             

             

             

             

             

79

             

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**Report of Independent Registered Public Accounting Firm on Financial            Statement Schedule**

             

The Board of Directors and Shareholders

Antares Pharma, Inc.:

             

Under the date of March 25, 2008, we reported on the consolidated            balance sheets of Antares Pharma, Inc. and subsidiaries (the Company) as of December            31, 2007 and 2006, and the related consolidated statements of operations,            stockholders’ equity and comprehensive loss, and cash flows for each of the years            in the three-year period ended December 31, 2007, as included in Antares Pharma,            Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. In            connection with our audits of the aforementioned consolidated financial statements, we            also audited the related consolidated financial statement schedule as listed in the            accompanying index. This consolidated financial statement schedule is the            responsibility of Antares Pharma, Inc.’s management. Our responsibility is to            express an opinion on this consolidated financial statement schedule based on our            audits.

             

In our opinion, such financial statement schedule, when considered in            relation to the basic consolidated financial statements taken as a whole, presents            fairly, in all material respects, the information set forth therein.

             

Our report on the consolidated financial statements refers to the            Company's adoption of the provisions of Statement of Financial Accounting Standards No.            123 (Revised 2004), Share-Based Payment, onJanuary 1,            2006.

             

|   | /s/ KPMG LLP |
|--------|--------------|

             

             

Minneapolis, Minnesota

March 25, 2008

             

             

             

             

             

             

             

             

             

             

             

             

             

80

             

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**Antares Pharma, Inc.**

             

**Schedule II**

             

**Valuation and Qualifying Accounts**

**For the Years Ended December 31, 2007, 2006 and 2005**

             

             

|  

                             

**Description**                                         |   |   | **Balance at**

**Beginning of**

**Year** |   |   | **Charged to**

**Costs and**

**Expenses** |                                       |   |  

                             

**Deductions** |   |   | **Balance at**

**End of**

**Year** |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------|--------|--------|---------------------------------------------|--------------------------------------------|--------|------------------------------------------------------------|--------|--------|--------------------------------------|
|                                                                                                |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Year Ended December 31, 2007                                                                        |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Allowance for doubtful                            accounts (Deducted from accounts receivable) |   | $      | 10,000                                     |   | $      | -                                           |  

                              | $      | -                                                          |   | $      | 10,000                               |
|                                                                                                |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Year Ended December 31, 2006                                                                        |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Allowance for doubtful                            accounts (Deducted from accounts receivable) |   |   | 20,800                                     |   |   | -                                           |  

                              |   | 10,800                                                     |   |   | 10,000                               |
|                                                                                                |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Year Ended December 31, 2005                                                                        |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
| Allowance for doubtful                            accounts (Deducted from accounts receivable) |   |   | 22,500                                     |   |   | 6,173                                       |  

                              |   | 7,873                                                      |   |   | 20,800                               |
|                                                                                                     |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |
|                                                                                                |   |   |                                       |   |   |                                        |                                       |   |                                                       |   |   |                                 |

             

             

81